FTX’s collapse coupled with the descent into a “crypto winter” rocked confidence across the cryptocurrency industry. More than $200 billion was wiped from market in just a few days, while some of the world’s largest exchanges faced an unprecedented liquidity crisis as users rushed to withdraw funds.
The turmoil dampened sentiment across the market, with NFTs no exception. Despite initial hype, businesses have become more dismissive of the technology, with trading volumes dropping by 97% between January and September 2022 compounding this outlook. Despite this gloomy backdrop, it would be premature to dismiss NFTs for good. Many of the benefits of NFTs are yet to be realised. The industry continues to innovate and progress towards the future of Web 3.0, meaning companies from across both the corporate and institutional sectors should consider how to build on this momentum.
The story so far – fashion, art and collectibles
NFTs have been around for a while, most popular in the gaming, art and collectibles worlds. This exploded into the mainstream in 2021, when digital artist Beeple sold an NFT of his work “Everydays: The First 5000 Days” for $69 million at auction house Christie’s.
In February 2022 trading volumes peaked at $247 million, sparking interest from more traditional and larger corporates looking to enhance their offerings and differentiate themselves from their peers. Starbucks, Gucci and Adidas all joined the hype, and this year there are already a range of launches announced across fitness, arts and even social and environmental issues. This normalisation of tokenisation will bring many benefits to tangible assets and the industries in which they are present. Not only does it make buying, selling and trading them more efficient, but it also reduces the probability of fraud.
A previously overlooked, but exciting use case is NFT ticketing. This could transform the events industry. NFT tickets are irreproducible and can have rules programmed into them. This can forbid the transfer of tickets and guarantee a specific resale price. NFTs could solve one of the industry’s largest challenges.
There will also be wider implications for how larger corporates approach their physical assets – these must evolve alongside tokens, to be more agile and customisable. Intersecting NFTs with use cases of other modern technologies such as artificial intelligence (AI) and virtual reality (VR), which enhance personalisation even further, is an increasingly popular approach. Offering enhanced personalisation and therefore exclusivity, this is one way companies can differentiate themselves in the market and stay ahead of their peers.
Institutional investors are catching up
The ability to access and process information, and then settle trades, accurately and at pace is key to the success of financial institutions across the world. This is even more important in times of market volatility and uncertainty – two characteristics which have dominated the economic landscape. To date, firms have invested in solutions with advanced analytical capabilities, that provide an automated and thus real-time trading experience.
While enhancing the trading experience, banks and central banks are now seeking other ways to remain efficient. Encouraged by success in the corporate space, tokenisation is an approach which has proliferated in the last year as investors look to tap into the opportunities the metaverse has to offer.
Enabling all stakeholders to operate on the same shared infrastructure as one source of data, this reduces expensive reconciliation and settlement failures, improving transparency, liquidity and overall operational efficiency.
Digital bond tokenisation has been most prominent in the institutional space. Several projects have launched since the ‘crypto winter’ took hold – by both central banks as well as individual players. For instance, in November 2022 France and Luxembourg launched their “Venus Initiative” – using an experimental central bank digital currency (CBDC) to settle a bond worth 100 million euros. In the same month, UBS sold what it claims was the first public digital bond issue which can also be accessed by conventional investors.
Potential roadblocks and the role of technology
Against this backdrop, many financial institutions have become more engaged with the possibilities of atomic settlement. However, some traditional players remain sceptical and view the path to unlocking these benefits as complex, risky and time consuming.
Technology overcomes these challenges. Before even considering tokenisation, firms must have embarked on a robust digitization strategy, exploring platforms with automation, transparency and interoperability at their core. Those best placed to explore tokenisation will have already started to explore more modern technologies, such as blockchain.
Enabling workflow automation, and providing a single source of truth, financial institutions using blockchain will position themselves ahead in the market. Transferring the right of ownership into a digital form, blockchain eases the ownership and transferring of assets. Giving traders access to more funds at speed, this accelerates and removes the need for manual settlements, thus increasing the pace at which trades can be executed.
As seen in the US and Canada, policymakers and regulators are making strides towards a real-time trading environment. Firms which embrace tokenisation and the technologies behind it will be best placed to navigate this transition.
Are we approaching tokenisation’s ‘ChatGPT Moment’
Despite this positive momentum, we are not at the point of mainstream adoption. While tokenisation has a host of benefits which solve many common business inefficiencies, it also comes with its own set of challenges. This relates to asset verification, fraud and perhaps most importantly user experience. To address these issues, developers must create solutions with security and transparency at their core. This will enhance how NFTs are mined, assets are tokenised and also how the final transactions are presented to users.
Tokenisation and the technologies behind it have the potential to disrupt the way business has been conducted. Although it is not about to have its “Chat GPT” moment, their capabilities must not be dismissed. With sentiment in the cryptocurrency industry improving, perhaps the “crypto spring” will bring a new era of confidence for the world of tokenised assets.
The post Realizing the Potential of NFTs – More Than Art & Collectibles appeared first on Securities.io.