The Tokenization Mirage: Why NFT Real Estate Can’t Deliver on Its Promises

Blockchain enthusiasts are making bold promises about revolutionizing the real estate market. They confidently claim that this technology will ‘upend property transactions ‘in ways similar to how streamers radically changed how people watch television’, prophesying that as much as $4 trillion of real estate will be tokenized by 2035.

The appeal is undeniable. Who wouldn’t want to replace a months-long closing process involving multiple intermediaries with near-instantaneous digital transfers? Industry marketing suggests that buyers can simply purchase NFTs representing property ownership, with transactions ‘recorded on an immutable blockchain’ to provide ‘legal ownership documents” for ‘“swift, uncomplicated investment methods.’”

But underlying this ambitious rhetoric is a fundamental issue that crypto enthusiasts have largely avoided confronting: does current private law actually enable the use of digital assets to directly represent rights in real property? In our forthcoming essay, we tackle this question head-on.

The Legal Reality Check

Our comprehensive analysis of American commercial and property law reveals a stark disconnect between technological capability on the one hand and legal recognition on the other. While entrepreneurs can use distributed ledger technology to create digital tokens that they claim represent ownership in real property, current law does not recognize such attempts to tokenize real estate as being legally effective.

As we see it, the core problem lies in a fundamental misunderstanding of tokenization itself. Blockchain enthusiasts frame it as an innovative technological process, whereas it is a legal construct that has existed for centuries. The law has long recognized that one asset, typically a writing, can be used to represent rights in another asset, from medieval bills of exchange to modern stock certificates. Yet each of these tokenizations emerged through explicit legal recognition and operates within mandatory frameworks. As we have argued elsewhere, this constraintreflects the cardinal property law principle of numerus clausus. The principle prevents private parties from unilaterally inventing new forms of property rights, ensuring that these interests remain uniform and readily comprehensible to all market participants. 

American law currently permits only limited forms of digital asset tokenization. As we have written in other work, the 2022 Amendments to the Uniform Commercial Code create two narrow pathways: enabling certain payment obligations to be discharged to whoever controls a specified digital asset (i.e., ‘“controllable accounts’” and ‘“controllable payment intangibles’”), and allowing documents of title like warehouse receipts and bills of lading to exist in digital form.  Some states allow business entities to use blockchain ledgers as their authoritative ownership records, making digital assets the mechanism for transferring equity interests. Conspicuously absent from these developments is any avenue for digital assets to embody property rights in real estate. This exclusion reflects fundamental barriers in American property law:

The Statute of Frauds Problem: Every American jurisdiction requires conveyances of real estate interests to be in writing, with deeds containing specific formal elements including property descriptions, grantor signatures, and ascertainable grantees. Even if electronic transaction laws could theoretically accommodate digital assets as deeds, this would only create a superficial compliance that fails to address the fundamental incompatibility between dynamic blockchain tokens and static deed requirements. Each property transfer would require updating grantor and grantee information in the token’s metadata (a process that likely eliminates any efficiency gains while creating new technical vulnerabilities).

The Bearer Instrument Problem: Perhaps most critically, American property law fundamentally prohibits bearer instruments for real estate (in other words, instruments that would transfer ownership through simple possession of a token). Unlike commercial law’s documents of title (like bills of lading and warehouse receipts) that can transfer ownership rights in goods through mere delivery, real estate interests cannot be embodied in instruments that pass ownership through simple transfer alone.

The Dual Ledger Problem: Even if digital assets could technically function as deeds, the title assurance system creates a fundamental obstacle. Property transfers would require maintaining both blockchain records and traditional county land records, failing to eliminate complexity while leaving token holders vulnerable to competing claims. The same person who conveyed an NFT deed to a buyer could subsequently convey that same property through a traditional written deed to another buyer. And under recording act rules, the second buyer may well prevail.

The Mirage

These are not abstract technicalities. Ignoring these foundational legal barriers has severe, real-world consequences. When buyers purchase NFTs purporting to represent real estate, they acquire tokens that the law does not recognize as conferring any property rights. Sellers who believe they have conveyed property through blockchain transfers remain legally obligated to deliver title through traditional means (and face liability if they cannot). Lenders that accept these tokens as collateral are taking security interests in worthless digital assets rather than valuable real property. The industry’s continued promotion of these arrangements, despite their legal impossibility, renders such technological innovation quite perilous.

What’s Actually Possible

This doesn’t mean, however, that blockchain technology has no role in the real estate market. The benefits lie not in circumventing property law but in working with its enduring architecture. Under existing electronic transaction laws, digital assets can technically function as deeds: the instruments that convey property. 

A blockchain-based deed could offer advantages over both paper and electronic documents: tamper-resistant records, decentralized storage eliminating single points of failure, and permanent accessibility. But this is fundamentally different from tokenization. The digital asset would merely be the deed itself, not a token embodying ownership that can be transferred through control. Each new property conveyance would still require creating new deed documents with updated party information and proper execution formalities.

The greatest potential may lie in the future integration of these emerging technologies with land registries, where DLT systems could enable real-time title searches, automated compliance checks, and streamlined recording processes. Yet significant infrastructure barriers stand in the way. As of February 2023, roughly 30% of America’s 3,600 recording jurisdictions still lack basic e-recording capabilities, and none currently accommodate blockchain-based documents. Until these foundational gaps are addressed through policy reform and public investment, these innovations remain aspirational.

The Takeaway

Direct tokenization of real estate, the creation of bearer-like digital assets that embody property rights, is legally impossible under American property law. Blockchain technology and digital assets can improve real estate transactions, but only when deployed as enhanced tools for traditional conveyancing rather than as replacements for the existing legal framework. The question is not whether technology can revolutionize property law, but whether the industry will abandon its illusory promises for realistic applications that actually serve market participants.

Until then, the $4 trillion tokenization prediction remains what our analysis suggests it is: a mirage.

The authors' full papaer can be found here. 

Christopher K. Odinet is a Professor of Law and Mosbacher Research Fellow at Texas A&M University. 

Andrea Tosato is a Professor of Law at Southern Methodist University.