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From virtual land and crypto kitties to digital art and tweets, Non-Fungible Tokens (NFTs) have seen an explosive growth in value, especially in the past six months.
Built on blockchains, NFTs are unique cryptographic tokens that represent ownership of an asset. As the metadata assigned to each NFT is unique, they cannot be traded or exchanged at equivalency, hence they are not fungible.
NFTs are being used extensively by digital artists and retail investors as a way to make money. The artist Beeple sold a collection of his digital art as NFTs for over $69 million. Similar to other markets for high value assets, retail investors are buying NFTs in the hope of selling them at a higher price. While this is an exciting venture for some, these investments are highly speculative with probabilities of profitability varying wildly according to industry sources.
Some market advocates believe NFTs provide opportunities for financial services by providing new ways for trading and loans systems to cut out intermediaries or secure digital representations of physical assets. Examples of this include real estate or other unique investment assets, such as representing ownership of bottles of fine wines.
While NFTs are designed to provide an authoritative demonstration of ownership of assets and are virtually impossible to counterfeit, they don’t protect the underlying asset itself. There’s no guarantee that the token itself was created legitimately and that the underlying digital asset is legally owned by the holder of an NFT. Anyone can copy the digital asset. However, the value of an NFT comes from being able demonstrate ownership of the asset, not protecting the underlying asset.
It works in much the same way as art. There is only one Mona Lisa – you may be able to take photos of it or buy a copy of it but you wouldn’t be able to own the authentic version, and that’s where NFTs come in.
Arguably, there is a big risk of fraud and copyright implications that have not yet been fully understood. Furthermore, if NFTs were used to represent physical assets then there are concerns that this may drive other types of fraud and money laundering. There is an argument that these issues should receive proportionate attention because they are already prevalent in other areas of finance and trade such as online banking and gambling.
The UK government’s perspective is an optimistic one, with HM Treasury’s plans to make the UK a “global crypto asset technology hub” and to create an NFT with the Royal Mint. However, as regulators grapple with the risks and opportunities involved – and until there is market clarity – the future of NFTs in the financial services sector is uncertain.
Harriet Wilson, Intern, Payments and Innovation, UK Finance