Much has been written recently about a continuing surge in the popularity of non-fungible tokens (NFTs) and the eye-popping financial transactions that have grabbed headlines. If you are not familiar with the technology, NFTs are tokenized versions of assets that can be traded on a blockchain, the digital ledger technology (DLT) behind cryptocurrencies like Bitcoin and Ethereum. Unlike Bitcoin, however, each NFT is a unique entity and can’t be exchanged one-for-one.
NFTs are commonly associated with buying/owning digital artwork, which allows an investor or collector ownership of the original digital work while the artist retains copyright and reproduction rights. To help illustrate the point, much like with physical artwork displayed in a home or a museum, almost anyone could buy a Wyeth print, but only one person can own the original.
While this seems like a niche use case, NFTs present a fundamental change to the way consumers buy and sell digital assets like music, purchasable content for video games, movies and more. What’s more, smart contracts allow publishers, artists and content creators to continue to be paid every time an NFT is sold.
However, as more people learn about and purchase NFTs, the blockchain technology enabling these exchanges is becoming more mainstream. With its arrival on the big stage, DLT has started to pose unique challenges and opportunities to the banking and payments industry in particular.
NFTs enter the mainstream
Are NFTs just a fad that banks can ignore? Many experts are confident in the prolonged growth of NFTs. According to a recent Forbes article, $174 million has been spent on NFTs since November 2017. This includes several noteworthy NFT sales which helped to raise their awareness. For instance, auction house Christie’s sold an NFT collection by digital artist Beeple for $69 million. Meanwhile, Twitter founder Jack Dorsey sold his first tweet as an NFT for $2.9 million.
NFTs have been around for a number of years, so why the sudden explosion in interest? The first big craze was around CryptoKitties, a blockchain-based virtual game allowing players to adopt, raise and trade virtual cats, with some fetching prices of up to $172,000. Many NFT proponents enjoy their security and also that they tap into the digital shift accelerated by COVID-19.
The impact of NFTs and DLT on banks
Although blockchain was launched about 10 years ago, the technology dates back to 1991. While its use and acceptance are still in their infancy, the popularization of cryptocurrencies and NFTs is giving new prominence to DLT. With this technology seeing wider adoption and use, it is likely to impact the way banking and payments industries do business as well. Namely, the technology is disrupting the way many modernized banks operate by providing vast improvements in operational costs while reducing the time traditionally required for different processes.
Despite the inherent advantages that blockchain provides, it has largely been slow on the uptake, possibly due to existing technology stacks that banks already have in place along with the uncertainty that a future of DLT creates. DLT is not an evolution of what’s gone before, but a new way of doing business that requires new technology.
An interesting aspect of a distributed ledger is that it is owned by nobody and everybody at the same time. In time, DLT could provide a global data infrastructure and all users will have access to the same shared data. Blockchain could be the secure, single version of the truth that bankers and technologists have pursued for decades. An original promise of blockchain was its potential to grow to be the foundation of the worldwide recordkeeping systems. Moving financial data across borders seamlessly, securely and in real time are great benefits for global banking and payments.
From a data perspective, by storing customer data on decentralized blocks, blockchain technology can eliminate redundant efforts and make it easier and safer to share information between financial institutions in real time. Because of the security inherent in the technology, blockchain may be able to provide needed relief to ongoing administrative and regulatory burdens. For payments, blockchain technology could come to facilitate fast (potentially real-time) payment processing services.
The challenge for banks leveraging DLT is about much more than technology – success also requires fresh thinking and a new approach to how software is designed, developed, deployed and managed.
So, what do NFTs and DLT mean to you and me (and your bank)?
NFTs are acting as a lightning rod, bringing wider attention to DLT than ever before. This is paving a road to a new future in how digital goods and content are bought, sold, shared and distributed. When it comes to people not currently buying or trading NFTs, how might they impact their future? When will they cross out of news headlines or social media and into the average person’s life? Is anything digital in your life suddenly going to become an NFT?
Think about everything that’s digital today that has already been proliferated throughout the internet. In the future, when you create things – anything really, perhaps you are going to think twice about how you put it out there. Maybe you will release a new song or short story or silly video as an NFT. Perhaps you’ll be able to sell a digital copy of a movie, novel or video game as an NFT in a digital second-hand marketplace. Now more than ever, NFTs with blockchain technology are changing the way people think about ownership rights to their new creation.
For banks and financial institutions, there is a clear line in the sand for those who are investing in modern technology and those who are not. With the proliferation of technologies that are not just going to disrupt but also disintermediate past technology systems, banks must ensure they are looking into all of the efficiencies DLT can bring. For consumers, the banks that are delivering on this are the ones that are going to bring the most seamless customer experience.