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NFTs as a Tool to Improve Financial Industry Compliance

Published on April 14, 2021

Non-fungible token (NFT): A cryptographic asset on a blockchain with unique identification and metadata distinguishing it from others. (Investopedia)

I’ve recently joined the NBA Top Shot community, an NFT platform sanctioned by the National Basketball Association. NFTs available on this platform are active play videos performed by players, and include individual player statistics in digital format. Each “moment” is registered on a blockchain, so authenticity is inherent, as is the designed scarcity of each item. Every member of the Top Shot community connects their Ethereum wallet to their Top Shot account to simplify payments. As an example, this link will connect to one of my holdings (LA Laker Dennis Schröder). Over the past 30 days from this post's publication date, NBA Top Shot recorded 380,000 unique users and $151,000,000 of incoming value to smart contracts involving 5.52 million transactions. Because these assets are virtual and registered on a blockchain, they are immune from any tampering and, as long as I protect my account access information, any theft. I can also display my holdings to anyone anywhere in the world, as demonstrated by the link above.

Moments are priced based on demand, which is calculated on the talent level of the athlete and the number of moments minted. If a LeBron James moment is created and only 1,000 are produced, this item can easily fetch hundreds of thousands of dollars. My moment linked to this post is number 4,467 of 15,000, capturing a layup by first-year non-starter LA Laker Dennis Schröder; the future value of this investment will be tethered to Schröder’s success in the NBA.

These moments are far better than traditional player trading cards such as those displayed in the cover photo: my collection of 2020 LA Laker cards immediately decreased in value the minute the packaging was compromised. As you can see, not only is the box opened but so too is the actual pack of cards. To (potentially) obtain a triumphant return on my investment, I have to keep the box and pack sealed, prohibiting me from enjoying the actual cards. Once the box has been breached, the individual cards are not only devalued but also exposed to theft, counterfeiting, alteration, and destruction.

I was curious to see what’s involved in creating my own NFT, so I opened an account (for free) on Open Sea, an NFT marketplace, and uploaded a 55-second GIF of me recording an isolated drum track (McCalmont Isolated Drum Track). (If you choose to view please double-click on the introductory GIF to add sound). Now, I’m fully aware that my NFT would be lucky to receive 5 cents from any sale, but imagine a pre-fame Keith Moon, John Bonham, or any other legendary superstar drummer. Your purchase of a pre-fame NFT will attest to your interest in the artist before their popularity. The same economic rules inherent to NBA Top Shot would apply here: the more significant the individual talent and the more limited the number of reproductions, the greater the seller's price. NFTs have created a legitimate market where none has existed prior.

Here is where this protocol can improve financial services: again, refer to the cover photo of this piece. You'll see a page from my Financial Industry Regulatory Authority (FINRA) broker/dealer record confirming I have passed the examinations for Series 7 and 24. It would be easy for anyone to question the authenticity of the displayed document. If this record were treated like an NFT and loaded onto a pre-existing blockchain, its authenticity, like an NBA Top Shot, could not be questioned. Imagine this protocol linked to medical, legal, and other regulated industry certifications.

In the past, I’ve written about Evernym and their work with the Illinois state government in providing an opportunity for parents of newborns to upload that newborn’s biometric information and birth certificate into an identity-centered blockchain. That digital record, managed by the parents until the child reaches 18, would follow the infant throughout his or her life. That record would grow as the child grows and receives documentation attesting to their evolving identity (ID cards, driver’s licenses, certifications, etc.) This digital record contrasts with the unorganized (at times unauthenticated) physical documentation in circulation today. Think about a one-stop-shop for proof of identity that does not require certification by a notary (who could theoretically be compromised) as one example. Also, imagine the secure nature of the base information controlled by the individual versus a centralized information clearinghouse such as Equifax.

Enter NFTs as a stopgap measure until identity-focused blockchains have matured and have been "approved" by global regulators. A company that verifies physical documentation linked to an individual’s support information could create an NFT to capture the authenticated data. Once identity-centered blockchains become mainstream and open to everyone, all of the pre-certified information could easily be uploaded into that facility, joining the collection of data points associated with those lucky enough to have been born and raised in a blockchain-centric society.

These collections of authenticated, protected, and easily accessed personal information will revolutionize customer due diligence and know-your-customer conventions. The infrastructure is already in place to create an authenticated digital “trading card for individuals,” so there’s no need to wait for the maturation of blockchains dedicated to regulatory-approved digital identity