How NFTs can impact the financial sector

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When Twitter founder Jack Dorsey sold his first tweet for $2.9 million as a non-fungible token (aka NFT), many wondered what an NFT was and how it could possibly sell for that much money. Yet, the popularity of NFTs has continued to soar, and many industries, including banks, are paying close attention to them. According to CBInsights, NFT business funding topped $1 billion in Q3 2021.

If you’re unsure how to define an NFT, you’re not alone. Forrester research estimates that approximately 28% of American adults who are online and have heard of NFTs do not 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, photograph, piece of music, game, or collectible – or it can be an original creation that exists only in form. digital. The difference is that each NFT is a unique entity that cannot be traded one-for-one like bitcoin.

As NFTs grow in popularity, so does the awareness of blockchain technology. After all, it is technology that is reimagining how digital goods and content are bought, sold, shared and distributed. This changes the fundamental nature of digital property. This 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 blockchain NFT collectibles. Adidas sold over $22 million in NFTs when it 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 could be a whole new asset class for digital data. In many ways, NFTs and blockchain could be what bankers have dreamed of 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 need to be closely examined.

NFTs keep financial data secure in the metaverse and beyond.

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

This creates significant opportunities for financial institutions responsible for managing sensitive data. For example, trade finance is highly regulated, but document fraud remains a significant challenge. NFTs, however, can be tied to where that data is stored off-chain. This creates an immutable record of the location of important assets.

The same can be said of NFTs in the metaverse. I think NFTs will become more important as the potential of the metaverse is actualized. As banks begin to invest more in the metaverse, blockchain technology can provide a stronger foundation for customer interactions. Decentralized registries will help ensure that all data is held securely.

NFTs can open the door to DeFi and fintech innovation.

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

The combination of NFTs and DeFi will drive fintech innovation, at least in the short term. In the same way that blockchain funds have emerged in response to the rising value of cryptocurrency, we are also seeing the emergence of NFT-related funds, like NFTX.

NFTs may become increasingly secured.

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

Looking ahead, especially as the third age of the Internet, Web3, is built on blockchain technology, opportunities for digital collateralization abound. There’s almost nothing in existence today that doesn’t also have a digital shadow – even banking transactions – which means 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 Bitcoin and Ethereum prices falling. While NFT prices are also down, volume has increased, suggesting that NFT investors/collectors are looking to take advantage of bargains.

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

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