How NFTs Can Impact the Financial Industry

As NFTs surge in popularity, awareness of blockchain technology is also increasing.

Working on a computer

When Twitter founder Jack Dorsey sold his first tweet for $2.9 million as a non-fungible token (aka NFT), many were left scratching their heads wondering what an NFT was and how it could possibly sell for so much money. Yet the popularity of NFTs has continued to skyrocket and many industries, including banks, are paying close attention. According to CBInsights, funding for NFT companies topped $1 billion in the third quarter of 2021.

If you're not quite sure how to define an NFT, you're not alone. Forrester research estimates that about 28% of U.S. adults who are online and have heard of NFTs don't understand what they are. An NFT is a digitized certificate — or token — that is unique and stored on a blockchain. Blockchain is the technology behind cryptocurrencies like Bitcoin (for which my company provides infrastructure support). An NFT can be a representation of something — a work of art, a photograph, a piece of music, a game or a collectible — or it can be an original creation that exists only in digital form. The difference is that each NFT is a unique entity that can't be exchanged one-for-one like bitcoin.

As NFTs surge in popularity, awareness of blockchain technology is also increasing. After all, it's the technology that is making it possible to re-think how digital goods and content are bought, sold, shared and distributed. It is changing the fundamental nature of digital ownership. It creates a ripple effect on a variety of industries– from sports to fashion to finance. For example, the NBA successfully launched NBA Top Shot, a series of NFT blockchain collectibles. Adidas sold more than $22 million in NFTs when they entered the metaverse last year.

A new asset class?

For banks and financial institutions, NFTs and the blockchain technology that powers them have the potential to completely revolutionize finance as we know it. According to Bank of America, NFTs may form an entirely new asset class for digital data. In many ways, NFTs and blockchain could be what bankers have dreamed about for decades (potentially worth more than Bitcoin's $900 billion market value). But to truly understand the potential impact on the financial world, the benefits of blockchain must be closely examined.

NFTs keep financial data safe and secure in the metaverse and beyond.

The beauty of blockchain is that the on-chain data encoded into an NFT cannot be altered, counterfeited or in any way accessed by anyone who does not have the cryptographic keys. In the event that a cyber attacker managed to steal an NFT, its history and destination would still be visible to all, making it highly secure.

This creates important opportunities for financial institutions charged with managing sensitive data. For example, trade finance is highly regulated, yet document fraud remains a big challenge. NFTs, however, can link to where this data is stored off-chain. This creates an immutable record of where important assets are housed.

The same can be said of NFTs in the metaverse. I believe NFTs will become more prominent as the potential of the metaverse is actualized. As banks start to invest more in the metaverse, blockchain technology can provide a stronger foundation for customer interactions. Decentralized ledgers will help ensure that all data is kept safe and secure.

NFTs can open the door to DeFi and fintech innovation.

In addition to enabling greater security, blockchain technology offers a multitude of benefits for financial institutions. These include lower friction for transactions due to automation and a higher level of customization for financial products and services. As NFTs continue to proliferate, the adoption of decentralized finance (DeFi) will be much more transparent and direct for all players and participants.

The combination of NFTs and DeFi will yield fintech innovation, at least in the near-term. In the same way that blockchain funds have emerged in response to the growing value of cryptocurrency,we're also seeing an emergence of NFT-related funds, like NFTX.

NFTs can become increasingly collateralized.

Already, NFTs are starting to be used as collateral for loans. Many NFT collectors are using services like Arcade to connect with NFT owners interested in borrowing money by collateralizing their NFTs. Lenders are able to charge much higher interest rates than that of traditional loans and borrowers are able to access funds without having to sell their digital assets.

Looking ahead, especially as the third age of the internet, Web3, is being built based on blockchain technology, opportunities for digital collateralization abound. There's almost nothing that exists today that doesn't also have a digital shadow — even banking transactions — which means that anything that can be digitized can serve as conceptual collateral.

Crypto Volatility

There has obviously been a lot of volatility in the crypto markets recently with prices of Bitcoin and Ethereum dropping. While NFT prices are also down, volume has been up, suggesting that NFT investors/collectors are looking to take advantage of bargains.

While there's no crystal ball to predict the future, it's clear that NFTs will continue to shape the financial industry, and blockchain will be an important part of that. As more financial institutions use NFTs as investment vehicles, the ones with a clear NFT strategy in place will be in a prime position to reap the benefits.

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