Written: June 2022
The world of NFTs is emerging, and I think it is a big deal. CNBC reported on June 15 Microsoft co-founder Bill Gates said he thinks cryptocurrencies and NFTs are “100% based on greater fool theory.” Bill is one of the richest and smartest persons in the world so he may be right, but I do not think so. In Paris in 1996 he and I both gave keynote speeches at a technology conference. I presented a very bullish case where the Internet would be the next big thing. You can see a YouTube video of the speech here. Bill gave a great speech, but he played down the Internet. He said that the web was interesting, but it was slow, unreliable, insecure, and had no place in business. I give him credit however for, once he had made a 180 about Internet, turning around Microsoft on a dime and rapidly creating and adopting Internet technology. Before discussing NFTs further, let me offer a high-level view of what NFTs are and how they work.
NFT stands for non-fungible token. Non-fungible means an NFT is not like money as we know it. If I give you a $5 bill, you can give it to someone else or you can buy something with it. Whatever you do with the $5 bill, it is still $5. That is what is meant by the expression “funds are fungible”. Your buying power of the $5 may change based on inflation, but $5 is still $5. Suppose I create a digital piece of art using an Apple pencil and an iPad and I store it on an NFT blockchain. If I make the NFT for sale for $5, someone may be willing to buy it. The buyer might subsequently sell the $5 NFT for $10. Or maybe $100. According to market tracker NonFungible, the average sale price of an NFT is now below $2,000. The average had been over $6,800 in January.
Critics of NFTs are correct there are large amounts of junk being created, fraud taking place, and generally a lot of market chaos. I will be writing another post with my view of how this may sort out and why I am optimistic about the future of NFTs for artists and art collectors. First, I would like to share a point of view about another use and potentially much more significant case for NFTs.
In 1993, my wife and I purchased a lake home in the Pocono Mountains of Pennsylvania. We took out a mortgage with Prudential Home Mortgage, which I paid off four years later. We sold the home in May 2022. The attorney for the buyer of the home did a title search and could not find any record of the mortgage being paid off. The way it is supposed to work is when the bank receives final payment, they file a certificate of satisfaction with the local county where the property is located. Apparently, they did not, so the attorney withheld 100% of the original mortgage from nearly 30 years ago. The attorney said he would release the money when I show proof the mortgage had been satisfied.
The wild goose chase began with a web search to get a phone number for Prudential Home Mortgage. I found they had been acquired by Norwest Financial. A search for Norwest showed they had been acquired by Wells Fargo. The people at the Wells Fargo were very nice and were optimistic they could find the record. Apparently, this type of situation is very common. That is why they have a department just for that purpose. They required a written request for the record search. After three weeks, Wells sent me a fax saying the mortgage was acquired by Bank of America. BoA required a written request to initiate their search. After two weeks they sent me a fax saying the mortgage was held by Wells Fargo. Their response time was approximately 20 days. Wells Fargo and Bank of America have something in common. They both have a Lien Release Department and neither use email, only fax and USPS mail. When I eventually get a response from Wells Fargo, nothing will surprise me.
Imagine if the original mortgage had been converted to an NFT. Just like a piece of art, a PDF of the mortgage could be authenticated, encrypted, and “dropped” onto a blockchain. Once the drop is confirmed by the miners operating the blockchain, the mortgage would become a permanent immutable record. Immutable is a key word. It means the NFT cannot be modified or deleted. It is permanent and would live on the blockchain forever as a publicly accessible document just like at the county office except without the need for faxes or USPS.
Think of the mortgage NFT as an asset just like cryptocurrency. Then, think of other assets which could be stored on a blockchain: crypto, art collections, music collections, mortgages, titles of land, homes, cars, boats, motorcycles, deeds, birth certificates, marriage certificates, death certificates, investment ownership certificates, and votes. Today, these assets live mostly on paper and often get lost and require dedicated departments to search for them. When they can’t be found, which is possible for my mortgage, then the interested party must hire an attorney to sue the issuer and go to court to get satisfied.
All the assets I have mentioned could be handled by existing large, centralized organizations, in theory. In practice, they are too big, too slow, too bureaucratic, and intrinsically resistant to change. In the case of banks, they are impeded due to multiple acquisitions and mergers of companies which have incompatible information technology systems. In the case of state, local, and federal organizations, they are slow to move on anything. In my opinion, blockchain technology is emerging as the next phase of the evolution of the Internet. Billions of dollars of venture capital are flowing into blockchain startups. Most will fail, but some will change the world just like the Internet has.