Newsflash; Assets aren’t restricted anymore to the physical world.
There’s been a huge surge in popularity for new digital asset classes and ”tokenisation”. The biggest example right now seems to be “NFT’s” and, many heads wiser than mine, are saying they’re the next big thing.
These ”tokenised” assets have more potential than we can possibly imagine today. They’re a game changer. Think "crypto" just 10 years ago. Or even 5.
So let’s explore how we can get a ticket on the next gravy train..
We give an overview below of what NFTs, and “Tokenized Assets” really are, and how they differ. We explore why they’re becoming vital to understand, and what difference they‘ll make to your daily life.
Investor Alert; Those of us that understand NFT’s, or try to at least, will be well placed to ride the next wave in a range of opportunities, from disruptive tech in Real Estate and Timeshare to the revolutionising of Managed Funds and Property Development.
Let’s start with token types:
The word ”Token” refers to a digital certificate (think impossibly long digital code) stored on a secure distributed (de-centralized) database called a blockchain. There are currently 4 main types of tokens available:
Security tokens - A token that represents another asset, for example stocks or shares. A token is a security token if:
The holder has received the token in exchange for money that has been invested in a common enterprise.
They expect to make a profit.
They won’t do any of the work required to generate that profit
Utility tokens - A token that gives a right to perform a certain action, they give the holder access to a blockchain-based product or service.
Currency tokens - A currency, but on a blockchain.
Non-fungible tokens (NFT’s) - A token that represents ownership of a unique digital asset, and our focus here today.
So, what’s an NFT?
NFT stands for ‘non-fungible token’ and no, I didn’t make that up.
NFT’s use the Blockchain (and yes the Blockchain is a real thing, and here to stay) to store data and guarantee privacy and security, although, NFT’s shouldn’t be confused with other uses of the Blockchain, such as Cryptocurrencies.
In effect, with NFT’s, you’re trading in a new kind of digital ownership certificate, of a unique product ie. one token representing the Mona Lisa, can be traded for one token of something completely different, or sold for cash; as opposed to one bitcoin for example, which is linked to the US dollar (or around $40,000 of them), and crucially with Bitoin, only US dollars.
The NFT effectively becomes the digital representation, or ownership register, of the asset it represents.
Anything that is unique and can be stored digitally can be turned into an NFT (such as the contract that grants full rights to an asset).
Each NFT generally has only one owner, it’s not divided.
This rarity is what gives it value. This means that although theoretically you can create more than 1 NFT for your product, “because each NFT represents a unique property, one NFT cannot be duplicated while maintaining the same value as the original”.
In other words, use an NFT to digitally represent value for a unique item. Like a digital artwork, boat or house. The ownership contract for that traditional asset is stored permanently on the blockchain in the form of a “smart contract”.
This means that as ownership of the NFT is transferred between people (when it’s bought or sold), the asset it represents transfers along with it.
NFT’s are created (minted) and stored on a blockchain (the first NFT’s were minted on the Ethereum blockchain but now there are other blockchain options).
NFT’s are rapidly gaining popularity, and a wide variety of uses.
For example, you can sell NFT’s of an event, a course, or for an experts’ calendar. NFT’s can also grant your audience access to a private, exclusive community with access to you, your services, or your products.
Recently, there has been an increase in high profile properties being sold as NFT’s. In a recent article titled “TechCrunch Founder's Apartment to Be Sold as NFT” Coindesk explored the ups and downs of this exciting new market.
In another piece Capital.com reported that a house in Florida sold as an NFT in one of the first sales of its kind in the area - Should you sell your home as an NFT? The article explains that ”The five-bedroom, three-and-a-half-bath house in Gulfport was sold at auction Thursday for 210 ether (ETH), or $652,289, by Propy, a real estate transaction platform.” It’s worth noting comments from the founder of the Real Estate site that sold the house “Propy founder Natalia Karayaneva tweeted the sale attracted 2,000 subscribers, with 30 connecting their wallets to the platform.”
What does it mean to own an NFT?
NFT’s seem to represent an exciting new shift in technology, helping investors reduce costs (and increase privacy) by eliminating the middleman. As with any new technology, there may be teething issues.
One thing is for sure though, as with Cryptocurrecies just 5-10 years ago, those that get in early could do very well while the return/risk matrix currently sits so high. While those that underestimate the trend in security democratization and tokenisation could miss out, or worse, see their worth eroded in a rush to trade online.
A new generation of 25 year old arm chair investors are demanding instant gratification with asset acquisition, along with the ability to trade amongst their friends. They favor the ability to acquire traditional assets, in new ways. NFT’s are helping to address that.
It doesn’t hurt the NFT case either that those of us older than 25 can swap properties, paintings or yachts at the swipe of a token over a liquid lunch!
Crucially, owning the NFT of a physical object does not necessarily mean you own all rights to the original, physical product. This is due to copyright laws.
These copyright restrictions are similar to those of a physical asset. Fortunately the copyright restrictions predominantly apply to artwork, songs etc. Again though, if written in to the NFT contract, then those rights could transfer completely to the new owner.
This may be worth considering when trading art represented by NFT’s. Each owner of the artwork could own its copyright outright (if the NFT reflects that). As opposed to owning a “print” of the original with no ability to replicate or sell it on.
Remember, simply put, an NFT isn’t the asset itself, it’s the record of ownership or authenticity, and it’s stored on the blockchain. It’s often compared to owning the deed to a house- ie. its proof of ownership. In a much better filing cabinet.
Proving ownership
Proving ownership of an NFT is done, well, by simply owning it. This built-in protection and security is a large part of the attraction to investors that catch on quick.
NFTs are tokens that represent the ownership of unique items. They only have one official owner at a time and no one can edit or change the record of ownership, or for example, copy and paste a new NFT for the asset into existence. The only way to be in possession of an NFT is by creating it or buying it off somebody else (it can’t really be stolen).
Proving authenticity
The best thing about NFTs is that it’s possible to track ownership history (how many times it’s been sold and on what day) and therefore authenticity. Well, sort of. As with most Blockchain transactions publicity is optional and it’s relatively simple for owners to stay confidential, using codes or a pseudonym. That said, someone selling a valuable, legitimate asset like a house, or prized artwork, would most likely want the highest price so could be inclined to share their personal, or company details in the ownership history.
When someone buys your NFT they can then track its ownership. If for example they are buying the digital version of the Mona Lisa, they can see who the first owner of the NFT (painting) was.
This owner should match up with the current owner of the original, physical Mona Lisa, therefore proving the NFT is genuine.
What’s the legality of NFTs
Currently, NFTs aren’t specifically regulated in the EU. However, in September 2020 the European Commission published a legislative proposal for the regulation of crypto assets (including NFTs) called the MiCA proposal.
This is estimated to be implemented in the next 4 years.
What’s in it for me? How can I use NFT’s to get ahead?
Your new NFT can be a continual source of income
NFTs are transparent, instant and secure.
The smart contract coded into the token can’t be edited or altered, which means the business that created that token will always be able to see the return when the token is sold.
Imagine for example, you create a token for your new book, painting, or house. When creating the NFT you ensure that every time it’s sold, say 5% of the sale proceeds (whatever they are in the future) are credited to your digital wallet. You could limit this to say 5 sales, or you could create a monthly income stream from re-renting an asset.
NFT income can then be instant, arms length and passive. Who doesn’t want that in an investment?
NFT’s and their Proof of Attendance Protocol
You can also use NFTs to reward your community/customers for their attendance. An “airdrop” is a transaction in which you send an NFT from your portfolio to someone else’s portfolio. It’s instant.
You could send people tokens for attending a specific event. Once they receive 5 attendance tokens for example, they could receive access to something even greater. An example could be that after attending a spring sale 5 times (and buying a product each time perhaps), a shopper gets access to a VIP event.
Using Proof Of Attendance Protocol rewards and builds closer, long-term relationships with your most dedicated members/customers.
Some other benefits of adopting POAP include: more privacy, it replaces cumbersome mailing lists, allows the ownership of limited edition assets.
Your POAP can be claimed by:
Batch delivery of badges = You can airdrop the badge/tokens to your customers Ethereum wallet address.
Manual sending = The organiser of an event could scan the customers wallet QR code at physical events and instantly send a badge/token to the recipient.
Using NFT’s to prove ownership
Since NFTs are essentially a proof of ownership and authenticity, they allow digital artists and creators to claim ownership of their work along with the potential of ongoing revenue from the sale and resale of that work.
Imagine publishing an ebook (it’s easier than you think on Amazon for example). Historically, when a PDF or digital book is downloaded it could be passed around friend groups, or uploaded for unlimited downloads. This limited the appeal of digital publishing for many. An author only got paid once (if at all), and the reader had a book that they couldn’t re-sell (unlike a physical book, for example in a second hand book shop).
Now, with an NFT, the author maintains the copyright, the buyer of the book owns the rights to hold or on-sell it and when they do, a percentage of the sale fee goes right back up the chain to the author. Any future buyer can also rest assured that the book they are buying is legitimate and directly supporting the talents of the creator.
The same model can apply for any digital work created and it’s a game changer.
Why should I use NFTs?
Collectability - NFTs are currently a bit like trading cards for the super-rich. There’s no inherent value in NFTs other than the asset they represent and, as a result, that which the market ascribes to them. Their fluctuating worth makes their collectability and trading potential very desirable. There is the potential to buy low and sell high very quickly and of course, new opportunities are entering the market every day.
NFT-backed loans - There are DeFi applications that allow you to borrow money by using NFTs as collateral. You could collect your NFT’s (and the assets they represent) as a digital portfolio of wealth. If needed, you can leverage that wealth to create liquid. Doing it with the new NFT lenders appears quicker and cheaper than say taking a property portfolio to a bank, needing registered valuations and paying high loan fees. As with most lenders, if you don’t pay the loan back, the company gets your NFT (and the asset).
Possible fractional ownership - Currently fractional ownership of NFTs isn’t commonly accepted or approved, but it is a prospect for the future. Think 100 NFT’s each representing 1% of the market value of shares of the Mona Lisa. This is a really exciting space to watch!
Using NFTs for charity - NFTs make charitable donations much easier. Since the smart contracts coded into NFTs can include a split of any revenue, and you can choose any charity you want to support, so a portion of every sale and resale of that NFT will go towards that charity. It’s a charity auction on crack! Say an artist sells a piece of work supporting child cancer research, every time that piece of work is on-sold, the charity receives additional income. The NFT can’t be redirected, changed or overwritten, this means that if someone no longer wants the piece of art, the charity, and possibly the artist, will be included in the profits of the sale.
How do I make an NFT?
Pick your item - Firstly you need to determine what unique asset you want to turn into an NFT. Make sure you own all rights, including the physical and intellectual property rights to the item you want to turn into an NFT.
Choose your NFT marketplace - The most popular marketplace is OpenSea because you can mint your own NFT and it’s easy to use. OpenSea has some limitations though and, for example, as of now doesn’t support the creation of NFT’s for Real Estate. It uses Ethereum block chain and has a lazy mint option. This means you can upload your asset and when the collector buys it, they will pay the gas fees. You are charged 2.5% of your sale for using the platform.
Set up your digital wallet - You’ll need to set up a digital wallet to create your NFT because you’ll need some cryptocurrency to fund your initial investment. The top NFT wallets include Metamask, Math wallet, Alphawallet, Trust Wallet and Coinbase Wallet. Make sure the crypto wallet supports the cryptocurrency used on the platform you intend to use.
Upload your file - Your chosen NFT marketplace should have a step-by-step guide for uploading your digital file to their platform. In OpenSea all you have to do is upload your files (noting accepted file types), inputting your collection’s description, making your profile and determining your royalties. Creators can upload a digital painting, a photo, a text, an audio file or a video from some notable event. When minting, you can program a royalty clause so that subsequent sales of your digital item generate a passive income for you.
Selling your NFT - After minting, it’s time to list your NFT for sale. You choose a price and officially list it on your profile. There is a new function where customers are able to use certain credit/debit cards to pay for their NFTs, instead of having to set up a crypto wallet. This new addition to the NFT world is a game changer! You don’t have to be a crypto geek anymore to buy digital assets or trade in NFT’s.
TIP:
Consider having multiple digital wallets so everyone doesn’t know how much money you have (it’s fully legal in the blockchain world).
If you have to pay to mint your NFT (Can be around $100) create it on the weekends as it is significantly cheaper
Are there broader business opportunities in the NFT space?
Yes. There are plenty of business opportunities in the NFT sector right now that don’t simply involve minting and selling your own NFTs.
I’m reminded of the old adage - “in a gold rush; sell the shovels!”
Here are a couple of quick ideas off the top of my head to get you started…
Become an NFT guru - create an online course with advice around purchasing and selling NFTs-
Create a transactional service - help people figure out if the NFT they are buying is copyrighted and help them get the best deal
NFT loan business - NFTs can be lent as collateral for loans, this could be a good alternative for fungible (divisible) cryptos
A niche NFT brokerage house - There is a huge market of investors looking to buy rare assets that can be secured or represented by NFT’s. Why not be a dealer in NFT’s for fine wine… hang on.. that’s brilliant… Think I’ll do that myself!
But what about Asset Tokenization?
Asset tokenization uses digital tokens to fractionalise ownership of assets such as property, jewellery, and smart contracts on blockchain to manage these ownership rights. It’s the process by which an issuer creates digital tokens on a distributed blockchain, which represents either digital or physical assets.
The shared (de-centralized) nature of the Blockchain guarantees that once you buy tokens representing an asset, no single authority can erase or change your ownership.
What’s the difference between asset tokenization and NFTs?
NFTs are one form of asset tokenization.
The key differences are that NFTs solely refer to digital ownership of an asset and can only have one owner at a time, whereas asset tokenization isn’t limited like that (eg. security tokens).
A token can represent a part of the asset, and people can buy fractions of the token.
What can be tokenized?
Tokenization allows for both fractional ownership and proof-of-ownership. Some examples of what can be tokenized include:
Venture capital funds
Commodities
Real estate
Sports teams
Race horses
Artwork
The potential for tokenization can be grouped into 4 main categories:
Assets - Any item of value someone can transform into cash. This can be further divided into two classes: business and personal. Personal assets can include cash and property. Business assets include assets that are present on the balance sheet.
Equity - Equity (shares) can be tokenized but the assets remain in the digital form of security tokens stored online in a wallet.
Funds - An investment fund can also be tokenized. Each investor is provided tokens which represent their share of the fund. These tokens are often easier to trade or sell-on than traditional forms of fund participation. Effectively tokenizing a fund can add to its attractiveness as those holding the tokens can instantly transfer them to (and get paid by) anyone via the Blockchain. This can be handy when liquidating assets. It can also save time and money by removing the fund manager or broker as middlemen.
Services - Businesses can offer goods or services as a way to raise funds or conduct business. Investors can use tokens to purchase goods or services provided by the supplier. This can create a private, additional revenue stream for the business. Any tokens purchased, for example to groom a dog, are paid for, and stored, via a secure crypto wallet. The “cash job” just got digital!
Why choose asset tokenization?
The Blockchain is behind the value of asset tokenization.
Anyone in the world can tokenize their assets and openly trade them without boundaries, and often scrutiny. Buyers can also trace the entire history of a particular asset. Here are many benefits to asset tokenization, and the list is growing daily.
What’s in it for the seller?
Reduced intermediaries
When selling your company’s shares on the stock market you need underwriters and other intermediaries, including securities custodians, brokers, registrars and more. Each intermediary increases the transaction’s complexity and cost.
For this reason the majority of businesses today are not listed on the stock exchange. Tokenization cuts out the intermediaries, which makes it faster and easier for the owner to raise capital.
Fractional ownership
Asset tokenization gives the seller the choice of retaining ownership of part of their asset. If for whatever reason the owner decided they have to/want to sell their asset, they have the flexibility to only sell the fraction of ownership they are comfortable selling.
If for example, the seller tokenized a property and sold half of the tokens, they may still be able to retain the property’s utility as a liveable space.
This could be a great way to help our children on to the property ladder. Each year additional tokens can be gifted, or retained. Ultimately these retained tokens, or those gifted to your own child (as opposed to their new spouse) represent ownership and control of the property.
Fractional ownership can also be more profitable as it accesses a wider market to enable the asset to be sold for a higher price. Eg. you may be more likely to sell 100 tokens to 100 people for $1,000 each at an art opening, than sell the whole painting to a sole owner for $100,000. As a result you’re likely to be able to sell each token for a higher price.
What’s in it for the buyer?
Immutability
Anything recorded on a blockchain is permanent, the blockchain record can’t be altered, changed or forged.
This means buyers are able to trace the token’s origin, issuance date, ownership changes, and the price it was bought and sold for overtime.
This can lower the possibility of investment fraud or theft. It can also makes it easier to determine what is or isn’t a good investment.
Again, Fractional Ownership
By dividing up ownership of an asset, you access a wider market as more people will now be able to afford it.
This can attract new buyers as, for the first time, they can “afford” to invest in something that they previously couldn’t.
This also creates liquidity in the market and can transform the asset into a lucrative investment opportunity.
Investors are able to invest smaller amounts of money personally, to share the risk and reward with a wider group.
It can allow them to diversify their portfolio in a way which previously wasn’t possible, avoiding large amounts of paperwork and saving money and time.
Other advantages include:
No barriers to trade (open global market)
Faster transactions
Cost saving by eliminating intermediaries (and their fees)
How do I tokenize an asset?
Firstly, keep in mind that tokenizing assets such as real estate or artwork may require assessment and auditing by a professional, accountant or law firm.
There are laws and regulations in place which can be confusing and often relatively undefined so for anything complex, you will most likely need to hire or consult a professional when creating your tokens…
A quick guide to tokenizing an asset:
Identify the asset - Find an asset you want to tokenize. You may have to have a valuation done by an auditing or accounting firm.
Smart contract generation - Once the auditing is finalised, the smart contract has to be created. The price and number of tokens should correspond to the price and valuation of the asset. Generate a smart contract through a company like Polymath or GoSecuirity. When generating your smart contract, you have to input how many tokens will exist and determine how many of these tokens you’ll be distributing to interested investors. This is called tokenomics (the economics of your token).
Determine how you tokenize the asset - You can give equity in the asset, profit-sharing (cashflow), or both.
Equity tokens - You can set the value of your new tokens to specific equity in your company. For example, you can generate 100 tokens to represent ownership of your company. You may then sell 25 tokens to represent 25% of the company. This form of tokenization is similar to a traditional stock in a company, you own a tokenized share of whatever you’re investing in.
A key difference though may be control. When allocating traditional stock to an investor, many jurisdictions allow for numerous rights to be given to a new major shareholder. This may not be the case for Tokens stored on the blockchain. This could be very desirable for an entrepreneur looking to raise funds without loosing control. Reporting requirements may also be reduced or non existent through tokenization.
Profit-sharing - You could also issue 100 tokens and peg their value to a percentage of profits generated by the company.
For example, each token could represent 0.5% of profits generated. The token holder receives value from the profits generated from your assets as opposed to the rise in the value of the asset itself.
Are there any rules and regulations around Tokenizing my asset?
“There are no unified, globally acceptable security tokenization (STO) laws or European taxonomy that categorises or defines crypto assets.
“At the European Union level, STOs are currently not regulated. However, there is a draft regulation proposal on crypto-asset markets.”
A recent (at the time of posting) reading of the new EU bill was rejected by members. This may indicate that there is little true desire, for now, to start legislating or trying to control what is effectively a truly democratized form of global investing.
As always, we’re not offering advice here though and strongly recommend that, if you find any of this interesting, you seek your own independent advice and clarification on anything mentioned before acting.
Take away:
Our Global Investors aren’t allergic to the odd profit. We’re exploring several aspects of the evolving NFT market and are really excited about some of the opportunities we’ve found (stay tuned).
Asset tokenization (and specifically NFT’s in my opinion) could be a ticket to a better life.
You no longer have to be a multi-millionaire to invest in lucrative, large ticket assets such as property, expensive artwork, rare motor cars or other collectibles. You don’t even have to own the physical item, you cash co-own with a community of like minded investors, sharing the risks, and the reward.
Now, in my opinion, THAT’s the democratization of investing at its finest.
The opportunities seem endless right now. I would personally suggest it’s only a matter of time before we see NFT’s, and tokenized assets everywhere. We were right about Crypto way back when, and we’ll be right about this.
The benefits of NFT’s are simply too great, and too wide to ignore. One of the challenges though could be government overreach. Dusty old departments are already looking at ways as to use shiny new NFT’s to update old official registries.
Think NFT Birth Certificates (you heard that here first), Land Registries or car ownership.
If you were a government, wouldn’t you be all over this? Look at how the digital Covid Pass came a thing, training us all to carry devices to access (free and open) services. It’s not a big leap to get to a point where a QR code (NFT) represents your ability to drive, or fly now is it?
With the potential for massive private investor profit, and inevitable government overreach, I see that the opportunities for the NFT space are massive. Right now. Maybe not in 10 years… But who knows?
If you’d like to know more about tokenizing your own assets, raising investor funds on the blockchain or how to increase your returns by leveraging this new market, send any questions to hello@globalinvestorgroup.co.uk and we‘ll be happy to share what we know.