Tokenization of real estate assets, a new application of Blockchain, is expected to tap into this ever-growing market by simplifying and securing the administrative processes of real estate transactions and making commercial and residential properties accessible to a broader investor base (Figure 1).

The tokenization of real estate is the process of fractionalizing a physical property into digital tokens created on Blockchain platforms.

However, a formal regulatory framework must be established before introducing the technology in the Indian market. Some of the key areas where regulatory compliance is required are:

1. Unregulated cryptocurrency market
The transactions of digital real estate tokens will be carried out on Blockchain platforms like Bitcoin and Ethereum. However, in India, cryptocurrency markets are largely unregulated and volatile. Therefore, a stable, regulated digital currency is needed to encourage serious investors. This makes a case for CBDC, which can become a viable option for trading in real estate tokens.

2. Registration and Stamp Duty
When a property is bought, and the ownership is changed, it is registered at the registrar’s office, and stamp duty is paid. If the payment of the stamp duty and registration process is integrated into the smart contract, is the registrar’s role rendered useless? Another issue in this scenario is that the Government will have limited access to the data related to the registered properties. The companies owning & managing the properties will hold the data.

3. Digital Infrastructure
National Payments Corporation of India (NPCI) launched the NPCI Tokenization system (NTS) in December 2021. Currently, this platform is for the tokenization of cards only. For real estate, either the same platform can be used, or another exclusive platform has to be built since the technology is now domestically available. In either case, there is a need for a licensed platform for tokenization.
Also, large-scale tokenizing real estate in India requires massive IT and power infrastructure. To ensure operational efficiency, high bandwidth internet, data storage capacity, and uninterrupted power supply are essential for the system’s effective functioning.

4. Property Taxation
The Indian Government has brought virtual digital assets (VDA) under the Income Tax Act 1961. If real estate is tokenized, then as per the definition of VDA, property tokens should be considered as VDA. According to the tax laws, a 1% withholding tax is levied at the time of buying the VDA, and a flat rate of 30% is charged on the income from the transfer of the VDA. However, if one buys a non-tokenized property, it is taxed based on the size of the property and profit from selling the property is also taxable. The key difference between VDA taxation and property taxation is that the interest paid on the housing loan is a deductible expense from the taxable income. However, in the case of VDA, no deductions are permissible apart from the acquisition cost. Hence, should this deduction be permissible if a token holder is considered a property owner?

5. Security of Digital Tokens
Blockchain is a safe platform for storing crucial information. However, with respect to the custody of tokens, there have been concerns regarding the security of vaults and other custody solutions. Some of the hacking heists worth millions of dollars have made international news. Regulators must ensure that history is not repeated by providing secure custody solutions for the real estate tokens.
If regulatory and legal compliances are in place, real estate tokenization can potentially transform investments in the sector. Since it is a popular investment instrument, if the benefits of tokenization are realized, it can also pave the way for the tokenization of other assets, particularly the illiquid asset class.

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“Tokenization refers to the replacement of actual card details with an alternate code called the “token”, which shall be unique for a combination of cards, the token requestor (i.e., the entity which accepts the request from the customer for tokenization of a card and passes it on to the card network to issue a corresponding token) and device (referred hereafter as “identified device”).¹

In simpler words, the token will function as the card at Point of Sale (POS) terminals and Quick Response (QR) code payment systems in place of the card’s information.

How does Tokenization work?

In order for Tokenization to operate, the user data must be removed and replaced with these tokens. Whether it’s credit card information, personal health information, Social Security numbers, or any other type of sensitive data that has to be secured and protected, the majority of organisations store at least part of this information in their systems. By using Tokenization, businesses can continue to use this data for their operations without running the risk of breaking compliance regulations by keeping sensitive data on-site.

Enhancing the safety and security of payments is the key objective of the entire process. When a customer enters their card information with the business offering the transaction service, the process is initiated to swap out the credit card information for a token. The organisation that obtains the credit card data utilises a service to convert the credit card number into a token, which is effectively handled like a real credit card number. After receiving the token, the merchant will give it to the commercial acquirer so that the transaction may be completed. The token will be taken from the acquirer by the token’s issuer, who will check its validity by comparing it to their database. The merchant will remain anonymous during this entire process and won’t see the card number.

The process is complete once everything has been approved and the card company’s account is used to send money to the merchant. The customer will then receive the products or services they ordered in exchange.

What are the benefits of Payment Tokenisation?

In accordance with the Indian context, the pandemic has accelerated the pace of digital transactions. Businesses developed improved technologies that supported online transactions as digital commerce grew in order to address consumer desires. ‘The volume of debit card payments in India for the financial year 2022 is estimated to be close to around 4 billion, while the volume of credit card payments was estimated at over 2.24 billion during the same time period.’ ^{2} This shows very high volumes in the payment industry and hence, security is always at risk due to improved levels of digital transactions. While consumers are concerned that various internet platforms may be able to access their sensitive data, businesses are anxious about losing devoted customers. Hence, Tokenization provides an extra layer of security to all the stakeholders involved

In addition to banking, Tokenization has various other benefits over its technical partner – Encryption:

1. Enhanced PCI compliance: Payment Tokenisation implies that fewer devices own card data.
2. Centralized management: The bank that issued the card keeps the token.
3. Flexibility of digital payments processing: The ability to return the money and set up recurring payments.
4. Low transaction cost: There is no need to allocate servers for clients’ data.

When comparing encryption to Tokenization, it should also be noted that tokenization only substitutes the information that is simply hidden by encryption. In most websites and applications, especially those with integrated payment processing, Tokenization has therefore taken the place of encryption. Payment Tokenisation’s benefits make it possible to improve PCI DSS compliance and protect user data while also decreasing the cost and inconvenience of security system maintenance. Also, “Card Tokenization” fosters trust since it easily safeguards the money:

1. Enhanced internal security
2. Increased profitability through improved client experience
3. Avoiding financial loss due to fines
4. Forming dependable connections with customers

Why do we need Payment Tokenization?

In the last 10 years, the financial services industry has experienced a significant technology surge. Online shoppers are growing every day thanks to cardless transactions, UPI payments, payment gateways, etc. One cannot ignore the reality that data is exposed to “Social Engineering” even as one benefits from the convenience of one-click transactions in digital banking. The fact that even if a hacker manages to break into the network, all that would be seen are random alphanumeric characters that have nothing to do with the original data, makes Payment Tokenization the most sought decision in major economies.

To perceive payment tokenisation from a stakeholder perspective, one must understand that the primary objective is to ensure that the actual payment information is not exposed during transactions, which in turn will ensure enhanced security and safety. From an Indian market diaspora, the Tokenization of card payments offers several benefits to different stakeholders involved in the payment process:

Cardholders: By swapping out sensitive payment information with an exclusive digital identity or token, tokenization increases security for cardholders. The fact that real payment information is not disclosed during transactions, helps to lower the risk of fraud. Also, since cardholders do not need to enter their card information each time they make a payment, it streamlines the payment process.

Banks and Payment Service Providers (PSPs): Banks and PSPs gain from tokenization since it adds another level of protection to card payments for them. They may safeguard their clients’ data and lower the likelihood of fraudulent transactions by substituting tokens for real payment information. With less sensitive payment information to maintain and monitor, tokenization also makes the payment process simpler for banks and PSPs.

Merchants: Tokenization offers businesses a number of advantages, including increased security and a decreased chance of chargebacks. Merchants may lower the risk of fraudulent transactions and safeguard the data of their consumers by accepting tokenized payments. As businesses no longer need to retain and handle sensitive payment information, tokenization also makes accepting payments simpler for them.

Payment Gateway Providers: Payment gateway providers benefit from a more secure payment processing system thanks to tokenization since they no longer need to retain and handle sensitive payment information. Payment gateway providers may lower the risk of fraud and make the payment process simpler for users and merchants by accepting tokenized payments.

To sum up, all the parties engaged in the payment process gain from the tokenization of card payments in India, since, it increases security, streamlines the payment process and lowers the possibility of fraudulent transactions. Tanya Naik, Head of Omnichannel, Pine Labs mentions – ‘Given the increasing use of digital payments, it is encouraging to see the regulator take efforts to improve payment security. Tokenization not only helps to make the financial transaction experience more secure for the end user, but it also helps merchants create a consistent user experience and greater transaction approval rates with speed and security. ³’

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