(The First 5000 Days by Mike Winklemann, NFT, sold for $69m in 2021)
Most of those who write about business and finance admire a columnist named Matt Levine. He writes the Money Stuff column at Bloomberg News-a constant marvel of razor-sharp analysis and gentle humour about subjects that might otherwise be eye-glazing.
Some time back, during the dizzying madness of the digital art NFT (Non-Fungible Token) era (when unremarkable cartoon images were selling for eye-watering prices because they were entangled with a newfangled crypto whatnot called ‘NFTs), Mr Levine set to work trying to understand what an NFT actually was.
After a great deal of analysis, probing, reading, interviews, application of financial nous, and searching for the right words, he finally arrived at his eureka moment to explain NFTs:
“Oh. I get it. It’s a receipt.”
Indeed, an NFT is a receipt for the item you bought. That’s basically it. It is a deed of ownership, if you prefer more highfalutin language. If you bought a digital cartoon image of a cigarette-smoking ape, you got a receipt-an NFT-lodged securely on a blockchain which proved you owned the ape, and to which only you had access. Behind the realisation that the token is merely an ownership certificate, a massive industry has been launched, one that will likely eclipse Bitcoin and other cryptocurrencies. It is (somewhat clumsily) called Real World Asset tokenisation, or more colloquially, just RWA tokenisation. The token being an NFT (or, in some cases, a fungible token).
Before I describe the shape of this new industry, a word of clarification about the NFT-the deed of ownership. It is digital. It lives on a blockchain, It is secure. It is unhackable. It can be frictionlessly transferred or sold by the owner on a public NFT market. And it can be tethered to an arbitrary number of conditions, like ‘you cannot sell this item on a Tuesday’. These conditions turn out to be critical-they make the ownership terms ‘elastic’, allowing them to be designed with infinite flexibility. This is not generally true of other old-style deeds of ownership like houses, car registrations, or even the receipt for the shoes you bought at the mall. It opens up an unprecedented world of new tools for financial packaging.
This brings us to the big ‘aha’ moment that is occurring now. In the world of traditional finance, the issuance of assets has always been accompanied by a dispiriting amount of paperwork and expense. The listing of shares for sale on a stock market, for instance, is a long, frightening, paper-heavy, wallet-emptying journey. Or, more prosaically, the sale of a home involves agents, municipalities, registrars, escrow, conveyancers, and so on. Or higher in the financial chain, the syndication of a loan to build a manufacturing plant requires originators, banks, depositories, underwriters, middlemen, and more middlemen.
Research done recently shows that for the issuance of a large financial asset, there can be as many as 30 parties along the way from origination to distribution-all taking their pound of flesh. The process is ossified, labyrinthine, inflexible and, in some cases, corruptible.
Enter NFTs. If the original asset can be split up into hundreds, thousands, or even millions of secure tokens of ownership (NFTs), each representing a fraction of the asset, and then secured, lodged, and traded on a blockchain (and perhaps tied to special conditions like the release of a yield at the end of each month), then the whole enterprise becomes vastly simplified. TO say nothing of widening the buyer base to investors who may want to spend only R1,000 to own a tiny piece of a billion-rand private credit deal (simply not accessible via traditional finance).
And so, over the past two to three years, we have seen an increasing number of RWA tokenisation projects, with assets offered for sale with only the mediation of a secure blockchain for secure lodging, trading, and life-cycle management. In all imaginable sectors asset issues are being tokenised: treasuries, property, funds, loans, collectibles, artworks, private credit, commodities, and more. Major research houses like BCG are predicting that this market (which was zero in 2021) will grow to $30 trillion by 2030, making it by far the fastest-growing new financial instrument in history.
So how is it going, a mere few years into the industry? The chart below from analytics firm RWA.xyz paints the thousand-word picture:
The industry is about to go parabolic. Big traditional players like BlackRock and Franklin Templeton are already neck-deep in tokenised issuances ($2.5 billion and $780 million respectively), while lesser-known new players with crypto heritages, like Ondo and Paxos, swim competitively in the same pool. The losers? Banks and investment companies who are too slow to adapt to this fast-moving juggernaut of financial opportunity. Oh, and of course, the middlemen. They lose, and we thank them for their service.
In South Africa no banks or large investment houses are seriously playing in this space, although a few new smaller independent companies like Rainfin, Mesh, RAMDEV have started to issue tokenised assets over the past few years. Crypto currency exchanges VALR and LUNO have also announced upcoming tokenisation projects.
And what of those digital art NFTs from a couple of years ago? Bored Apes and Pudgy Penguins and the like? They are still there, still trading, but well off their tulip highs. NFTs have moved on and grown up.
I suppose there is always a market for everything under the sun. NFTs and the blockchain just make it easier, faster, cheaper, safer and most importantly, open to anyone.
Steven Boykey Sidley is a professor of practice at JBS, University of Johannesburg and a partner at Bridge Capital. His new book “It’s Mine: How the Crypto Industry is Redefining Ownership” is published by Maverick451 in SA and Legend Times Group in UK/EU, available now.
Originally published at https://stevenboykeysidley.substack.com.
Remember NFTs? They’re All Grown Up Now was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.