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NFT technology is currently transforming digital ownership across various industries, including the art world, gaming, fashion, major businesses, and high-profile celebrity merchandise. However, the impact of NFTs goes far beyond owning digital items. Read this blog post where we delve into the exciting world of NFTs and their potential to revolutionize finance and international trade. While NFTs often receive attention for their association with digital assets, there’s much more to them, particularly in the realm of financial services. Join us as we explore the intriguing possibilities of NFTs in banking, international trade and financing, shedding light on their practical applications in our everyday lives.
NFTs are more than just digital files on a blockchain: Features Making it Advantageous for Financial Services
NFTs symbolize digital ownership and are constructed using smart contracts and blockchain technology. Blockchain platforms are extremely secure, dependable, and provide verifiable information through an unchangeable record of transactions. This inherent security feature offers significant advantages for financial services, trade, and banking sectors where authenticity and trust are paramount. Smart contracts are automatic agreements that exist on the blockchain and establish the functioning of assets within the blockchain. NFTs add a distinct and touchable quality to data by endowing it with a unique cryptographic identity, ensuring its uniqueness even when compared to identical sets of data. Additionally, NFTs provide robust fraud prevention features. Each NFT has a unique digital signature, making counterfeiting virtually impossible. Moreover, NFTs can be employed to establish provenance and traceability in supply chains, mitigating the risk of counterfeit goods and enhancing consumer protection.
Use cases of NFTs in DeFi
NFT installations and markets have flourished within the realm of decentralized finance, establishing themselves as a vibrant and undeniable force. Tokenizing assets and connecting real-world finance origination to decentralized finance markets could create a new class of financial assets and significantly overhaul payment systems, financial services, and supply chains worldwide.
Loan Collateralization
As NFTs cannot be exchanged with other tokens or currencies, one of the best applications of NFTs in finance is to use it as collateral for loans, reducing the risk for lenders.Customizable loan terms, such as interest rates and loan-to-value ratios, can be tailored to meet the specific needs of borrowers and lenders. Arcade is a well-known platform that facilitates NFT-backed loans, allowing individuals to engage in peer-to-peer lending and borrowing. With use of the Pawn protocol, non-fungible tokens can be integrated with DeFi products. Users on this platform have the option to utilize ERC20 tokens such as wETH, USDC, or DAI as collateral for loan purposes. When applying for a loan, borrowers specify the desired loan amount, currency, payout, repayment period, and interest rate, providing lenders with information to make informed decisions.
Zeeve distributed file system(ZDFS) is a secure, enterprise-grade decentralized storage service built on top of IPFS. It pins all your content in our wider IPFS nodes network so that it remains accessible and easily retrievable even when your local node isn’t online.
Debt Management
A major application of NFTs in finance can be as a form of collateral, implying that in case of failure of debt repayment, the lender gets the token automatically from borrower repayment. It is designed to avert any legal action and facilitate debt management.
NFTs enhance security and transparency in DeFi transactions. All transaction records are securely stored on the blockchain, providing lenders with real-time information on debtors’ repayment status without the need for direct communication. Smart contracts associated with non-fungible tokens enable parties to establish specific repayment conditions, safeguarding both borrowers and lenders from unexpected issues. Tokenizing NFTs enables efficient trading on decentralized exchanges, offering faster liquidity and expanding financial opportunities like margin trading and lending for effective debt management in DeFi.
Insurance
The reliable ownership verification offered by NFTs is critical in financial transactions, eliminating the need for cumbersome processes. Unlike traditional systems requiring paper collection and verification by bank officers, NFT policies offer efficient ownership confirmation. Their lack of expiry dates and renewal requirements make them ideal for insurance policies.
CoverCompared is an excellent example in this category, utilizing the power of NFTs and DeFi to bring about a transformation in the insurance industry. It offers a secure platform for multinational insurance providers to offer various policies, including those related to crypto, health, life, and travel protection.
NFT-based derivative contracts provide innovative hedging solutions without relying on third parties. These contracts can create smart reinsurance systems that adjust premiums based on market changes or events.
Furthermore, NFTs enhance transparency in the insurance industry by storing policyholders’ data, including names, coverage details, payment history, and related information, on public ledgers. This bolsters industry transparency and safeguards against fraudulent activities.
Governance
NFTs are being used effectively in DeFi governance, addressing a limitation of traditional DAOs by providing permanent voting rights to specific users or wallets. These unique tokens, called soulbound tokens (SBTs), cannot be transferred and are permanently associated with their designated wallet.
DeFi projects leverage NFTs in governance by enabling permanent members or councils with voting rights. These members make crucial decisions on fund allocation, asset management, and other important topics. Moreover, NFT holders serve as advisors for strategic planning. Beyond voting, NFTs offer exclusive content access and discounts, enticing new users and fostering loyalty.
NFT Staking
Users can stake their tokens in NFT staking pools to earn rewards, similar to DeFi yield farming. With deposit of tokens, owners are eligible recipients of interest without compromising ownership. Staking NFTs in DeFi pools is advantageous as it enhances asset value and generates passive income. The requirement for staking NFTs in DeFi pools is just a usual deposit of tokens into a liquidity pool post signing up. They can then set parameters like the stake amount and duration. By staking their NFTs, users start earning rewards in DeFi pools. However, it’s important for potential investors to research before investing in this or any other cryptocurrency-related investment product or service.
NFTs in International Trade and Trade Finance
The adoption of blockchain technology in trade finance has the potential to revolutionize the industry, with some experts predicting a market size of $574.8 million by 2025. This is due to the increased efficiency and security that blockchain offers in the verification and transfer of assets.
NFTs could help trade finance and businesses handle sensitive data and create new products, payment rails, IDs, supply chain dynamics, and more.
A. NFTs for supply chain management
By utilizing NFTs as receipts, documentation, and identification, the requirement for oversight can be greatly reduced, and all pertinent information can be conveniently accessed from a single source. This integration of automation, transparency, and precision is expected to enhance the efficiency of supply chains and minimize wastage. For example, NFTs could be used to create blockchain receipts that track products from raw material acquisition to retail shelves, recording every step and purchase immutably.
B. NFTs in provenance and authentication
Banking regulators have long considered Trade Finance to be a high-risk area susceptible to money laundering and financial crime. Trade-based money laundering (TBML) often involves manipulating the price, quantity, or source of goods to conceal illegal funds.To combat this, an immutable digital tracking system powered by NFTs could authenticate the legitimate origin of a product and establish its rightful owner.
In global trade, a bill of lading is typically required for the consignee to legally acquire the goods from the shipper. This document proves ownership and enables the transfer of physical possession. Tokenization, which involves converting the bill of lading or the entire shipment into digital tokens, could decentralize the verification of ownership. NFTs can securely store and authenticate various important documents such as contracts, certificates of origin, letters of credit, and bills of lading.
C. NFTs for trade finance and invoice financing
NFTs have eliminated traditional obstacles for investors, leading to increased automation, less resistance, and lower expenses. Moreover, the elimination of legacy problems has resulted in a more streamlined and efficient trade financing process. This development also allows banks to optimize their balance sheets, enabling them to provide more trade finance without incurring additional risk while adhering to international regulatory standards.
Several companies in the TradeTech sector are currently investigating tokenization and digital documents for trade transactions. Startups have the potential to revolutionize the commodities market by utilizing NFTs to create digital representations and innovative methods for capital generation. The XDC Network blockchain is being actively examined as a trade finance system, with Tradeteq leading the way by successfully executing one of the earliest fully tokenized invoice finance transactions on-chain.
NFTs in Banking
Tokenization of Assets
Banks can use NFTs to tokenize assets, offering benefits like enhanced liquidity, accessibility, and transparency. This enables democratization of investment options and streamlined asset management. Tokenizing high-value assets such as real estate or fine art allows fractional ownership, enabling investors to buy and trade portions of these assets. This broadens the market by making traditionally illiquid assets more accessible to a wider range of investors.
Identity Verification & KYC
Using NFTs for identity verification and KYC procedures offers significant advantages. Banks can streamline the KYC process and reduce the risk of fraud by representing digital identities as NFTs. This approach can lead to enhanced security and faster client onboarding.
Digital Arts & Collectibles Banking
With the NFT’s popularity, the demand for digital artwork and memorabilia has also been steeper. Banks can benefit from this trend by offering financial options for NFT-based assets. They can provide loans backed by NFTs or create tailored services for digital art creators and collectors.
Smart Contracts & Automated Transactions
Banks can use NFTs as triggers to execute these smart contracts, automating transactions and making processes more efficient, thus translating into reduced costs and increased effectiveness.
Cross-border Payments & Remittances
Cross-border transactions often suffer from high costs and lengthy processing times. However, NFTs leverage blockchain technology to offer faster and more affordable transfers, thereby significantly impacting the banking sector by reducing costs and improving accessibility for international money transfers.
Challenges that NFTs need to address
However, despite the promising potential, there are still several challenges that need to be addressed. Integration into existing financial firms and regulatory structures is also crucial for the success of NFTs in trade finance. According to a report by Accenture, 94% of banking professionals believe that integration with legacy systems is the biggest barrier to blockchain adoption.
Furthermore, education across multiple industries is necessary to ensure that the benefits of blockchain are fully understood and utilized. Currently, only 25% of businesses have a clear understanding of blockchain technology, according to a survey by Deloitte.
Despite these challenges, there is already momentum towards NFTs in trade finance, with many local governments and national politicians researching the potential benefits. For example, the Chinese government has launched a national blockchain platform for trade finance, which is expected to handle over $1.5 trillion worth of transactions annually.
In conclusion, while there is still work to be done to fully integrate blockchain into trade finance, the potential benefits are significant. A true renaissance in trade finance could occur if more players recognize the opportunities and take action to seize them.
About The Author
Dr. Ravi Chamria is co-founder CEO of Zeeve Inc, an Enterprise Blockchain company. He has an experience of 18+ years in IT consulting spanning across Fintech, InsureTech, Supply Chain and eCommerce. He is an executive MBA from IIM, Lucknow and a prolific speaker on emerging technologies like Blockchain, IoT and AI/ML.
Passionate About: Blockchain, Supply Chain Management, Digital Lending, Digital Payments, AI/ML, IoT
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