PropTech: Why tokenized real estate needs KYC

The emerging PropTech sector is revolutionizing real estate investment by leveraging blockchain technology to tokenize real estate assets. Although the new approach is opening up the sector to new investors, it may be especially vulnerable to exploitation for money laundering and other illicit financial activity – if robust KYC and AML measures are not properly implemented.

This monthly update takes a look into why the emerging PropTech (property tech) sector requires KYC.

By tokenizing real estate assets, real estate owners/controllers have found a way to take advantage of blockchain technology by making real estate investing faster, more secure, and more accessible to larger pools of investors. However, the process is far from simple – both from technical and legal perspectives. 

PropTech companies seeking to tokenize real estate assets need to consider numerous, complex and diverse implications – one of the most important is ensuring token issuance is not exploited for money laundering or other forms of criminal activity and/or terrorist financing.

As real estate tokens are considered securities, trading them needs to comply with the relevant laws and regulations governing normal securities, such as those outlined by the U.S. Securities and Exchange Commission (SEC). Unlike regulations governing utility tokens, laws governing securities are well established – and violating them can bring serious fines or even criminal convictions.

PropTech platforms should carry out KYC checks on both real estate owners and investors as a standard registration process for using the platform. The details of the KYC process would be configured according to the prevailing requirements of the platform and the laws of the jurisdiction(s) it operates in. This process would essentially:

 

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1. Establish whether the user being onboarded is:

    • A business – this will launch a Corporate KYC process that involves checking a business’ name against global corporate registry databases, and ensuring that the company is real, licensed, has a verified address/place of business and is active, or
    • An individual investor –  this will establish an individual user’s identity through ID document verification (IDV) with  government databases.
  1. AML Watchlist screening: The second step involves vetting the business or individual for known involvement in illicit financial activity, as well as assessing the risk that they might be involved in such activity. For companies, this involves checking its registered principals and Ultimate Beneficial Owners (UBOs) against global sanctions and watchlists, including global lists of Politically Exposed Persons (PEPs) and adverse media.
  2. ​​​​Crypto wallet screening: Investors’ wallet addresses can also be screened for possible association with money laundering, terrorist financing, and other AML risk indicators to prevent and combat financial crime proactively.
  3. Establish Risk Profile: Once these elements of a business and/or an individual’s identity have been established, the potential investor can be assigned a risk profile based on risk assessment procedures.

As more and more actors enter the space, it will be critical that PropTech companies take regulation seriously while embracing technology that can make onboarding investors seamless, effective, and safe.

If you’d like to learn more about how our end-to-end workflow solution can be integrated with your platform, let us know, and we’ll be happy to discuss it.