Treasury Set to Launch NFT

Rishi Sunak is certainly a man for the times. A hoodie wearing Chancellor, who drinks his coffee from a £180 smart mug is attempting to prove he has his finger on the Web 3.0 pulse by announcing via Twitter he has asked the Royal Mint to create an NFT to be issued by this summer.

He also announced that The Treasury will regulate some cryptocurrencies as part of a wider plan to make the UK a hub for digital payment companies.

Most traditional investors views on cryptocurrency are it’s the next Tulip Bulb Bubble and that NFTs are…well who knows what NFTs are. At least you could plant a tulip!

This announcement however, is a clear sign we need to move cryptocurrency and NFTs out of the very backs of our minds to somewhere a little more front and centre.

I’m conscious our reader base (and indeed writer base) may be late to this so before we get to the “why should I care”, lets cover the basics.

What Is A Cryptocurrency?

A cryptocurrency is a form of digital money. Most of us use currency in a digital form every day and we are all very comfortable spending money we don’t actually touch. So what’s the difference?

Well firstly, a cryptocurrency exists without any Central Bank, Government, or Institution behind it. Take Sterling (£GBP not Raheem). This is backed by The Bank of England and each note is emblazoned with the words “I promise to pay the bearer on demand the sum of…”.

Historically this would have been exchanged for the equivalent amount of gold when presented to the Bank. This redemption ceased in 1931 when Britain stopped using the gold standard.

Present it to the Bank today and you would receive in return….erm…twenty pounds. Which you can do, for example replacing a torn note for a brand new crisp polymer one. And of course if there were no notes to give out, the Bank can always print some more.

Sterling is already a virtual currency. One that exists because everyone has bought into the system. You can walk into a shop and buy £10 of goods using a £10 bank note because the shopkeeper knows he can bank that £10, receive a £10 credit on his account and then pay his staff that same £10 in wages.

This only works if we all believe. On holiday, I was presented with the following exchange rates. The Scottish version of the £10 received less in Bulgarian Lev than its English counterpart.

This is a situation Scots are all too familiar with, all having at one point uttered the meaningless phrase, “that’s legal tender pal”, to stony faced English shopkeepers.

One side trusts the other a little bit less.

We should all therefore be comfortable with the concept of digital money.

We are also comfortable with the fact other currencies are not always worth the same. Our holiday spending money is currently less thanks to the weakening pound.

This is where we currently find ourselves with cryptocurrencies. There is no universal trust and we have no idea what they will be worth from one day to the next. So to this regard, they are currently an extremely volatile form of investment.

That doesn’t mean this will always be so.

There are already stable cryptocurrencies, stablecoins no less, which are linked to traditional currencies or assets such as gold. Of the better known, Tether and Binance are both pegged to the $USD.

There are two key differences with cryptocurrency. Record keeping and supply.

With traditional currencies, transactions are recorded with the trusted institution we hold them with. Each institution has its own central database, these are not shared with other institutions. So accounts and assets can be lost. You may have experienced trying to locate lost assets if you have had to carry out probate for someone.

With cryptocurrencies, there is one database, but rather than being a central database, there is a decentralised shared transaction record, known as a blockchain. So everyone has a copy of the ledger.

Blockchain is a database of financial transactions which constantly grows as new transactions or ‘blocks’ are added to it, forming a continuous and public chain of data. This prevents anyone from ‘double spending’ and makes it extremely hard for anyone to alter historical transactions.

This shared record which shows ownership could ultimately offer more security.

As for supply, this can be almost limitless with traditional currencies, as we have seen with the quantitative easing during the credit crunch and the printing money response during Covid.

This increase in supply has the effect of eroding the value of the money in your pocket.

Cryptocurrencies can be different. Take the best known, Bitcoin as an example.

The supply of bitcoins is limited. There are currently circa 19 million in existence and there will never be more than 21 million. This prevents the kind of erosion of value that affects traditional currencies.

The supply of some cryptocurrencies actually reduce over time as the number in circulation are removed (burned), leaving the remaining units hypothetically “worth more”.

These differences could play in cryptocurrencies favour however don’t mention that to the software developer Stefan Thomas who in 2011 purchased 7,002 bitcoins but subsequently lost his password, leaving him without access to his £235 million fortune (based on current bitcoin price of £33,545).

What Is An NFT?

While most of us will be able to get our heads around cryptocurrencies, NFTs require a lot more open mindedness.

NFT stands for non-fungible token, and these are also digital assets held on the blockchain technology.

The minute we look at examples, is the minute our immediate response is, “why would anyone pay this for that!”.

So before we look at examples, lets just consider the similarities between cryptocurrency, which will help us understand them more, and the differences, which could lead us to thinking they could be more valuable.

The similarities are; a digital asset that can be traded; a value that fluctuates; they are protected using the same blockchain technology.

The difference is in the word fungible. In economics, fungible refers to the characteristic that individual units are essentially interchangeable and each of whose parts is indistinguishable from another part.

Each £10 note is worth £10 and £10 credit in a bank account can be exchanged for £10 of goods. There is no difference between the £10 note in my pocket or yours. A £10 note is fungible. £GBP is fungible. $USD is fungible. Oil is fungible.

Gold can be fungible. Pure gold that is. Gold made into the crown jewels, becomes non-fungible.

Each NFT is unique, which makes it different from cryptocurrencies.

Consider a real-world example, football collection cards. Each pack of cards is purchased for the same amount, and each pack contains a number of unique cards. Manchester City cards may be more valuable than say, West Ham United cards and a Cristiano Ronaldo card may be more valuable than every other card.

Scarcity is the reason someone paid the current record price for a sports card, US$6.606 million, for a 1909 Honus Wagner baseball card as there are only thought to be between 50-200 of them produced as opposed to the thousands for other players.

Let’s say there was only one set produced, one card per player. This could make the cards even more valuable.

Baseball cards are real world items though that you can touch and feel. A digital image of a sphere (below) however is not a real thing.

It is though, what 28,983 investors collectively paid $91.8m for in December 2021 making it a record transaction for the sale of a single NFT.

An NFT therefore, has a value, like baseball cards, because someone is willing to pay for it.

Sotheby’s have already hosted two NFT auctions and they must have been successful because their third one is later this month (18 - 25 April 2022).

And now Rishi is getting on the bandwagon.

My two concerns on NFTs at this time (with my limited knowledge) is the supply and the end buyers.

Anyone can produce an NFT and in almost unlimited quantities. Sure, there are current NFTs that are popular and expensive, but what happens when the next new one (or thing) comes along.

Finally, who are the end buyers? I understand the motivation for the creators. Arguably there has never been a better time to "be an artist", especially when we consider Van Gogh only sold one painting in his lifetime.

I understand the motivation of those buying newly “minted” NFTs. A speculative investment, one that can hopefully be sold on for a much higher amount at a later date. These are then sold on the secondary market (perhaps on OpenSea, the largest NFT marketplace) to the wealthy, because who else is buying an NFT of Paul McCartney’s ‘Hey Jude’ notes, which just sold for over £57,000.

The ultimate end buyers will be the people who are always last. The people who cant afford to lose the money they invest. The people whose first stock market investment was into tech stocks late 1999, early 2000, or the people left holding the tulip bulbs when the music stopped.

The NFT craze currently has the outside resemblance of a cross between a pyramid and a ponzi scheme.

NFTs are here to stay however, and once this Wild West period expires, their uses will be far more varied than a speculative investment. They could represent anything from membership to exclusive clubs and discounts to the title deeds for your property.

So Where To Next?

Currently, our imagining of the technology is to apply it to our deep-rooted understanding. We look at cryptocurrencies and compare them to traditional currencies.

The real changes in what this technology holds is not what is comparable, but what is incomparable.

Cryptocurrencies and blockchain are part of a wider concept, Dencentralised Finance (DeFi). This perhaps will form an article itself at a later date (once I understand it more), however I will leave you with this.

Currently, you deposit money with a bank, you are in essence, lending to them. For that, they give you a rate of interest, between around 0% and 0.5% if we are lucky.

They then take your money and lend it to someone else, homebuyers at around 1.5% and credit cards at over 20%. The profit they make does not go back to you, it goes to the shareholders (and of course bonuses).

DeFi aims to take control away from the big institutions and create a truly global peer to peer system. It’s why the banks are running scared of the technology.

What remains to be seen is if the pioneers for this technology turn out to be 21st century Robin Hood’s, or revert to 20th century Gordon Gecko’s.