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When Tokenized Real-World Assets Collide With The Real World

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Biying Cheng and I have a column in Law 360, When Tokenized Real-World Assets Collide With Real World. It reads,

The city of Detroit filed a public nuisance lawsuit in July of last year in the Michigan Circuit Court for the Third Judicial Circuit against Real Token, its co-founders and 165 affiliated entities, alleging building code and safety violations across over 400 Detroit residential properties.[1] RealT is a blockchain real estate platform that sells fractional interests in individual U.S. rental properties through the issuance of crypto security tokens.

On July 22, the judge issued a temporary restraining order — later converted into a preliminary injunction on Nov. 4 — barring RealT from collecting rent, pursuing evictions without a certificate of compliance and directing future rent into escrow until properties are brought up to code.

Detroit v. Jacobson is ongoing, with a trial scheduled to begin in May. The case highlights the brave new world we face when real estate assets are tokenized via blockchain technology.

The facts surrounding the case raise three pressing questions. First, are these real estate tokens securities? Second, assuming they are, do investors know what they are getting into when they purchase them? Third, and most importantly, are the very human tenants in these properties being provided with habitable housing by their decentralized finance landlords?

Are real estate tokens securities?

Until the Trump administration indicated that it might be taking a new approach to crypto more generally, it seemed clear that tokens like those issued by RealT were securities. Gary Gensler, chair of the U.S. Securities and Exchange Commission under the Biden administration, had stated that security tokens were generally securities under the long-standing Howey test, derived from the U.S. Supreme Court’s 1946 decision in SEC v. W.J. Howey Co.[2]

Trump administration officials have not, however, spoken in one voice on the issue. While SEC Commissioner Hester M. Peirce, the head of the SEC cryptocurrency task force, stated in July last year that “tokenized securities are still securities,” SEC Chairman Paul Atkins stated that “most crypto assets are not securities” a few weeks afterwards.[3]

Further muddying the waters, President Donald Trump’s Working Group on Digital Asset Markets released a report around the same time that distinguished between tokenized securities and tokenized nonsecurities, such as “commercial real estate.”[4]

On July 31, Atkins also announced the Project Crypto initiative to aid “President Trump in his historic efforts to make America the ‘crypto capital of the world.'” Under the aegis of Project Crypto, the SEC intends to develop “clear guidelines that market participants can use to determine whether a crypto asset is a security or subject to an investment contract” to slot crypto-assets into various categories.

The initiative also contemplates “an innovation exemption that would allow registrants and non-registrants to quickly go to market with new business models and services,” with no need to comply with burdensome regulatory requirements.[5]

It remains to be seen which types of real estate tokens will be deemed by the Trump administration to be securities and which will be deemed interests in real estate. It is important to acknowledge, however, that it would be a radical change to deem real estate tokens like RealT’s not to be securities, and it would upend decades of settled law relating to the Howey test.[6]

Indeed, the U.S. Court of Appeals for the Ninth Circuit on Aug. 11 reaffirmed a broad interpretation of the Howey test in SEC v. Barry.[7] To determine whether a security token is a security, the starting point is to decide whether it is an “investment contract” for the purposes of the Securities Act. Courts have found that the Howey test requires four elements to be met to determine whether something is an investment contract: (1) there must be an investment by the investor (2) in a common enterprise (3) with an expectation of profit (4) derived primarily from the efforts of others.

The Ninth Circuit in Barry found that sales of fractional interests in life settlements were investment contracts under the Howey test, and thus are securities. A life settlement is a transaction in which someone sells a policy insuring their own life to investors for an agreed-upon price, and the investors then take over the payment of the premiums and collect the death benefit after the insured dies. The defendants were sales agents for Pacific West Capital Group, a firm that buys life insurance policies from seniors and then sells fractional interests in those policies to investors.

Applying Howey, the court held that investors’ expected profits depended on PWCG’s managerial and ongoing efforts, including its policy selection, operation of the premium-reserve mechanism and the fractionalized structure that left investors reliant on PWCG’s management. The life settlements were thus found to be investment contracts.

Although this case does not address the tokenization issue, it demonstrates that the Howey test is generally applicable to transactions that fall under the broad category of “investment contracts.” So, while recent regulatory announcements impose some uncertainty regarding the applicability of the test, the Ninth Circuit’s decision in Barry shows that the Howey test is still alive and well, at least for now.

Are investors protected?

Promoters of real-world asset tokenization claim that they can lower barriers to real estate investing by allowing retail investors into the types of deals that once required high investment minimums and limited access to accredited investors. While the low cost and ease of entry into the real estate tokenization market are real, major challenges remain for retail investors to understand the risks posed by the tokens, as well as those posed by the underlying properties themselves.

Under the current regulatory framework, if a real estate token offering meets the Howey test, it is an investment contract and thus a security. The transaction then must be registered with the SEC or exempted.

Real estate token issuers typically rely on exemptions such as Regulation A, Regulation Crowdfunding, Regulation D and Regulation S. Each of those exemptions has various limitations on solicitation, investor accreditation and amounts raised, as well as other aspects of the offering.

States such as New York and California also have their own regulations that tokens must comply with. State securities regulators have identified schemes tied to digital assets as a top threat for retail investors.[8] It is far from clear whether real estate tokens generally comply with all of the federal and state investor protection regimes that apply to them.

In addition to being exposed to fraud and misrepresentation by token issuers, retail investors are also exposed to real-world problems relating to their investments that can rapidly interrupt cash flows and investor distributions.

Are tenants protected?

The Detroit RealT lawsuit clearly demonstrates how digital assets and their underlying real-world assets interact in a way that an investor pitch deck cannot. As alleged in the lawsuit, tenants in their properties have suffered for months from lack of heat, leaky roofs and other unsafe conditions. Investors are suffering — albeit only financially — for owning such poorly maintained properties.

Tenants are not without remedies. Many local governments, including Detroit, have significant statutory protections in place for residential tenants. Residential rentals in Detroit must obtain and maintain a certificate of compliance, and courts can effectively halt rent payments or consider noncompliance against landlords in  cases. When units are out of compliance, tenants may be directed to escrow rent until code issues are fixed, as the judge in the RealT case has ordered.

What’s next?

We are just beginning to live in a world of tokenized real estate. The RealT case in Detroit should provide some guidance as to how we should navigate this new world.

But the regulatory environment is not yet clear. Investors do not yet understand what they are investing in. And tenants may be suffering real-world consequences until a whole host of regulatory and business issues are worked out.

The sooner we figure it out, the better for all.

[1] City of Detroit, City of Detroit Announces Major Lawsuit Against Real Token And 165 Related Corporate Entities for Widespread Nuisance Abatement Violations (July 24, 2025), https://detroitmi.gov/news/city-detroit-announces-major-lawsuit-against-real-token-and-165-related-corporate-entities.

[2] Gary Gensler, Chair, U.S. Sec. & Exch. Comm’n, Remarks on the Importance of Oversight and Investor Protection in Our Crypto Markets (Apr. 4, 2022), Securities and Exchange Commission, https://www.sec.gov/news/speech/gensler-remarks-crypto-markets-040422. , 328 U.S. 293 (1946).

[3] Hester Peirce, Comm’r, U.S. Sec. & Exch. Comm’n, Statement on Tokenized Securities, (July 9, 2025), https://www.sec.gov/newsroom/speeches-statements/peirce-statement-tokenized-securities-070925; Paul Atkins, American Leadership in the Digital Finance Revolution (July 31, 2025), https://www.sec.gov/newsroom/speeches-statements/atkins-digital-finance-revolution-073125.

[4] President’s Working Group on Digital Asset Markets, Strengthening American Leadership In Digital Financial Technology 37 (July 2025), https://www.whitehouse.gov/fact-sheets/2025/07/fact-sheet-the-presidents-working-group-on-digital-asset-markets-releases-recommendations-to-strengthen-american-leadership-in-digital-financial-technology/.

[5] Paul Atkins, Chair, U.S. Sec. & Exch. Comm’n, American Leadership in the Digital Finance Revolution (July 31, 2025), https://www.sec.gov/newsroom/speeches-statements/atkins-digital-finance-revolution-073125.

[6] SEC v. W.J. Howey Co., 328 U.S. 293 (1946).

[7] SEC v. Barry, 146 F.4th 1242 (9th Cir. 2025).

[8] NASAA Highlights Top Investor Threats, North American Securities Administrators Association (Mar. 6, 2025), https://www.nasaa.org/75001/nasaa-highlights-top-investor-threats-for-2025/.

Trump & Pulte’s 50-Year Mortgage

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Politico quoted me in ‘Band-Aid,’ ‘Distraction’: Experts Slam Pulte, Trump 50-Year Mortgage Idea. It opens,

The Trump administration is entertaining a potential plan for the government to back 50-year mortgages to address a housing affordability crisis.

But, in a housing market defined by low supply, industry experts warn that changes in financing are likely to be little more than a “band-aid” and a “gimmick,” while posing bigger risks to homebuyers.

“As a country, the mortgage term is not what we should be worried about. We should be focused on building more supply,” said Troy Ludtka, senior U.S. economist at SMBC Nikko Securities America.

Federal Housing Finance Agency Director Bill Pulte posted on X Saturday that the Trump administration is working on directing government-owned housing finance companies Fannie Mae and Freddie Mac to support 50-year home mortgages, calling the move ”a complete game changer.” President Donald Trump also posted on his social media platform, Truth Social, supporting the idea.

The proposal comes after Trump directed Pulte to leverage Fannie and Freddie to ramp up the country’s stalled housing production to bring down costs and address the estimated shortage of 4.7 million homes. But the new proposal is raising concerns about whether such a major change to the two giant mortgage financiers’ buying rules could destabilize a central strength of homeownership — the opportunity to build wealth over time.

In a series of follow-up posts over the weekend, Pulte wrote that “a 50 Year Mortgage is simply a potential weapon in a WIDE arsenal of solutions that we are developing right now. STAY TUNED!” He sounded off about other possible ideas like supporting portable mortgages, which can transfer to a new property, and assumable mortgages, which can be transferred to a property’s new buyer.

An FHFA spokesperson told POLITICO, “We continue to evaluate all options to address housing affordability, including studying how to make mortgages assumable or portable.”

And a White House spokesperson said in a statement, “President Trump is always exploring new ways to improve housing affordability for everyday Americans. Any official policy changes will be announced by the White House.”

Experts expect that extending the potential length of Fannie- and Freddie-supported home loans would require congressional support.

Fannie and Freddie don’t offer loans directly to potential homebuyers; instead, they purchase mortgages from lenders to package and sell on the secondary market. This frees up resources for lenders to issue new mortgages.

By purchasing 50-year mortgages, Fannie and Freddie could make the longer-term loans more appealing for lenders to offer. With a longer loan, monthly payments could come down, but it also comes at a cost to homebuyers.

“It would lead to buyers building equity in their homes more slowly. At the beginning of the mortgage, more of those payments tend to be interest… This is more of a stopgap band-aid to address affordability,” said Gennadiy Goldberg, head of US rates strategy at TD Securities.

Sharon Cornelissen, director of housing at the Consumer Federation of America, called the proposal “a distraction” and warned that although expanding the accessibility of 50-year mortgages could lower monthly payments, “the cost of that is that people won’t be able to build wealth through homeownership.”

And as first-time homebuyers get older, the 50-year mortgage appears less manageable, Cornelissen said. Last week, the National Association of Realtors shared findings that the median age of first-time homebuyers had risen to an all-time high of 40.

“So you’ll be 90,” Cornelissen said, adding that finishing payment on a 30-year mortgage is a “stabilizing force” for people going into retirement.

David Reiss, a Cornell Law School professor and real estate finance researcher, said a move toward 50-year mortgages would require homebuyers to rethink how they save for retirement.

“We often hear financial advice that you want to try to pay off your mortgage before the time that you retire,” Reiss said. “So that’s a problem.”

VIDEO: Retrenchment and Rollback in Consumer Protection and Housing

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The video for the ABA Professor’s Corner webinar on Retrenchment and Rollback: Federal Consumer Protection and Housing has been posted. Rosa Newman (Elon) moderated and I spoke alongside Kathleen Engel (Suffolk) and Julie Patterson Forrester Rogers (SMU). The session explored “the federal government’s retrenchment on consumer and civil rights protections during the Trump Administration and the consequences for housing. The panel will connect shifts in federal consumer protection frameworks to the on-the-ground impacts for affordable housing development, tenant stability, and fair housing enforcement.”

The FHFA’s @Pulte Acts on X Alone

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Business Insider quoted me in Mortgage Regulator Bill Pulte Has Posted at Least 13 Agency Orders on His Personal X Account (behind a paywall). The story reads, in part,

Until he became the head of the Federal Housing Finance Agency and a warrior in President Trump’s fight with the Federal Reserve, Bill Pulte was mostly known for posting on X. Under the handle @pulte, the businessman frequently sent groceries and gas money to people in need.

In his governmental role, which he assumed in March, Pulte has continued to use X as a megaphone. Over the last six months, he has posted at least 13 official orders on his personal account — and they don’t appear to be posted publicly anywhere else.

The practice is unusual for the head of an agency that regulates Fannie Mae and Freddie Mac, the two housing-finance companies under federal conservatorship central to the $21 trillion residential mortgage market.

*    *     *

“This is very abnormal,” said David Reiss, a law professor at Cornell University who focuses on housing policy and real-estate finance. “I don’t know what a court would do if someone sued based on an order that he only posted on X.” He added by email that impacted parties might argue that carrying out official acts by an X post doesn’t comply with the Administrative Procedure Act.

The FHFA did not respond to questions about Pulte’s posts. Pulte didn’t respond to a request for comment.

Bullying the Fed

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Fed Chair Jerome Powell

Central Banking quoted me in Economists Denounce Trump’s ‘Bullying’ of Fed Chair (sign up required). It opens,

Economists have attacked what they regard as US president Donald Trump’s bullying of Federal Reserve chair Jerome Powell, describing it as dangerous for the central bank’s continued independence.

On June 30, Trump posted on his social media platform a copy of a handwritten letter to Powell showing interest rates around the world. In the letter, Trump had written: “Jerome, you are as usual, too late. You have cost the USA a fortune, and continue to do so. You should lower the rate by a lot. Hundreds of billions of dollars being lost. No inflation.”

Along with the note, Trump posted that “Jerome ‘Too Late’ Powell, and his entire Board, should be ashamed of themselves for allowing this to happen to the United States. They have one of the easiest, yet most prestigious, jobs in America, and they have FAILED — And continue to do so”.

He added: “If they were doing their job properly, our Country would be saving Trillions of Dollars in Interest Cost. The Board just sits there and watches, so they are equally to blame. We should be paying 1% Interest, or better!”

On July 1, Powell said the Fed would probably have lowered rates already had it not been for the tariffs and trade policies introduced by the Trump administration.

Ralf Fendel, professor of economics at WHU – Otto Beisheim School of Management in Germany, says Trump’s note bears all the hallmarks of political interference.

“Handwritten personal correspondence is traditionally reserved for heartfelt gratitude or strategic diplomacy, but not for exerting pressure on an independent central bank,” he tells Central Banking. “In resisting such pressure, Mr Powell is upholding the Fed’s institutional credibility and responding appropriately to a macroeconomic environment clouded by trade policy uncertainty and various economic risks.”

Fendel adds that Fed decisions must be guided by economic data and not the demands of the White House.

William English – professor of economics at Yale University, and a former director of the Fed’s monetary affairs division and secretary to the Federal Open Market Committee (FOMC) – says that having a president who is so publicly critical makes the Fed’s job more complicated. “But they have their mandate and will do their best to achieve that,” he says. “We’ll see how it goes!”

Francesco Bianchi, professor of economics and department chair at Johns Hopkins University, says the most recent remarks by Trump represent a turn for the worse.

“Such a confrontational stance cannot be good for central bank independence,” he says. “Powell probably feels that he needs to push back against the pressure and that he has a bit more freedom given that his second term is coming to an end.”

Fed historian Robert Hetzel adds that Trump appears to want to return to a time when the central bank was subservient to the US Treasury.

David Reiss, professor of law at Cornell University, says there is an extensive history of presidents “jawboning” the Fed chair to lower rates. However, he says central banks work better when “insulated from the political exigencies of political leaders”.

“Paradoxically, bullying the central bank can lead to interest rates increasing, as markets demand a higher risk premium as trust in the central bank’s decision-making decreases,” he says. He also concurs with Powell’s assessment that tariffs are inflationary through many channels.

Fannie, Freddie and Trump

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FHFA Director Bill Pulte

Central Banking quoted me in Fannie, Freddie . . . and Donald. It reads, in part,

IIn a client note on May 13, investment management firm Pimco said any privatisation of Fannie and Freddie would be a solution in search of a problem.

“If the GSEs are released but the government remains accountable to come to their rescue, wouldn’t taxpayers ultimately be the biggest loser, once again, by seeing GSE gains privatised but losses socialised?” it said, adding: “Don’t fix what’s not broken.”

David Reiss, professor at Cornell Law School, says Pimco’s view reflects the fact that the mortgage market has been functioning “pretty smoothly” since Fannie and Freddie were nationalised. According to this viewpoint, there is “no need to release them from conservatorship”.

However, Reiss says he does not like to see so much power and influence concentrated in the GSEs, and he believes the private sector would do a better job of evaluating credit risk.

“Some people – mostly investors in Fannie and Freddie securities – think [privatisation] is the right thing to do because the conservatorships were supposed to be temporary and the companies should be returned to private control and investors should be able to get some kind of return on their investments,” he says.

Reiss adds that some members of the Trump administration think privatisation would generate hundreds of billions of dollars in revenue that could be used to help pay down the national debt, offset tax cuts and seed a sovereign wealth fund.

Joe Tracy, senior fellow with think-tank the American Enterprise Institute and a former official with the Federal Reserve banks of New York and Dallas, agrees with Reiss. “The problem is that they are in conservatorship limbo, so the government has effectively nationalised a large segment of mortgage finance,” he says. “This should be carried out by the private sector.”

    *     *     *

Lawrence White, professor at New York University and co-author of Guaranteed to Fail: Fannie Mae, Freddie Mac and the Debacle of Mortgage Finance, says the GSEs are unlikely to become boring unless they are broken down. He believes that if Fannie and Freddie are privatised in their current form, each enterprise will be likely to pose a systemic risk from a financial stability perspective.

“The implication is that their regulator, the Federal Housing Finance Agency [FHFAI, will need to have strong powers of examination and supervision and will need to impose substantial, risk-adjusted capital requirements,” he says.

“It is unclear whether there will be implications for the Fed as lender of last resort, since the Fed’s lending function is currently limited to banks.”

Reiss agrees that the two lenders are systemically important. If they “had to significantly scale back their lending, it would likely cause a crisis in the financial markets”, he says. “If that crisis were not quickly addressed it would cause a crisis in the real economy as well, freezing up credit for new construction and resales.”

Given that the two GSEs issue more than 70% of the outstanding $9 trillion of mortgage-backed securities in the US and, if privatised, would be two of the country’s largest publicly traded companies, the financial stability risks are clear, he says.

Reiss adds that if the privatisations were poorly planned, and if this were priced in by the markets, it would lead to “higher mortgage rates, with all of the knock-on effects that would have”. This, he says, would “increase the magnitude of a financial crisis if the two companies were to report poor financial results down the line”

Reiss’s interpretation of the Fed’s role is different to that of White, and he believes history may end up repeating itself. He says that although the FHFA is Fannie and Freddie’s primary regulator, the Housing and Economic Recovery Act of 2008 requires the Fed to be consulted about any federal government processes related to the companies.

“The Fed may also co-ordinate with other parts of the federal government in responding to a financial crisis, such as purchasing Fannie and Freddie securities, as they did during the financial crisis of 2007-08,” he says. “One could well imagine the Fed playing a similar role in future crises involving Fannie and Freddie.

What Happens if Fannie and Freddie Go Private?

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I was quoted in Fintech Nexus’ Home Invasion: What Happens if Fannie and Freddie Go Private. It reads, in part,

The Trump Administration has telegraphed significant changes to GSE mortgage lenders — with massive implications for the industry

Since his swearing in on March 14 as the fifth Director of the Federal Housing Finance Agency (FHFA), construction mogul William J. Pulte has executed major policy and personnel changes. Among other moves, Pulte has named himself board chair of the Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac, removed 14 of the GSEs’ 25 sitting board members, fired most of the companies’ audit boards, generally slashed headcount, and rescinded several Biden-era oversight-related advisory bulletins.

According to Professor David Reiss of Cornell Law School, a scholar of real estate finance and housing policy, Pulte’s simultaneous leadership of the FHFA in addition to roles at the GSEs, which have been under federal conservatorship since the 2008 financial crisis, is not normal.

“The whole point of regulation is you have somebody who’s overseeing an industry,” he told Fintech Nexus. “This is like the left hand [knowing] what the right hand is doing: You’re overseeing yourself, so it’s … kind of inconsistent with the notion of a supervisory regulator.”

Fintech Nexus contacted the FHFA, requesting that it comment on the impetus behind Pulte’s simultaneous self-appointments to Fannie and Freddie. The FHFA did not respond.

*     *    *

CAPITAL IDEAS

One idea percolating is for the Trump Administration to use Fannie and Freddie as a pool of capital to inject into a sovereign wealth fund. An op-ed in the Financial Times by Stifel CEO Ronald Kruszewski suggested this reconfiguration could provide “continued government backing,” “stabilize investor confidence,” and “pave the way for a $1 trillion sovereign wealth fund by 2040.”

However, in a letter to the editor in the Financial Times, Dini Ajmani, Former Deputy Assistant Secretary of the US Treasury, suggested the idea would fail, as any privatization of the GSEs would require proper capitalization, taxpayer compensation, and adequate confidence of securities investors.

“I believe the difficulty in meeting all three conditions is why [the] status quo has persisted,” Ajmani told Fintech Nexus. “To build capital, Fannie/Freddie must retain earnings, which means the taxpayer is not compensated. If the taxpayer is compensated through dividend payments, private capital will be uninterested because the agencies will be undercapitalized.”

To this end, FHFA Director Pulte may continue to atrophy many forms of GSE oversight as a way to prime the pump: Pre-empting congressional activity by deregulating Fannie and Freddie can accelerate their transition toward open-market frameworks.

The Trump Administration may see it as its only viable short-term  avenue, as many members of Congress are uninterested in bringing Fannie and Freddie out of conservatorship; Senator Elizabeth Warren (D-MA), member of the Senate Committee on Banking, Housing, and Urban Affairs, called the move “Great for billionaires, terrible for hardworking people.”

Should the Trump Administration succeed in its quest, we may see states attempting to fill in the gaps on regulatory accountability, rhyming with blue-state attorneys-general’s litigiousness in the wake of the Consumer Financial Protection Bureau’s de-clawing, though this is unlikely.

“State regulators do not generally play a role similar to the two companies (except to some small extent state Housing Finance Agencies),” Reiss of Cornell Law School said. “I could imagine state agencies trying to increase consumer protection for mortgage borrowers, if the federal regulatory environment changes, but we would have to see how that plays out to understand how the states would respond.”