Crypto is Both a Security and Currency, or What Should I Know About Crypto Lending and High Yield Accounts?
December 15, 2022
December 15, 2022
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So first and foremost, Non-Fungible Tokens (“NFTs”) are not cryptocurrencies. NFTs utilize blockchain technology, which in essence is a chain of custody tracking and inventory tool. So every transfer of a NFT is tracked by digital technology which provides recordation of ownership, along with other metadata information. Behind all NFTs there is some real asset backing its suggested worth – a piece of art, a song, a video, etc. Now there may be an argument as to the value of that asset, but that is a contract issue of consideration and bargained for exchange. And although cryptocurrencies utilize blockchain technology, just like NFTs, there is no actual asset, physical like gold, or intellectual like a patent or song catalogue, that is backing the value of the cryptocurrency itself. Rather a cryptocurrency’s value derives from elsewhere. And candidly, I’m not sure where and what that elsewhere is.

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Turning our attention back to NFTs – here is my fun suggestion. Perhaps you have a baseball card collection or stamp collection or comic book card collection (“Assets”) that you wish to turn into cash. When it comes to these Assets there are different grading methods, and different condition valuations to consider since these are not fungible Assets. There are actual organizations that will provide appraisal values – even if they vary in range. And accordingly, you can always sell the Assets to another buyer straight up for some negotiated price. In doing this, you will retain no further ownership interest in the Asset.

Or, if your Assets have enough current or potential value, then perhaps a NFT is for you. For example, you have a baseball card collection that you value at $100,000. You can create a NFT that represents ownership interest in the combined value of the baseball card collection, since different cards will have different values – yet the entire collection will be subject to the NFT. And the hope is that overtime the value of the collection will rise from $100,000 valuation.

What are the potential benefits? First, there is an actual physical Asset. This is not a matter of “full faith” since the baseball cards exist. The baseball cards backing the NFT can be secured in a safe, so the hacking risks that occur so frequently with cryptocurrency are not at play here. While the baseball cards may have been originally sold by Topps, after they sold the cards to the public, Topps retains no economic interest in the physical cards sold. Nor do they have any future interest in the cards you purchased from them.

The NFT, through a private placement, can be sold to 10 investors at $10,000 each or 1 investor for $100,000. You can still maintain a 25% interest in the Asset and sell off the other 75% through the NFT – so you can still participate in the potential upside (or downside) performance of the Asset. The NFT may include a provision that every future sale of the NFT interest will result in a transaction/commission fee that will be paid to the originator/issuer of the NFT. This is often best utilized by an Artist who sell their works yet would like to retain an income stream from future sales of that work. Much like actors receive residuals from their performances. So in effect, NFTs provide great flexibility for anyone innovative enough to securitize their Assets, while maintaining partial ownership interest and compensation for future sales of your NFT.

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