On May 30, Chris Okada listed a non-fungible token (NFT) on the crypto industry’s top marketplace, OpenSea, for 15,000 ether, worth $29 million at the time.
This may sound reminiscent of the famous (or infamous) “Everydays” collage that digital artist Mike “Beeple” Winkelmann sold at Christie’s for $69 million in March of 2021, kicking off the craze that made NFTs something people outside of the crypto community had heard of.
Except for one thing: Okada’s NFT wasn’t a digital artwork. It was a real-world office building in New York City’s Flatiron District, on the edge of trendy Chelsea.
See also: NFT Series: What Are NFTs and Why Are They Crypto’s Newest ‘Next Big Thing?
But there was a problem, the landlord told CoinDesk on June 15. During those two weeks, the value of 15,000 ether dropped to about $15 million. Given that NFT sales, like all cryptocurrency transactions, are irreversible, that would seem to be a problem — particularly if a buyer could get to it before Okada could change the price.
Spoiler: No one did.
While the NFT market has generally been limited to collectibles like cartoon apes that sell for hundreds of thousands of dollars, it has also been hyped as a way to sell everything from real estate to fractional ownership of real-world artwork. While the former is a billion-dollar market, the latter is in its infancy, making Okada something of a midwife.
The reality is a lot more complex, however, enough to raise the question, do NFT ownership titles add anything of value, or are they a solution in search of a problem?
Real-World Hurdles
One reason Okada didn’t fear the price change is that the NFT he was selling was not actually the title to the property. What it gives the buyer, the listing notes, is “exclusive rights to acquire the building all its uses rights & related deed covenants.”
Why? Well, as it explains, the legalities involved in real estate sales mean the NFT cannot “warrant the completion of the real estate transaction, or reflect the transfer of the deed or title. The traditional real estate process must still be complete.”
One big reason for that is that the legality of a title deed — or any other right of ownership — transferred via cryptocurrency is legally uncertain at best.
Which makes it, in effect, an option to buy, though perhaps a legally binding one. You still need the lawyers, the filings and everything else. And, if real estate NFTs take off — particularly for private homes but for commercial properties too — you’d need an agent to sort through the listings and find the right one.
That is to say, the buyer and seller would not be able to escape the main reason for the creation of the first cryptocurrency, Bitcoin: to avoid the need for and cost of financial intermediaries.
It could well lock the buyer into a price as it has, in effect, already been paid. That said, many states’ real estate laws include the right to walk away before the closing. So while selling a Bored Ape Yacht Club collectible is in effect a final sale in which one or both parties are locked behind pseudonyms, real property has to follow real laws. And it’s not hard to identify either buyer as well.
Some Utility
Basically, arguments for tokenizing anything on an NFT are mostly the same as they are for any blockchain-based ownership documentation. Sales are irreversible, they are permanently and unchangeably recorded on a blockchain, they facilitate peer-to-peer sales that bypass expensive intermediaries, and they allow an expensive item to be broken up into more affordable parts.
Read more: PYMNTS NFT Series: Tokenizing Assets Is NFTs’ Next Frontier
NFTs, in addition, can hold any type of media and make it easily viewable. So along with a title deed, an NFT of a building could include pictures, a video walk-through and images of any paperwork — in theory.
And there are some heavyweight financial industry names interested in using NFTs to tokenize financial assets.
Read more: Goldman’s Interest in NFTs Could Speed the Tokenization of Real Assets
Why not NFTs?
Another problem with the permanent and often pseudonymous nature of crypto transactions is that mistakes can be irreversible.
While cryptocurrency addresses are long alphanumeric strings that need to be exactly right, it isn’t really possible to send a payment off to a wallet address that doesn’t exist, and the chances of a switched number going to a real address are so small only mathematicians could measure them.
That said, if some fraudster copies Okada’s listing with a different wallet address, the buyer wouldn’t get the building or their funds back.
Okada’s listing says that to “prevent fraud pre & post transaction, Purchaser is highly advised to coordinate with both Property & NFT Teams PRIOR to completion of the NFT Purchase” adding that buyers should use “multiple levels of verification” to ensure that they are sending the funds to the real owner’s digital wallet.
Still, the price volatility issue is one reason companies like Mastercard are pushing to make NFTs of all kinds salable in dollars, not only ether or other tokens, as is the case today.
Another is the possibility of mispricing in other ways. Such as the guy who listed a million-dollar NFT (a picture of a rock. No seriously, a picture of a rock) in the wrong token, selling it for fractions of a penny.
See more: Bitcoin Blunders: 5 Classic Examples of How Not to Buy, Sell or Store Crypto
A bigger one is that while it’s very nice for attracting the interest of crypto-rich buyers, the exchange fees for buying enough ether to pay the price could be enormous.
Tokenization and fractionalization of real estate and or other high-value items have been called a way of democratizing investments and widening the field of buyers.
The Securities and Exchange Commission (SEC), on the other hand, calls them an unambiguous offering of securities that must be registered with the agency and go through the required regulatory steps.
Read more: How Did NFTs Become SEC’s Newest Crypto Target?
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