Fitting NFTs into financial services | PaymentsSource

Non-fungible tokens burst on the scene last year as artists and celebrities used the tokens to sell unique — often quirky — pieces of digital art, touting the fact that distributed ledger technology protects NFT works from counterfeiting and theft.

For several months certain NFT art pieces were selling for millions of dollars, but after the recent cryptocurrency collapse, NFT values sharply deflated. The average NFT price fell from $3,894 in May 2022 to below $300 last month, according to data from Chainalysis.

But other potential use cases for these tokens are emerging. NFTs enable businesses and banks to record, manage and transfer digital assets on a blockchain so owners can store data or digital works on a blockchain where it’s protected from cloning, loss or corruption.

From gaming and entertainment to real estate to insurance, NFTs–still in the early development stage–have the potential to streamline collaborative ownership through smart contracts and improve distribution and management of royalties and loyalty programs, experts say. 

Starbucks this week released details of a coffee-themed NFT program it’s activating later this year within its long-running Starbucks Rewards program. The coffee giant aims to bring NFTs to the masses by extending the metaverse to its 27 million loyalty program members–one in 10 U.S. adults–by enabling users to buy NFTs with a credit card instead of cryptocurrency. 

Rewards program members will be able to purchase or earn NFTs in the form of collectible digital stamps created with Polygon blockchain technology and redeem them for unique prizes and experiences, including a trip to Starbucks’ coffee farm in Costa Rica.

Other brands with NFTs include Budweiser, which offered a collectible NFTs last year and Gucci, which recently purchased virtual real estate in The Sandbox, a metaverse rival to Decentraland where many NFT projects are based. Adidas and Nike have done brisk business in recent months selling virtual shoes via NFTs.

In addition to consumer loyalty programs and brand marketing, NFTs increasingly are driving innovations in the secure distribution of event tickets and managing online gaming-account value, according to John Stefanidis, CEO and co-founder of Sydney, Australia-based Balthazar, which aims to provide users with access to NFT games without upfront costs.

“Our thesis is that when the broader utility and applications of NFTs improve, such as in the form of contracts, deeds and gaming, that’s when we will start to see NFT sales volumes rise,” Stefanidis said.

While some of NFT-based transaction links could occur without banks’ involvement, one expert believes banks will eventually become necessary partners to businesses as NFT commerce expands.

“Banks are at the center of payment networks now, and what they can offer in the emerging world of NFTs and decentralized payment systems is trust,” said Alykhan Sunderji, co-founder of Seattle-based Sunder Legal, which specializes in advising startups in the crypto and NFT arenas. Prior to launching the firm last year, Sunderji was head of legal for Amazon’s fashion operations during an eight-year stint at the online retail giant.

In many industries, the hardest part about sending a payment is figuring out who to pay. NFTs can solve this problem, Sunderji said.

“In the music industry, for example, it’s incredibly challenging to know who to send royalties to. But once you own an NFT to receive royalties you can continue to send and receive benefits from it securely indefinitely, no matter where you go,” he said.

In another theoretical example Sunderji provided, multiple individuals can use NFT ownership to jointly invest in a real estate project or other enterprise, with the NFT tokens used to vote and make decisions about the property with no intermediaries.

“Where today someone might send me a check for a dividend, one day that company could send it to my digital wallet via an NFT,” Sunderji said.

Nick Casares, head of product at PolyientX, the NFT-focused division of Phoenix-based Web3 concept incubator Polyient, also foresees banks playing growing roles in the emerging NFT marketplace.

“NFTs are part of the set of emerging digital assets which are becoming a new way for people to think about value, and when it comes to controlling and transferring value, it’s inevitable that banks will play a role,” he said.

In a blog post last year, Citi Ventures noted that NFTs can be used to digitize nearly every kind of asset, and the technology could potentially become a billion-dollar opportunity within the next decade.

But it could be a bumpy journey. The recent plunge of crypto values — down more than 60% from November of 2021 — has chilled momentum in technology innovation and investment. And the recent crackups of prominent crypto players including the Celsius exchange and downfall of the crypto-based hedge fund Three Arrows Capital have further slowed momentum.

In recent months, several banks and payments companies have launched a smattering of NFT projects that are more experimental than transactional, in part because of the lack of any formal regulations around NFTs.

New York City-based Quontic Bank in May minted some limited-edition hats and sunglasses on the blockchain to showcase its metaverse ambitions.

American Express’ venture arm recently joined in an $8 million funding round for OneOf, a Miami-based company building a sustainable NFT marketplace that’s working to develop NFTs for consumers new to crypto.

To kick off its collaboration with OneOf, Amex last month launched its first set of NFTs at an event at the Mandarin Oriental hotel in in Bodrum, Turkey, where Amex participating customers could receive a complimentary NFT collectible designed by renowned Turkish NFT artist Selay Karasu.

Amex’s goal with the event was to explore new ways to connect with card customers while exploring developments in NFT-powered commerce, Margaret Lim, director of Amex Ventures, said in a press release.

Earlier this year Amex filed a trademark application with the U.S. Patent Office for an online marketplace to buy and sell NFTs, a project that is still in development.

Mastercard in June supported a Pride Month event in Decentraland and separately announced a partnership with Coinbase’s NFT marketplace as well as several NFT commerce firms and Web3 infrastructure firm MoonPay.

Visa in March launched a one-year program providing financial and technical support for entrepreneurs working in art, music, fashion and film who are trying to incorporate NFTs into their business model.

Bank technology firm Fiserv, which last year announced a partnership with crypto asset-management firms Bakkt and an alliance with bitcoin technology firm Nydig, is holding off making any specific moves involving NFTs.

Chad Davison, Fiserv’s director of fintech solutions at the Atlanta-based company said banks are intrigued by the possibilities NFTs and cryptocurrency represent for the future, but most financial institutions are still in research mode with the metaverse. “We’re watching NFTs on the radar,” he said.

Financial services providers could team up with other companies to create on-ramps to experiment with NFTs, said Billy Huang, founder of New York-based Insomnia Labs, which is developing undisclosed NFT projects for consumer brands Under Armour and L’Oreal.

“As digital goods become tied to NFTs, you can foresee them playing wider roles from tracking inventory all the way to making payments,” Huang said.