Most of us have had the experience of using mortgages to acquire property. In this process a bank creates digital fiat currency and passes it on to you via collateralisation of the property being purchased. The borrower then enters into an agreement with the bank to pay the loan principal and interest until the ‘Death of the Engagement’ or in French the ‘Mortgage’. This concept has existed in England since at least the 1650s.
Titles of property and the need for tokenisation
Currently, the world’s premier currencies are experiencing stupefying amounts of monetary inflation that has not been seen since the 1970s when the effect was known as ‘stagflation’. This is resulting in unprecedented increase in retail prices across the board from consumer goods to energy and to construction materials. The current feeding frenzy is being fuelled by large cash holders such as the American BlackRock investment management corporation who are using their cash to purchase whole swaths of housing divisions.
This is a proportional and direct response to the long and protracted years of inflation that we can anticipate that have been caused by historic money printing and accelerated in recent years with the stimulus payments created by global government response to the Covid pandemic. BlackRock is using property as an inflation hedge against the loss of the purchasing value of the US Dollar.
Housing pricing and sales have skyrocketed to meet the demand of the old aphorism ‘the safest place to put your money is in the ground’ during times of turmoil. Since most people don’t have the resources of a BlackRock, they are turning to something better – ‘little pieces of property’. These tiny fragments of property are known as NFTs or non-fungible tokens.
As Plato observed: “Most people are not just comfortable in their ignorance, but hostile to anyone who points it out.” This can be said of current understanding of NFTs and what they are. NFTs are simply transparent claims of title against property, both tangible (real estate, automobiles, art, for example) and intangible (electronic art, brands, goodwill).
As an example, a single home can have a million titles each representing a small portion of the home. Each title certificate is unique with its own individual serial number. These titles can be safely and individually exchanged in digital exchanges and digital wallets in great volumes and instantly. Obviously, this is not entirely practicable or secure if using paper titles as the units of exchange.
The advent of blockchain, distributed ledgers and automated market makers has now allowed the exchange of titles instantly with 100 per cent surety on their authenticity at all times. Now, in order to exchange £50,000 of a £1,000,000 property, it can be done in a few thousands of a second anywhere around the world with just a mobile device. In the previous legacy banking, property and legal systems, it would have taken a few months.
NFTs are claims of discrete title against the ownership of tangible and intangible property. They are distinct titles in their own rights and cannot be divided. They are, however, fusible into large collections of unique titles to represent varying degrees of ownership of the title of a property. One thing they are definitely not is financial instruments. A common mistake by the mis-informed or the complacent is to conflate units of account – USD, GBP, EUR, BTC, ETH, for example – with titles of property. These are mutually exclusive and have nothing in common with each other from a regulatory or legal perspective.
NFTs enable the extinguishment of mortgages
Since a single property now can be paired with an almost seemingly infinite amount of titles, the need to hypothecate the entire property is no longer necessary in order to have use of, or occupier status over, a property. Current existing mortgages can, therefore, be extinguished merely by selling off the unrequired portion of the titles. Homeowners with the minimum requisite amount of ‘titles’ to confer a controlling level of ownership of the property can now go ‘mortgage free’ with no requirement to pay for the balance. ‘Half price’ houses are now also possible and housing for young families can now become a tangible reality for many of those who have been historically excluded from the asset class.
NFTs enable partial purchasing of property equity and the attendant rights. Rights previously bundled such as boundary, air, view, mineral, water rights can be parcelled off as individual rights and traded as individual titles and used in daily commerce. This allows the most attractive rights to some users to be acquired individually without the need to acquire all the property rights. NFTs open up a new world for rights not previously seen.