Let’s talk about Non-fungible Tokens (NFTs)
(Last Updated On: 2. July 2022)
What is the difference between Leonardo Da Vinci’s Mona Lisa and a high-quality printed poster of the same size? Well, a large part of the 2.7 million visitors didn’t come to the Louvre in 2020 for a reprint, I guess. The original one hangs there, verified by trustworthy certificates of authenticity. In the digital world though, there has never been a counterpart for such verification before. Until the development of the blockchain, no technology was established that made digital goods unique. That changed with the establishment of a standard for so-called non-fungible tokens, NFT. The term stands for unique, non-replicable digital proofs of ownership (tokens) that represent the rights to a digital or physical asset or document. Many NFTs are based on Ethereum blockchain technology protocols, making them technically very similar to crypto assets.
NFT boom in digital collectibles
But you have to ask yourself critically whether everything that is currently traded as NFT is actually of value in the long term or is only due to the current hype. In fact, by buying and exchanging NFTs, users learn how to handle and trade crypto tokens. Today they buy trading cards as NFTs, tomorrow they might buy shares in real works of art or real estate. NFTs have also made their way into computer games and into the hyped virtual worlds of the Metaverse. In the virtual worlds of “The Sandbox” and “Decentraland” users spend millions of dollars buying virtual properties.
NFTs for real goods
Potential of NFTs for the financial industry?
The art, gaming, entertainment and sports industries are pioneers in the use cases of NFTs. In addition, more and more industries are testing the potential of NFT, such as fashion companies or the event industry. And in fact, complete ecosystems are already emerging in which various service providers are developing tokenization, trading, trusteeship and payment services as well as supplementary services.
With the tokenization of physical items, a digital twin can also be mapped as an NFT and transferred or certified in the physical absence of the original item. Digital twins are increasingly being used in the production of industrial goods, in supply chain management and in logistics.
Also, some specialized companies such as 360X, Sygnum, Bitbond, Centrifuge, Cashlink, Opensea and Binance are currently active, offering sub-processes within the value-added processes of tokenized assets. 360X, a subsidiary of Commerzbank and Deutsche Börse, is currently working on prototypes for the financial sector.
But just as an idea of how the financial industry could profit from the NFT concept: as trustful institutions, banks could develop new services such as a trading platform for NFT tokenization services as a trustworthy identification of real assets and their entry in a blockchain for private and corporate customers. For not all current NFT ecosystems seem to meet the requirements for trusted services. Therefore, there is also a demand in the digital world for high-quality service providers who adhere to the compliance.
But to be honest, until the whole NFT concept will be accepted and established by the broad market, it will last several years. For the market for NFTs is still in its infancy, and even if its growing rapidly, it just needs its time to evolve. Also, for a profitable structure, higher market penetration and certainly also regulatory clarifications are required.
But once it has reached a certain level of maturity, the NFT concept can offer numerous possible applications. This could help to reduce the costs and to increase the efficiency of existing processes. Additionally, it could provide several new income sources.
Be careful when buying NFTs
If you would like to purchase an NFT on an NFT-platform like opensea.io or rarible.com: the public reporting often gives the impression that the buyer of an NFT is also the owner of the digital asset.
But is this really true? It is worth to scrutinize this critically! Here’s the reason: there does not exist any standardized legal practice at this moment. Therefore, at this stage of evolvement, NFTs are legally neutral data sets whose meaning and the legal position associated with them are shaped by the “Terms of Service” on which they are based!
Depending on the jurisdiction, NFTs can embody property rights, license rights and a variety of other rights. In other words, whether you are really an owner of a purchased piece of art is explained in the terms and conditions of the platform your bought your NFT. Therefore, to avoid that you would spend your money on possibly worthless digital zeros and ones, you should take the time to look at the small print.
In this spirit, I wish you a successful trading and investing.