Headline: How are NFTs used in Finance?

Date: 10/6/2022

Body:  So, we are hearing all kinds of things about NFTs.   The lady who started the Bored Ape series of NFTs made $2 Million in the space of 2 days.    (The cheapest one is now going for tens of thousands of dollars.)  So, there is a lot of money in NFTs.   The question is, are there a lot of NFTs in money?  So, let’s see.

How NFTs Can Play Into Trade Finance

OK, first, NFTs are more than just pictures.   They are pictures that come with a receipt of ownership that resides on the blockchain, and that is immutable.  This attribute makes NFTs very useful.  Even if a hacker can steal an NFT, the history would be on the blockchain, transparent to all.  Within the world of business, the NFT can be used to streamline the cryptocurrency process.  In trade finance, NFTs could help because developing a convincing fraudulent NFT is effectively impossible, as the transaction to create them is memorialized on the blockchain.  NFTs could also help by minimizing human error, as signatures are difficult to read, but a tokenized NFT is readily identifiable and instantly verifiable.  Further, as smart contracts become ever more, well, smarter, they can ensure that routine transactions stay within normal limits, freeing up employee time to work on other tasks.  And, yes, this is already happening.   Tradeteq executed the world’s first on-chain tokenized transaction.

What you talkin’ about, Wallace?

OK, first you have to understand that NFT does not equal picture.   Up to now, that has largely been correct, because most NFT’s have been sold as art pieces.  In simple terms, NFTs are digital receipts of purchase that reside, forever, on the blockchain. This means that any item that may benefit from being more easily verifiable and interoperable with the blockchain could eventually become an NFT.    This provides a level of certainty and transparency that has never existed before.  The thing to remember here, is that the NFT is really the entry on the blockchain, and the picture, or sound file that is associated with it is not the NFT itself.  (Per Forester Research, 28% of Americans don’t know this, so, if it’s weird to you, you’re in good company.

Despite this oft-misunderstood attribute, the money being shelled out for these NFTs is very large.  Adidas sold more than $22 Million in NFTs in 2021 alone.     Already, in 2022, more than $40 Billion of NFTs have been sold.  One major bank considers NFTs to be an entirely novel class of digital assets.  (I’m not one to make predictions often, especially concerning the future, but I can foresee an online world where your NFT becomes almost a signature for you.  You would tote that NFT around with you from metaverse to metaverse, and you could do business with people based upon an evidenced, immutable history of interactions that went favorably or not.  Really, handwritten signatures can be faked.   But, the NFT is recorded on the blockchain.)  We might not be there today, but I feel pretty confident that this is our eventual destination.)  Interestingly, some NFT purchasers are already using NFTs as collateral on a loan.   So, I take this as progress toward my prediction.

Let’s Take it to the House!!!

Real estate is a pain.  Commercial real estate can be governed by contracts that run into the hundreds of pages.  This means thousands of individual details that are vitally important.  I have never done a commercial real estate transaction, but, I have done several residential real estate transactions, and I can attest to the pain involved.   Oftentimes, things are so stressful that I begin feeling it as symptoms in my body.  Somehow, I doubt that I am alone in this.  But, as we get the blockchain involved, things could become much simpler.  Title Insurance searches are now so complex that there is an entire industry dedicated to it.   With all transactions permanently on a blockchain, proving clean title will be made much faster, and significantly less expensive too.  These benefits could easily apply to other types of insurances and taxes as well.

The Verdict

The blockchain will have significant effects upon how we transact business.   It will stand as a check on credibility, a simplification of research  and likely turn into some type of signature, signifying you.  I wouldn’t blame you for not believing me.  Things right now are so vague that NFTs are anything to everybody.  But, for just a moment, I ask you to think of the evolution of the signature and similar devices and how important they are.   Several centuries ago, the signet ring was invented, and a person would leave a characteristic mark on the wax sealing an envelope.  Even today, signatures are vital.  If you got an e-mail shouting in the subject line, “LOSE 20 POUNDS IN ONE MONTH!!!” would you be more likely to open this if it came from your doctor (high credibility) of from your Uncle Victor who is always  going on about how the Lindbergh baby was launched into space with the Tesla (likely lower credibility.)  As NFT usage matures, especially within social media, I can easily envision  a situation where you will begin to notice which NFTs are presented with information that turns out to be true, and you then making decisions based on the belief that this information is more credible.

The point I am trying to make is that financial information can tend to be VERY complicated.  In order to have at finding a way in this world, you must subject every fact presented to you to the sniff test.  Key to that test being successful, one must develop a finely tuned, err… um… BS detector.   And one of the keys here is to understand the sources of your information and which ones you can trust, and which ones you should probably inspect closely.

REFERENCES

Opinion: Real-World Use Cases for NFTs in Finance and Trade | FinTech Magazine

Beyond CryptoKitties and bragging rights: A look at the financial use cases of NFTs – Tearsheet

How NFTs Can Impact the Financial Industry (newsweek.com)

NFT Meltdowns Are Paving The Way For Better Use Cases (forbes.com)

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.