If you’ve been hearing people talk non-stop lately about NFTs, or Non-Fungible Tokens, the latest trading trend in cryptocurrency, it’s probably been about how they’re revolutionizing the digital art world, or about how these one-of-a-kind digital assets are taking gaming worlds by storm.
But that’s just the flashiest side of NFTs rise in popularity. Just like cryptocurrencies, NFTs are grabbing the attention of investors, financial institutions and shaking up the FinTech sector overall. And it’s no wonder. Before NFTs, there wasn’t much you could do with digital assets. There wasn’t really any thought of owning one. After all, most everything on the Internet can be copied, shared and kept for free. NFTs turned that assumption on its head and the excitement around NFTs has everything to do with how digital assets are bought, sold, and distributed.
A growing number of businesses are joining the fray, to make the most of the growing public appetite for NFTs and their fast-rising value. NFTs are being taken seriously as an emerging asset class by investment houses and their newfound popularity among NFT collectors and in the public imagination is driving interest from major players in the payment technology industry to bridge the gap between cryptocurrency and traditional fiat money.
So what are NFTs anyway?
As tokens, NFTs are similar to cryptocurrencies like bitcoin in that they’re owned and traded using blockchain, the decentralized digital ledger technology. The big difference between NFTs and currencies like bitcoin is that each NFT is absolutely unique. When NFTs are “minted,” meaning written to a blockchain (such as Ethereum, currently the primary marketplace for NFTs), an extra piece of information is created and stored that ensures that NFT can only be owned by one person at a time, just like any physical asset.
Currently, images are causing the most excitement, which explains the art world interest. Games like Cryptokitties and Axie Infinity let you collect and trade digital cats and fantasy monsters that also exist as NFTs. But anything digital can exst as an NFT, from videos, to music – even a tweet. Jack Dorsey, co-founder of Twitter, sold his very first tweet as an NFT for over $2.9 million. The Tweet can still be viewed on Twitter, screenshot, copied, saved and shared by anyone, but only the owner has the single, original, signed and verified version – and the investment potential.
Brands of all kinds are getting in on the trend and minting their own NFTs. America’s iconic Time magazine put a series of three NFT covers up for auction recently, two of which featured famous, text-only Time covers that marked key turning points in US social history. “Is God Dead?” from 1966, and “Is Truth Dead?” from 2017. The third NFT, designed especially for the auction, asks “Is Fiat Dead?” – a fitting lead into how NFTs are impacting the economy and edging their way into traditional finance.
A new asset class – and a bridge between crypto and cash
NFTs and the cryptocurrencies being used to pay for them are challenging traditional fiat money. The global market for NFTs, Reuters reports, grew approximately 182 times in the first half of 2021, as compared with the same period in 2020, reaching a staggering value of $2.5 billion. The legitimacy of NFTs as an emerging asset has risen exponentially alongside the rise in dollars invested. Given the investment appeal, some crypto marketplaces are starting to include NFTs in packages of investments, or exchange traded funds (ETFs).
But FinTech and payments companies have more reasons to get involved. Given the massive liquidity of NFTs, traditional players want to have services in place for NFT traders to capture part of the market, tap into the transaction activity and remain relevant. No one wants to be left behind when that much value is changing hands. Mastercard, for instance, has already partnered up with digital currency firm Circle to bridge cryptocurrencies and traditional fiat money for clients who are eager to use digital assets anywhere Mastercard is accepted.
Some potholes in the road ahead
One thing holding the financial sector back is security. Although NFTs and the blockchain technology that enables them are supposed to offer the ultimate in secure authentication, there have been some notable breaches. Recently, a digital thief discovered security loopholes on a famous artist’s website and engineered the lucrative and ironic sale of a fake Banksy NFT for $336,000.
As with any new technology, there are kinks to be worked out – and all the more with new entrants to the financial sector. Some industry insiders speculate that fraud risk with NFTs can be addressed by establishing better KYC (Know Your Customer) processes, as in traditional banking, to eliminate fraud and money laundering.
Major players in the FinTech industry are already trying to bring more transparency and internal regulation to the way they oversee client transactions, and this is likely to become a priority across NFT-related business practices. To build its reputation going forward, the NFT community will need to make stronger security measures a top priority to bring greater legitimacy to the marketplace and drive continuing investment.
Expect more from NFTs
Despite the massive growth, it’s still early days for NFTs. And while some companies are getting on board for the early adopter bragging rights, many more recognize that NFTs are a significant new asset class and see the growth potential of the broader marketplace. Serious players are getting involved not only to invest, but to expand their own businesses by bridging the gap between fiat money and cryptocurrency in extensive and meaningful ways. Whether or not the interest lasts, in the near future, it’s bringing a big boost to NFTs growing credibility.