Non-Fungible Tokens or NFTs. A relatively alien concept to many until last year’s boom.
With skyrocketing valuations and celebrity interest, digital assets soon became the “cool” investment option. And their volatility just seemed to fuel their intrigue.
However, 2022 spelled the downturn of the NFT gold rush. Since January 2022, the market has seen a steady decline, and some have reported a drop of over 97% in market value over the course of the year.
Instead of the bloated valuations seen last year, over 50% of NFTs are now less than $200. Despite this, adoption continues to rise, and transactions remain steady, showing a marginal decrease compared to market value.
“We’re still strong believers in this asset class,” said Urs Bernegger, Co-Head of Trading & Investment Solutions and Co-Founder of SEBA Bank. “We continue to believe in these big steps that have been done in the crypto world, and a lot of development is still going on. When spring comes, prices will act accordingly… it’s a normal cycle.”
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SEBA integrates NFT capabilities into their custodial wallets
SEBA Bank specializes in digital assets and has long provided cryptocurrency investment solutions. In light of the belief that the market will continue to grow substantially, they have recently launched a new custodial wallet for NFTs.
Bernegger explained that despite the downturn, there continues to be a strong interest in digital assets and the NFT capabilities were in high demand from their clients. Adding the asset class to their custodial wallet facilitates a simple overview of all their client’s investments.
“We do traditional securities, we do fiat currencies, we do cryptocurrencies, staking, and we now are integrating NFTs, and it’s all in one bank account,” he said. “This allows the client to have a segregated wallet, where he still can see his NFTs, cryptocurrencies, etc., but the private key is with SEBA. It gives the client that overview of all this wealth.”
Initially, the wallet will only be compatible with ethereum based NFTs, following the needs of their clients, but Bernegger expected additional capabilities to be rolled out in the near future.
He continued to explain that clients had more security in their assets by using the custodial wallet offered by SEBA. Issues with lost private keys or the inheritance of the accounts in case of death are made easy, with the bank holding the private keys. Instead, account access is facilitated to assigned signatories, like a standard bank account.
“With personal wallets, if the key is lost, assets cannot be recovered anymore; they are basically lost. It’s not like a bank safe, where, let’s say, the widow could go and say, OK, my husband used to have this account, and the bank can open the safe even if she doesn’t have the key.”
“Quite a lot of our clients do hold their own keys, but they’re not crypto tech savvy. So they welcome the ability to just transfer the assets to SEBA, and we hold them safe.”
NFT regulation remains uncertain
The bank is one of two in Switzerland that received authorization from the local regulatory authority, FINMA, to hold and deal with crypto assets. In announcing its NFT capabilities, the company stated it was “proud to be the first regulated bank to offer NFT custody.”
As it stands, NFTs remain in a regulatory grey area. Throughout the world, steps toward regulating crypto assets have skipped over NFTs. While proving to be one of the most extensive bills focused on digital assets, the MiCA regulation, passed over a month ago, left the NFT vertical ambiguous.
“We need to rethink the regulatory approach and move towards implementing activity-based regulation … rather than an entity-based one for NFTs,” said Eva Kaili, EU lawmaker. “It should not be in just one box of media … it deserves a custom regime … they can be used in many industries.”
While SEBA is regulated under FINMA, not the EU, the regulatory murkiness of NFTs and crypto assets as a whole still applies. The bank, therefore, conducts its own checks on clients to maintain compliance.
“What we have to check is where the client bought the NFTs. So we can run forensics on crypto wallets. That’s also what we do with other cryptocurrencies we receive from clients…Once they transfer them into the bank, we do all the forensic checks.”
“We can see what kind of wallets the client’s wallets have been in touch with, and the source of the wealth is also checked once the client onboards and continually cross-checked. That includes how much wealth he has and where he has it from. So that makes sense of the whole KYC AML picture, especially the source of funds.”
In the midst of institutionalization
The custodial capabilities for NFTs form a part of the bank’s infrastructure, aimed primarily at what they believe is a market currently in its infancy. Despite the 2022 downturn, Bernegger explained that SEBA is one of many institutional players poised for the next bull run. Many are seeing heavy development along with the blockchains holding the assets.
“Other banks, which are also our clients, see similar interest in this space. They have their own clients that do hold cryptos, and they also have plans to hold NFTs. Some of our partners suggest that they issue NFTs in the next few years themselves.”
“If you look at crypto, it is very different than any other asset class. Usually, things start as institutional and then go down to retail. For example, if you look at securities trading, at the beginning, where did you trade securities? You could only do it with a bank. Now we have hundreds of brokers that offer securities trading.”
The opposite happened with the crypto market. It was born in retail and is starting to get institutionalized, but what happens when it gets institutionalized? I think that remains to be seen, but it will be a very interesting journey.”
“So NFTs or crypto assets in general, once they get looked at from all kinds of wealth managers as an asset class that their clients should be involved in, I think that will be a very exciting time. There will be a tidal wave of new money coming in…and it will also take directions you probably cannot even imagine.”