Gavin Brown, associate professor in financial technology at the University of Liverpool, and professor Daniel Broby, chair of financial technology at Ulster University Business School, discuss the potential merits of NFTs
by Rebecca Campbell
Non-fungible tokens (NFTs) are evidence of digital ownership (tokens) stored on the blockchain. As such, they are largely tamper-proof and not interchangeable (non-fungible). These unique tokens could represent anything from digital assets to property to products, including proof of digital ownership of stocks. It is important to note that owning an NFT does not equate with owning the underlying asset.
NFTs have huge potential. According to a blog post by the world’s largest NFT marketplace, OpenSea, trading volume in January 2022 was 600 times higher than the previous January. However, according to a blog post by DappRadar, a global app store for decentralised applications, NFT trading volume has declined over the course of the year, from US$12bn in Q1 2022 to US$2.5bn in Q3 2022.
It is important to note that owning an NFT does not equate with owning the underlying asset
In April 2022, in recognition of their growing popularity, Rishi Sunak, the UK’s then chancellor, asked the Royal Mint, the country’s official coin producer, to create an NFT as part of a plan to embrace crypto assets. The announcement did not specify what the NFT would represent and it is not currently clear if this plan will go ahead, given the recent changes in the UK government. NFTs have even been used to crowdsource funding to help defend Ukraine in the face of Russian invasion.
In this Q&A, associate professor Gavin Brown and professor Daniel Broby briefly outline the use of NFTs in the financial services sector.
Please provide some examples of how NFTs can be used in the sector
GB: NFTs are particularly useful for validating ownership when trading in digital assets. Much of the use cases to date have either been focused upon digital art assets or projects where the underlying valuation is spurious or uncertain.
They can and will be used more readily to verify and transfer ownership rights. This may include real estate, land, debt, stocks, commodities, publishing rights, and royalties. NFTs can enable faster and cheaper process flows, which will deliver incremental efficiency gains to end-users. In the future we may likely also observe easier interoperability between industries and financial intermediaries who use NFTs across multiple blockchains.
What are some benefits and risks of using NFTs?
GB: They are quick and cheap to create. They are effectively a micro-securitisation, which is when an asset is used to back a certificate or proof of ownership. This is nothing new and has been used at a much larger scale in sectors such as mortgages and unsecured lending for many decades.
DB: The risks and disadvantages of a proof of digital ownership of an NFT are largely in its cryptographic security. As NFTs are built on a blockchain, they are largely tamper-proof and secure, hence their attraction.
An immutable record on a public distributed ledger provides a clear audit trail and this assists with identification of money laundering.
NFTs used as proof of digital ownership, like stock certificates, facilitate the possibility of straight through processing of stock settlement.
With NFT sales dropping sharply in Q3 2022, is now the right time for NFTs to be embraced by the finance sector?
GB: I would suggest that use cases can be made for NFTs at any time. When designed and implemented correctly, they can remove friction in all sorts of financial processes. They can speed up transactions and remove costs and administration from global financial systems.
How long will it take before we start to see NFTs used more in financial services? What obstacles remain?
GB: Five to ten years. As ever with the digital asset space, the largest obstacles are gaps in people’s education and understanding, as well as overcoming the perceived reputational risks of institutions. If NFTs are to have a place in mainstream finance, then further research and development is key. Paramount to this effort will be the potential development of sector-standard NFTs for specific processes, which in turn become recognised across jurisdictions and geographies alike. However, it may be that NFTs are eventually used by companies in the finance sector, only without the awareness, labelling and branding that consumers get to see.
All nascent technology developments typically receive scorn during the early stages of their lifecycle. This is only fit and proper, because it ensures that important new technologies evolve and improve, leaving only viable advancements to proliferate to potential mainstream adoption.
DB: The only obstacle is the technical ability to ensure the adoption of blockchain in a robust and secure way.