March 10, 2023
By Anjali Kochhar
“With the rise of virtual digital assets, cyber security threats have also increased, leading to commercial banks like BNY Mellon, Deutsche Bank, JP Morgan Chase, and many others becoming crypto custodians”, explains Dr Ravi Chamria, Co-founder & CEO, Zeeve.
With the expansion of virtual digital assets (VDAs), experts are testing the potential of these assets across various sectors, including banking and finance. Currently, global banks are testing the waters with a decentralised approach. And so, it surprises no one when investors wonder whether Non-Fungible Tokens (NFTs) have a potential role to play. In fact, NFTs can be utilised in boosting digital payments, crossing geographical borders.
At the moment, there is an ongoing debate – will cryptocurrency and other VDAs replace the traditional banking segment, to create a new universe of finance?
Interestingly, however, experts are looking at integrating both aspects, instead of creating competition. Thus, the question remains – what is the scope of NFT in banking?
Scope 1: Requirement of custodial services
Historically, banks have enjoyed importance for their ‘custodial services’, particularly for keeping jewellery, precious metals, or other assets safe. In exchange, the customer had to pay a fixed annual fee.
Put simply, NFTs are a type of VDA that cannot be copied, sub-divided, or even replaced. This also helps creators prove their ownership as well as the authenticity of the asset.
There exists a simple understanding between NFT investors – rarer the NFT, higher is its value. And this understanding has potential to create a new revenue stream for banks across the globe.
“With the rise of virtual digital assets, cyber security threats have also increased, leading to commercial banks like BNY Mellon, Deutsche Bank, JP Morgan Chase, and many others becoming crypto custodians”, explains Dr Ravi Chamria, Co-founder & CEO, Zeeve.
As the adoption of NFTs gradually increases, people possessing high-value NFTs are likely to search for secured and reliable custodial services. And who better than banks to offer these services? They have years’ worth of experience to convince investors to store their NFTs in the bank’s database, in exchange for a fee.
Just to clarify, these expensive and rare tokens are not limited to art. They can also include land deeds, financial documents, and other assets.
Now here’s a catch – there already exist custodial services for VDAs. So, how do banks stand apart from the existing competition?
“While wallets like Metamask or cold wallets can work for individual investors, institutional investors will need third-party custodians to ensure the safety of their NFTs”, reiterates Dr. Chamria.
Thus, in a nutshell, banks might just witness a new revenue stream in the making, by custodial services to three parties – a. NFT holders, b. NFT marketplaces and c.Customer base of NFT marketplaces. And who knows, if the demand for such services increases, banks might just add NFT as part of their service offerings.
Scope 2: NFTs kept as collateral
The first use case generated a new revenue stream for banks. But here’s another use-case: keeping high-value NFTs as mortgage, in exchange for a loan.
How would an NFT-based loan work? In simple terms, the NFT would be placed in a wallet that requires multiple signatures (or authorizations). Three parties would get a key to the wallet – lender (in this case, the bank), the borrower, and a lawyer.
In case the borrower is unable to repay the loan amount, the bank can either fractionise or sell the NFT. Unfortunately, however, there are certain risks involved, primarily because NFTs are unchartered territory for many. So, what are the risks involved?
To begin with, banks can keep NFT land deeds/tokens as collateral to issue loans. These NFTs are merely used for representing the actual land. But the situation is different for art-based NFTs.
According to Dr. Chamria, “With NFT Art as collateral, banks may want to be cautious about accepting them as collateral since the value and liquidity of such assets can be volatile. And if they do, banks may only accept blue-chip NFT collections as collateral. They may also need a whitelist of collections that they deem acceptable.”
This caution by banks is justified as the price of an NFT changes constantly (except, if used only for representation). So, if the price of NFT drops considerably, it would not make sense for the borrower to repay the loan. This would leave banks with an NFT that is worth much less than the actual loan amount.
Given the risks involved, offering custodial services for NFTs seems like the more viable option for big commercial banks to generate revenue.
As the banking sector acquires more clarity on NFTs, their horizons might just widen beyond custodial and mortgage-based use cases.
About the author
Anjali Kochhar covers cryptocurrency stories in India as well as globally. Having been in the field of media and journalism for over three years now, she has developed a sharp news sense and works hard to present information that goes beyond the obvious. She is an avid reader and loves writing on a wide range of subjects.
