[NASDAQ] The Future of Finance, Where NFTs and CBDCs Collide
The Non-Fungible Token (NFTs) market has been on a tear in recent months, with numbers suggesting that the total capitalization of this space may lay anywhere between $10-$50 billion at the moment. Not only that, but these novel digital offerings have gained so much traction recently that an increasing number of celebrities, artists, illustrators and musicians are releasing NFTs of their personal creations on a near daily basis.
The reason why so many content creators — and now increasingly business owners and retailers — are flocking towards NFTs is because they provide a tangible means of offering ‘ownership transfer’ of a digital or real-world commodity while eliminating the need for any financial intermediaries, who otherwise end up taking a huge chunk of the paycheck.
Furthermore, it is worth highlighting that along with the rise of NFTs, even Central Bank-Backed Digital Currencies (CBDCs) have gained a considerable amount of traction over the last year or so. China’s Digital Yuan (DC/EP) project, in particular, has been of a lot of interest to many as it is the first time a CBDC has been deployed for mainstream commercial use by a major nation.
That said, it now seems as though a number of other countries are also actively exploring this space, with the United States, Japan, Great Britain, Russia, Sweden, the Bahamas, France, the Philippines, Turkey, and Switzerland all looking to devise their very own digital currencies in the near-to-mid term. The BIS reported that over 80% of surveyed central banks are engaging in research, experimentation or development of CBDCs. This is because these novel digital offerings stand to make daily payments and monetary transactions smoother, as well as international transfers substantially cheaper.
CBDCs and NFTs can help tackle similar issues uniquely
A simple reason as to why NFTs have been able to gain so much mainstream attention in recent weeks is because they can be used to facilitate literally any type of private transaction involving digital files and/or digital rights in various fields ranging from art to music to videos. And with the ‘contactless’ economy booming at the moment as a result of the COVID-19 crisis, an increasing number of people are pushing for trade digitization, potentially highlighting the role that NFTs can play in streamlining global digital trade.
NFTs have an advantage over CBDCs given that global market participants can participate in the circulation of NFTs, whereas CBDCs would require different economies to employ a framework for ‘interoperability’; that is, transmutability of CBDCs of different jurisdictions. To put it another way, we can say that by deploying NFTs, distributors and holders are essentially providing buyers with a ‘digital rights-transfer contract’. The advantage of this scheme is that it can be executed in a totally remote fashion.
This is fairly similar to how CBDCs are designed, i.e. they can be interpreted as ‘commodities in digitized form’. However, a major difference lies in the fact that CBDCs are used to make transactions at a retail level — much like how we use cash fiat to buy a cup of coffee — a space where, unfortunately, NFTs currently cannot be employed.
On the other hand, one of the most standout features of an NFT transaction is that it is able to take place digitally without the need for a trusted third party intermediary, largely thanks to the fact that it makes use of a blockchain ledger — wherein a detailed record of all the transactions related to the NFT in question are duly noted — allowing for a high level of data transparency.
Is a CBDC-NFT hybrid the next frontier?
The most innovative aspect of NFTs is the way they facilitate private arrangements between two parties. In this regard, while CBDCs are backed by central bank issued fiat currencies, NFTs do not feature a centralized mechanism for their settlement and/or clearing apart from their use of a blockchain ledger — which serves as its core trust model.
Therefore, it stands to reason that nearly all of the primary monetary transaction based advantages and risks lie with NFTs, especially since most of the problems and benefits associated with CBDCs are related directly with publicly authorized forms of money. Lastly, the public nature of CBDCs and the private nature of NFTs are both features that can be utilized and harnessed within the context of blockchain technology, potentially in the form of a new hybrid-offering that can make the best of both worlds.
Thus, in the future, a more well-defined policy and regulatory framework may be required for the development of a real-world CBDC-NFT hybrid that can benefit from the controlled nature of the former, while offering certain security benefits afforded by the latter.
Originally published in: https://www.nasdaq.com/articles/the-future-of-finance-where-nfts-and-cbdcs-collide-2021-05-26
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