By: Lou Grilli, Sr. Innovation Strategist
NFTs have become today’s form of pop art, replacing household names like Andy Warhol and Salvador Dalí with newer artists like Beeple, BoredApeYachtClub, and CryptoPunks, with equally crazy dollar amounts being fetched for original pieces of art. One of Beeple’s works sold for $69 million, and four CryptoPunks pieces sold for between $7 million and $23 million each.
NFTs, or non-fungible tokens, represent ownership of a digital asset. If you own cryptocurrency such as Ethereum, the amount you own is represented by a digital token. Instead of representing ownership of currency, an NFT is a digital token that represents ownership of something, most commonly digital art. An NFT can also represent a song, a video or even physical items.
As an example, Christina creates a piece of digital art. Since it’s just a computer file, anyone can duplicate it countless times over. Christina then creates an NFT to represent a single, unique ownership of that piece of art, making it one of a kind. She can now sell the NFT on an auction site for $50. Someone out there thinks it will be worth ten times that in a few years – so they invest by buying that NFT.
NFTs are not limited to art; they can also represent ownership of real-world items. I live on the west coast of Florida, and there’s a small waterfront town just a few miles from my house called Gulfport. A house in Gulfport was auctioned off as a non-fungible token, with the winning bidder paying 210 ETH, the equivalent at the time of the auction of $654,310.
Investors Beware
If you’re an artist, NFTs are a great way to establish ownership of your work – and make money from it. If you’re an investor looking to get rich off NFTs, however, there’s a lot you need to be aware of. Because of the digital nature of NFTs, one of the most significant risks is counterfeits. Earlier this year, Disney released a set of digital art as NFTs in a series called “Mickey and Friends.” The NFTs are similar to digital trading cards, and each one comes with custom music and a unique autograph on the back. The whole series sold out within minutes of launch, and within hours, pirated versions were available for sale on other NFT platforms. In fact, OpenSea, the largest NFT trading platform, admitted that more than 80% of NFTs created on its platform were unoriginal or fake. If you want to invest in NFTs, you need to be able to spot fakes.
What should banks be doing?
- See what your customers are doing, ideally using data analytics to track funds flowing. Track ACH and debit transactions to and from the major crypto exchanges, like Coinbase, crypto.com, Gemini, FTX, Binance.US. and BitFinex. Likewise, you should also be looking at purchases made at the largest NFT exchanges, such as OpenSea.io, NFT LaunchPad, crypto.com and Rarible. You may be surprised to see how much activity your customers are already conducting in the world of digital assets.
- In August of 2021, Visa bought one of the aforementioned CryptoPunks for $150,000. Visa doesn’t consider this a business investment, and the asset is not on their balance sheet. It did so because Visa believes that NFTs will play an “important role” in the future of retail, social media and entertainment, and they wanted a first-hand understanding of the process. Meanwhile, Mastercard has filed 15 trademark applications with the U.S. Patent Office regarding NFTs. If this is an area of interest for your financial institution, start small and have a team of enthusiasts go through the effort of buying an NFT within a reasonable budget. Or better yet, create an NFT with your bank’s branding and give it away to your customers.
- Make it count. Consider cryptocurrency balances, including NFT investments, as part of a customer’s ability to repay when underwriting a loan. Some of your customers are starting to accrue significant balances in cryptocurrency and NFTs. When searching for a mortgage, they want their cryptocurrency and NFT investments to be considered. They don’t want to sell their holdings, incurring a tax liability and, more importantly, abandoning the opportunity for additional gains on their investments. Likewise, they don’t want to sell their NFTs, given the limited market of buyers and the slower appreciation cycle. Neobanks are willing to attract new clients by doing just that – using reasonable valuations, considering risks of loss and using these investments as part of the overall equation when underwriting a loan.
While this may not be something that all banks are ready for just yet, Loan Officers should start following news related to the topic, discussing it with their Chief Compliance Officer, and preparing for a future where digital assets, cryptocurrency and NFTs comprise a growing portion of a household’s net worth. And this future looks like it might happen sooner than anyone expects.
Lou Grilli is a senior innovation strategist, tasked with building and shaping a superior payment and banking experience capability. Lou is currently focused on real-time payments and cryptocurrency. Lou participates on the U.S. Faster Payments Council and is named on a patent for the use of blockchain for loyalty programs. Lou holds an MBA from Duke, and a master’s degree in Computer Engineering from the University of South Florida.
