The merger of FinTech and PropTech | Dentons

PropTech, a term derived from “real estate” and “technology”, is often associated with FinTech. In today’s world, real estate is being bought every single day, which inevitably involves financial transactions. A predominant part of real estate transactions requires some form of technology, and with FinTech experiencing massive growth in society, it has undoubtedly merged with PropTech to produce FinTech Real Estate. In this article, we will discuss some aspects of FinTech Real Estate by focusing on peer-to-peer lending, crowdfunding, real estate blockchain, smart contracts and tokenization from a Mauritian legal perspective.

Peer-to-peer lending

Peer-to-peer (P2P) lending can be referred to as a financial business that enables a person to lend funds through a web portal or electronic platform that matches lenders and borrowers. Loans granted through P2P loans are usually unsecured. In Mauritius, P2P lending platforms use a segregated account model as prescribed in the Financial Services (Peer to Peer Lending) Rules 2020. This requires the P2P operator to ensure at all times that the funds of lenders and borrowers are maintained separately from their own funds, which shall maintained through appropriately identified bank accounts in Mauritius. For context, the P2P operator is a legal entity issued with a P2P lending license by the Financial Services Commission (FSC) to operate a P2P lending platform. It should be noted that the funds requested from a P2P operator should be used to finance a project. There is an obligation for the P2P operator to perform due diligence on its lenders in accordance with AML / CFT laws in force in Mauritius, and also on its borrowers, and assess their creditworthiness prior to admission to the P2P lending platform. Interestingly, P2P operators in Mauritius are obliged to give a two-day notice period to borrowers and lenders where they can cancel their written agreements without penalty.

An example of P2P real estate lending is providing loans for real estate projects without having to go through the traditional lending process, which reduces intermediary intervention and additional documentation. Although there are licensed P2P operators in Mauritius that provide consumer loans, flexible loans and corporate loans, there is currently a gap in the market for P2P operators offering real estate loans, as there are certain obstacles that must be overcome before this can become a reality.

Crowdfunding

Crowdfunding is the collection of funds from investors for a specific investment purpose through a web portal or electronic platform. Any person operating a crowdfunding platform in Mauritius must be licensed by the FSC. Similar to the due diligence requirements imposed on P2P operators, crowdfunding operators must perform due diligence on each issuer, in addition to due diligence performed under AML / CFT legislation, before allowing the issuer to raise funds through the crowdfunding platform. The issuer is the entity that seeks funding through the crowdfunding platform. The same due diligence mechanism applies to the investor who provides financing on the crowdfunding platform.

A hypothetical model for crowdfunding in the real estate sector is where investors can own property with other investors through crowdfunding platforms. Investors can subscribe for shares in companies that in turn own the property. The company can then rent out the property to tenants, thus enabling investors to earn passive income from the monthly rent. There are working models for crowdfunding real estate, for example on certain US-based technology platforms, where members can use the platform to invest in real estate advertised by real estate companies. To date, no such platform has been created for the Mauritian market. Perhaps a significant part of the absence stems from control over the real estate market in Mauritius, especially where foreign investors are involved. In order to acquire shares in companies that own or lease real estate, non-citizens require authorization from the Prime Minister’s Office. Therefore, using the said model, if a foreign investor were to buy shares in the company that owns the property through the crowdfunding platform, it would be required to request authorization from the Prime Minister’s Office, a lengthy administrative process defeated by the rapid and the seamless nature of crowdfunding transactions.

Blockchain and real estate

Blockchain is a distributed digital ledger consisting of “blocks” where transaction data is stored and where the “blocks” are linked together to form a “chain”. Blockchain is immutable, which means that the data stored there can not be changed. As such, this technology is considered safe and reliable and has found its use in a number of applications over time.

Real estate transactions consist of several steps involving intermediaries, and there is currently a much-discussed topic of whether blockchain can find an increasing presence in the middle of these transactions. Every real estate agent has a specific function that is required by law in several jurisdictions. One such example in Mauritius is the requirement that land acquisition transactions be carried out by a notary. In addition, when a deed has been executed, it must be registered in the land register of the general registrar’s department. Can blockchain therefore be integrated into these transactions? At present, in Mauritius, this is not feasible, as more than just a change in existing legislation would be needed. Sure, the possibilities exist as some of the most notable features of the blockchain are its security, immutability and efficiency, but there will be a significant nationwide or even worldwide effort that needs to be implemented. Perhaps the most important consideration when carrying out a property purchase is to establish the identity of the parties involved in order to secure ownership. There have been significant concerns regarding identification in blockchain technology that has given rise to robust AML / CFT measures. If real estate transactions were to become blockchain-based, identification concerns would first have to be resolved.

Another application of blockchain is the integration of smart contracts during property purchases. Currently, there is an involvement of legal professionals who prepare, evaluate and advise their clients regarding certain contracts such as preliminary reservation contracts, any real estate agreement or leases. Smart contracts are dependent on the fulfillment of predetermined conditions and are time- and work-efficient. The shortcomings of these smart contracts, however, are that they cannot replace a need for legal professionals in, among other things, negotiations between the parties, inform them of any legal consequences or verify the fulfillment of precedent conditions.

On the other hand, one of the advantageous uses of blockchain will potentially be the inscription of joints in the cadastre. Blockchain, which is in itself a secure database, will be able to keep track of deeds. This will create transparency over ownership of real estate transactions registered by the blockchain.

Tokenization of real estate assets is another advantage of blockchain in real estate. Property rights are fractionated and represented by digital tokens so that the tokens are linked to an underlying fractional ownership, respectively. Transfer of the token will also transfer the associated right. The benefits of tokenization include an increase in the investor pool, transparent records and the involvement of smart contracts that reduce the need for intermediaries. This is not currently a practice in a country like Mauritius, more because of the reasons described earlier in this article on control of the real estate market.

Conclusion

As the world becomes more FinTech-oriented, the real estate market is now a key player in FinTech. Blockchain, P2P lending and crowdfunding have certainly revolutionized real estate transactions and have already been integrated into the real estate market in certain jurisdictions. Embracing these advances would require regulation and changes in existing laws, but since virtual assets found their way into more national laws, there are definitely optimistic opportunities ahead.

References

• Financial Services Act 2007
• Rules for financial services (crowdfunding) 2021
• Non-Citizens (Property Restriction) Act 1975
• Rules for financial services (peer-to-peer lending) 2020
• “Legal Challenges and Opportunities for Blockchain Technology in the Real Estate Sector”, Rosa M. Garcia Teruel, Department of Private, Procedural and Tax Law, UNESCO Housing Chair, Rovira University of Virgili, Tarragona, Spain