What is the future of NFTs within the banking sector?

Is there a future for digital representations of assets – or non-fungible tokens (NFTs) – as a credible currency for banks?

The answer really is yes – but not yet…

But first, what are NFTs?

They are, in essence, cryptographic assets on a blockchain with unique identification codes and metadata that distinguish them from each other.

Normally, they are used to represent real-world items such as original artwork, other collectibles and real estate. When these items become an NFT, they are effectively ‘tokenized’ to makes buying, selling, and trading of them more simple and less susceptible to fraud. Each one is unique. So they have an identifiable chain of ownership that allows them to maintain value and be traded as collectable items.

How do NFTs differ from cryptocurrencies?

They are not the same as cryptocurrencies because they cannot be traded or exchanged at equivalency (the value of artwork, for example, as in the real world, is subjective).

So they are not a vehicle for commercial transactions as a cryptocurrency such as Bitcoin or Ethereum is. But just like cryptocurrencies, NFTs can remove intermediaries, simplify transactions, and create new markets.

How are NFTs used?

NFTs are mostly used currently for buying or owning digital artwork. The NFT gives the investor or collector ownership of the original digital work while the artist retains copyright and reproduction rights. It is not so different from a physical artwork displayed in a home or a museum. Anyone could buy a Georgia O'Keeffe print, but only one person can own the real item.

NFT made a splash in the news recently when the major auction house Christie’s sold an NFT digital collage by the famous American digital artist Mike Winklemann, better known as Beeple, for $69.3m.

What will the impact of NFTs be for the banking sector?

The wealth management sector has always viewed clients’ high-end physical collectibles (for example their Scottish whiskey collection or their fine art) as an integral part of an investor’s portfolio.

But at this stage, most banks are still at the exploratory stage for the use of NFTs in financial services.

• Goldman Sachs has announced it is considering NFTs in the context of financial instruments, according to the bank’s global head of digital assets Mathew McDermott.
• JPMorgan has created a lounge in the metaverse where users can buy virtual plots of land with NFTs.
• However the UK’s Barclays Bank has advised its customers: “Collectible NFTs are probably best seen in a similar light to classic cars or art: to be enjoyed, with value a secondary consideration. As far as including the tokens in strategic asset allocation policy goes, the market seems too untested and volatile for that at the moment.”

The slowness in uptake goes hand in hand with the uneven adoption of blockchain technology and DLT (distributed ledger technology) by banks in general. DLT is the infrastructure that allows simultaneous access, validation, and record updating in an immutable manner across a network that's spread across multiple entities or locations.

But the growing use of cryptocurrencies and NFTs is making DLT a bigger priority for banks. With the technology seeing wider adoption and use, it is likely to impact the way banking and payments industries do business as well.

But one factor that is likely to make banks take NFTs more seriously as a financial instrument is the fact that people will soon be able to buy and sell NFTs using fiat currency, such as the US dollar or euro.

In March this year, Coinbase announced it would be partnering with Mastercard to allow card payments on its upcoming NFT marketplace. This means users will be able to directly purchase an NFT with fiat currency (also known as a government-issued currency, such as the USD) using their Mastercard credit or debit card, all without having to buy cryptocurrency first.

Other NFT platforms have also said they are planning to launch fiat payment options.

So, while NFTs remain in their infancy and are still an asset class that produces a great deal of scepticism, certainly, NFTs cannot be ignored by the banking sector.

The figures speak for themselves. According to CBInsights, funding for NFT companies topped $1 billion for the first time in the third quarter of 2021.