In this article, I explore the tokenization of real estate RWAs, meaning real estate-backed assets that are represented as tokens and made tradable digital assets. My focus is on new business models that could emerge for Swiss Banking.
While blockchain applications are not currently among the top strategic priorities for Swiss banks—where AI and IT security continue to dominate—the massive business potential of RWA tokenization suggests that this should soon gain relevance.
A market report by EY Parthenon (September 2023) projects that institutional investors will drive over $13.9 trillion in tokenized RWA volume by 2027 (see infographic below). According to forecasts, real estate RWAs alone could account for approximately $400 billion of this market.
International financial institutions have largely committed to the tokenization trend, as clearly illustrated in the graphic below. Among them is Swiss banking giant UBS, which is actively exploring and investing in tokenized asset solutions (Graphic: Tokenizationinsight with further references).
The tokenization of real estate RWAs not only enables financial institutions to streamline capital market processes but also unlocks new business models in wealth management, lending, and trading.
Banks with a traditional wealth management offering on the passive side, combined with real estate financing and lending on the active side, stand to benefit from synergies within their diverse client base by introducing tokenized real estate products.
Swiss banks such as Raiffeisen, Cantonal Banks, and private banks like Julius Baer, EFG, and Vontobel will inevitably move in this direction sooner or later. UBS, already operating on a different scale, is naturally leading the way in this transformation.
I have identified four use cases for real estate value tokenization that make economic sense and appear to be both technically and regulatory viable.
- Tokenized Real Estate as Investment Products
- Lending Based on Tokenized Real Estate
- More efficient Real Estate Funds & Private Equity
- A Secondary Market for Digital Real Estate Assets
1️⃣ Tokenized Real Estate as an Investment Product for Wealth Clients 🏡
💡 Use Case
A Bank could introduce tokenized real estate funds or individual tokenized real estate investments as regulated financial products. These could be offered as structured investment products, real estate token funds, or digital shares or bonds in real estate companies. This would allow clients to invest in high-value real estate projects without direct property ownership*. The tokens could either be tradable on regulated markets or held as long-term alternative investments.
* NOTE: Direct Ownership of Real Estate via Blockchain/DLT remains legally impossible today. While blockchain could enable direct ownership transfers, Swiss law does not permit it. The requirement for notarization and official land registry entry remains a firm legal barrier, ensuring transaction security. Current Swiss Legal Framework, e.g. land registry requirement (Art. 656 ZGB): Ownership is only established through official registration at a land registry office. And Swiss law does not recognize blockchain entries as a substitute for land registry records.
But Switzerland allows tokenized economic rights (e.g., fund shares) which represent financial interests. And the use cases featured in this article refer to such indirectly tokenized Real Estate RWA.
Bottom line: Unlike experimental projects abroad (e.g., Brazil), direct DLT-based ownership remains unrealistic in Switzerland & Europe and is not actively pursued.
📊 Economic Viability & Business Problem Solved
🚧 Problem
Wealthy clients are increasingly looking for stable, inflation-protected investment options beyond traditional equities and bonds. Real estate funds and REITs, as only one example for its tokenized equivalent, are often seen as an attractive alternative due to their long-term value appreciation and rental income potential. However, traditional real estate funds come with several inherent challenges that tokenized real estate funds could help mitigate, particularly:
- Limited accessibility with high capital entry barriers,
- long lock-up periods of 5 and more years and related lack of liquidity,
- opaque fund structures related to e.g. performance, costs and real-time valuation of underlying assets,
- and generally high administrative and transaction costs
🎯 Solution
Tokenized real estate funds as private or public investment products, with trading capabilities on Swiss digital trading platforms like SDX or BX Digital: Tokenized assets allow for fractional ownership, enabling customers to invest in smaller-sized fund units; portions as low as CHF 100 are possible. Lock-up periods can be bypassed through the trading of tokenized fund units via blockchain-based secondary markets, and thereby generating liquidity, whenever needed. The non-transparency problem is – for blockchain use cases – a no-brainer; every key aspect of the asset from ownership, to transactions or real-time property valuation can be tracked via the blockchain network and respective automated reporting. And ultimately also the incurred high costs of traditional funds can be significantly lowered, as the automation level via smart contracts is increased.
💸 Cost Aspects
- Operational and Administrative Costs: Setting up a tokenized real estate fund requires investment in initial blockchain infrastructure setup, and under run-the-bank considerations for custody solutions, and compliance monitoring. Hence, particularly in the early adoption and setup phase the endeavor can be costly.
- Public Offering: A comprehensive prospectus is required in Switzerland under FIDLEG (Art. 35) if the tokenized real estate fund is offered to non-qualified investors. The preparation of such documentation involves significant legal, compliance, and structuring costs, making public offerings quite expensive. Usually, it would not pay off to tokenize real estate values < CHF 10 Mio., and this applies even for private placements (see next point).
- Private Placement: While the documentation requirements are simplified under FIDLEG (Art. 36), issuers must still provide key investor disclosures for qualified investors, adding some cost burden.
📜 Regulatory Considerations
- The regulatory aspects of documentation (e.g. prospectus), disclosure or reporting, and AML (Anti-Money Laundering) / KYC (Know Your Customer) requirements have just been outlined.
- Note: These regulatory requirements are the same as for traditional financial products and services in Switzerland. In fact, even the legal basis is identical and applicable likewise for digital assets. In that sense, for the TradFi user and customer there is no change required. For the Crypto or DeFi user, though, this is the new normal. Times where payment or asset / security tokens could have been issued or traded outside the regulatory Financial Markets framework are gone, at least in Switzerland. And the related FIDLEG and AML rules would also apply for private actors, e.g. if they intend to issue such tokens in a private placement process.
✅ Benefits for the Bank
- Expanding investment options – Clients gain access to new illiquid assets with potential for stable returns and appreciation. For crypto investors this would feel like staking but without the risk of an unstable or volatile asset like the majority of the tokens subject to staking.
- Wealth protection and diversification – Real estate serves as an inflation hedge and, as an alternative investment product, mitigates market volatility.
- Fee-based revenue – The bank can earn custody, trading, and advisory fees on tokenized real estate investments and, hence, generate new income streams.
2️⃣ Lending Based on Tokenized Real Estate as Collateral (DeFi Meets Private Banking) 🏦
💡 Use Case:
Tokenized real estate can serve as digitalized collateral for loans. Clients could use their tokenized real estate holdings to obtain capital for other investments or business financing. This could include traditional mortgage loans as well as innovative blockchain-based Lombard loans backed by smart contracts.
📊 Economic Viability & Business Problem Solved
🚧 Problem
Slow Mortgage Processes & Inefficiencies in Collateral Management: Traditional mortgage lending is paperwork-intensive, slow, and highly manual. Loan approvals require extensive documentation, property valuation, and regulatory checks, often taking weeks or months to finalize. Additionally, real estate collateral remains illiquid, meaning banks hold large amounts of capital tied to properties, limiting their ability to issue new loans.
🎯 Solution
Blockchain-Based Lending Model with Tokenized Real Estate: By tokenizing real estate collateral, banks can leverage blockchain-verified ownership and smart contracts to automate loan approvals, reducing processing time from weeks to hours. Additionally, dynamic collateral management through tokenized assets allows banks to optimize capital reserves, enabling them to lend more without increasing risk exposure.
For such solution, banks must tackle following risks.
💸 Cost-Related Risks
- High Setup Costs – Blockchain custody, smart contracts, and compliance infrastructure require significant investment.
- Collateral Volatility – Unlike traditional property valuations, tokenized assets may fluctuate in secondary markets, raising concerns about loan-to-value stability.
📜 Regulatory Considerations
FINMA Licensing & FIDLEG Compliance is as outlined in Use Case #1. Legal Uncertainty – Smart contract enforceability remains untested in loan defaults.
🔄 Market & Liquidity Risks
- Illiquidity of Tokenized Real Estate – Despite improved tradability, tokenized real estate markets remain underdeveloped, limiting banks’ ability to liquidate collateral efficiently in default scenarios.
- Institutional Adoption Still in Progress – Major banks and investors have yet to fully embrace tokenized lending, making widespread acceptance and scalability a gradual process.
✅ Benefits for the Bank
- More efficient capital utilization – Tokenized real estate enables banks to lend more with lower capital buffer. In traditional mortgage lending, banks must hold large amounts of capital against illiquid real estate collateral, restricting their lending capacity. Tokenized assets, being digitally verifiable and tradable, allow for dynamic collateral management with near-instant valuation, and thereby, enabling issuing more loans with equal risk exposure.
- Faster loan approvals – Smart contracts streamline credit risk assessment and loan disbursement. Instead of a multi-week manual process with paperwork-heavy due diligence, blockchain automates collateral verification through immutable real estate token ownership records, and cuts processing time down to hours rather than weeks.
- New revenue streams – By offering token custody and collateral management, banks create new service-based revenue. Unlike traditional mortgage lending, where profits are mainly derived from interest rates, tokenized lending enables custody fees, transaction fees, and even staking revenues on tokenized assets.
3️⃣ More Efficient Real Estate Funds & Private Equity via Tokenization 📈
💡 Use Case:
Tokenized real estate funds and private equity structures enhance liquidity, transparency, and efficiency. Instead of traditional, illiquid real estate investment funds or private equity real estate structures, tokenization allows fractional ownership and automated smart contract execution, making fund administration leaner and more scalable.
📊 Economic Viability & Business Problem Solved
🚧 Problem
High Costs, Lack of Liquidity & Limited Investor Access: Traditional real estate funds face high entry barriers, complex administration, and long lock-up periods. Investors often struggle to exit positions due to illiquidity, while fund managers deal with manual processes and costly compliance.
🎯 Solution
Blockchain-Based Real Estate Funds: Smart contracts automate capital calls, distributions, and investor rights, reducing manual effort and costs. Tokenized fund shares can be fractionally owned and traded, improving liquidity and access for wealth clients.
📜 Regulatory Considerations
Requires adherence to FIDLEG (Art. 48) & CISA (collective investment schemes), including prospectus requirements and FINMA approvals.
💸 Costs and other ⚠️ Impediments
- Liquidity Challenges: Tokenized assets still face low trading volume, requiring institutional adoption for scalability.
- Operational Setup Costs: Smart contract infrastructure, fund structuring, and compliance integration increase upfront costs.
✅ Benefits for the Bank
- Automated Fund Administration: Smart contracts handle dividends, capital calls, and investor rights, reducing operational costs.
- Increased Liquidity & Investor Access: Tokenized funds can be fractionally owned and traded on regulated secondary markets, attracting a wider investor base.
- New Revenue Streams: Banks earn custody, transaction, and tokenization fees, supplementing traditional fund management earnings.
4️⃣ Secondary Market for Real Estate – Bank as a Marketplace Operator 🏛️
💡 Use Case:
The Bank could establish a blockchain-based trading platform for tokenized real estate or partner with existing platforms like SDX or BX Digital. This would allow clients to buy, sell, and trade tokenized real estate assets more efficiently.
📊 Economic Viability & Business Problem Solved
🚧 Problem
Real Estate Remains Illiquid & Hard to Trade: Despite tokenization, real estate-backed tokens lack active secondary markets. Without an efficient trading venue, price discovery is difficult, and institutional investors remain cautious.
🎯 Solution
A regulated blockchain-based trading platform, where investors can trade tokenized real estate assets. Thereby, as an essential byproduct, support the generation of the essential market liquidity ultimately. Swiss ecosystem-partners like the SIX group seems to follow that strategy already now, as investing in Real-Estate tokenization platforms in promising markets (see my other blog post: SIX Group Drives Liquidity Across Europe – Especially Retail Real Estate Investors will benefit)
📜 Regulatory Considerations
- FINMA Licensing: Operating a regulated trading venue requires a FINMA-approved license under FIDLEG (Art. 41ff.)
- AML & KYC Compliance: Every transaction must meet strict anti-money laundering standards, ensuring secure investor participation.
⚠️ Market Depth & Liquidity Risks
Even with a platform in place, widespread adoption is needed for real estate tokens to become truly liquid.
✅ Benefits for the Bank
- New revenue streams from trading fees, custody fees, and listing fees, and more income generated from market-making activities, if appropriate.
- Access to institutional and private investors – Expands the investor base by offering tokenized real estate assets to HNWIs, family offices, and institutional players, and driving higher transaction volumes.
- Innovation & Competitive Edge – Positions the bank as a leader in digital financial services, and creating a competitive edge over traditional real estate financiers. Enhances investor trust through a regulated trading platform.
- Market liquidity – Facilitates real-time trading, unlocking liquidity in traditionally illiquid real estate-backed assets.
Conclusion: Tokenization as a Strategic Opportunity for Swiss Banking 🚀
The tokenization of real estate opens up new business models that go beyond traditional banking services. Next to greater greater efficiency, it also opens new investment products, and innovative lending solutions, and thereby, generate new revenue streams.
🚀 Swiss banks are well-positioned to lead in tokenized real estate. In Switzerland, the respective infrastructure and ecosystem is available, and the regulatory framework for digital assets with the Swiss DLT-Law equally – but will they act in time and drive market liquidity from an institutional side?
Which of these 4 use cases will take off first? 💡
👇 Let’s discuss! 🚀
Exciting times, more to come, stay tuned …