Asset revolution or pyramid scheme? – Manila Bulletin

HOMEFRONT column by Victor B. Consunji, Founder and CEO of Victor Consunji Development Corporation

By now everybody has heard of cryptocurrencies, NFTs and the blockchain.  With Bitcoin trading above two million pesos, those who bought Bitcoin 10 years ago are multi-billionaires.  From many accounts, it seems that even the newcomers are making obscene profits flipping so called NFTs, which on the surface seem to be nothing more than digital images.  This begs the question:  Is this the beginning of a financial revolution that will change the way we think about asset ownership or is it a pyramid scheme relying on selling to a greater fool, headed for an inevitable collapse?

When you talk to many in the space, it often sounds like a get rich quick scheme, where the only purpose of these “assets” is to sell them to someone else before the music stops.   Well, I’m here to tell you, despite the grifters that will inevitably ride the wave of any new technology that’s undergoing massive adoption, there’s a lot more to this story than just some Ponzi scheme.  In this month’s article, I will explain the value of the blockchain, the appeal of Bitcoin, the functionality of smart contracts like Ethereum, as well as Non-Fungible Tokens (NFTs) and examine the implications they will have on digital and real-world property ownership.

First thing you might be asking: What is the blockchain?

A blockchain is most easily thought of as a distributed database that is shared among the nodes of a computer network. As a database, a blockchain stores information electronically in digital format. Like the internet, the blockchain doesn’t just exist in one location, on one computer, instead its history and current state are stored on all computers or nodes at once. 

Blockchain’s most famous application is one of the simplest: Bitcoin.  It’s often referred to as digital gold because of its scarcity, the code is programmed so that there will only ever be 21 million Bitcoins.  Think of the Bitcoin network as a bank ledger, where you have accounts (known as wallets) and each wallet has an allocation to it.  Unlike traditional money working with two decimal places, such as the centavos to the peso, Bitcoin’s are divisible into 0.000001 of a Bitcoin, which are called Satoshi – an ode to the anonymous inventor of the world’s first cryptocurrency.

To move Bitcoin from one wallet to another wallet, you need three things:  Your wallet address (think of it as your account number), your encrypted private key (similar to a password) and a destination wallet address.  One of major differences between the blockchain and the traditional database is that with blockchain there isn’t a single authority to validate the encrypted password. Instead, the complex task of decrypting the password is divided among many computers (called miners) so that no one computer has the whole password. 

Once the transaction has been validated, the ledger is updated across the entire network and the miners get some Bitcoin as a reward.  This division of labor, plus the fact that the database is stored on thousands of computers globally, is the reason why cryptocurrencies like Bitcoin are considered decentralized.  If any one of the computers validating the transaction doesn’t pass the decryption test, then the transaction is voided.  Another major advantage of cryptocurrencies is that they run 24/7, transaction speeds are fast and fees for moving large amounts of money are small in comparison to traditional methods such as the SWIFT telegraphic transfer.

Blockchain sounds interesting, but what are these so-called Smart Contracts?

With Bitcoin, the information stored on the blockchain is very simple:  Who owns which Bitcoins?  With Smart Contract platforms such as Ethereum (the second largest market cap cryptocurrency) you can take power of the blockchain and add more information and functionality to it.  

Let’s take a simple transaction involving the sale of goods where there is a buyer and a shipper of goods.  A smart contract can be encoded so that there are multiple payment milestones.  The transfer of the payment can be programmed in tranches: First as down payment once both parties approve the sale, another milestone can be when bill of lading is verified by the port and the final payment can arrive 30 days after the customer receives the goods and has inspected them. 

In short, the blockchain smart contracts allow multi-step, complex transaction to be solved both in the digital and real world.  These Smart Contracts are versatile and powerful, with an infinitum of possibilities, especially around the decentralized finance space or DeFi.  However, my ultimate interest and focus is how these smart contracts and more specifically NFTs will fundamentally change the way we look at ownership of most assets, including property.

So now you might be thinking: What is a Non-Fungible Token and how does this relate to property?

Whereas fungibility applies to Pesos or Bitcoin, meaning each Peso is indistinguishable and interchangeable with any other, a Non-Fungible Token simply means that each token is unique.  With NFTs the purpose is similar to Bitcoin: it’s all about ownership, with other features like voting rights and memberships to be attached. 

The physical world equivalent of an NFT would be a unique collectible asset such as a piece of art or a piece of property, for which you might have a certificate of ownership proving its authenticity. For digital art, the NFT with its blockchain technology replaces the need for certificates of ownership.  It also makes the transfer of this collectible instantaneous and encrypted, similar to the way Bitcoin transactions are protected.

One of the first NFT collections to gain mass popularity is a project called Crypto Punks.  You may have seen them before, they are highly pixelated digital images of people or aliens, who differ by their gender, race, accessories, physical attributes, and some even smoke cigarettes.  Some of these NFTs have traded for millions of dollars, but it’s clear that these aren’t beautiful works of art that inspire one like a Manansala.  In my opinion, their value simply comes from the fact that this one of the first applications of NFT technology and this technology will fundamentally change the way we handle the ownership of assets.

If you take an NFT and divide it into pieces, it becomes what is known as a Fractional NFT, which is effectively a modern way of owning shares of a unique asset.  It’s important to note that NFTs aren’t limited to digital images, this principle can be extended to physical art, stock in companies and of course, real estate.  This is, of course, providing you have the real-world contracts legally binding the NFT and the asset itself, and the right legal and accounting infrastructure to manage the real-world asset.

For investors in real estate, fractional NFTs allow encrypted ownership of shares in expensive assets such an apartment building or luxury villa.  Transactions will be faster, cheaper, encrypted on the blockchain, and all benefits of ownership (such as voting rights and dividends) can be automatically credited to the wallet of the NFT holder.  Additionally, borders will cease to exist, meaning Filipinos would gain the ability to easily purchase properties from any country around the globe.

For property developers like us, fractional NFTs provide an opportunity to build and sell projects to the global market, such as our up-and-coming project in Uluwatu, Bali.  VCDC will be offering the chance for both Filipinos and international investors to own a piece of our sustainable luxury hotel villas, which will be listing at an average price of over 200 million pesos.  While purchasing an entire villa may be out of reach for many, fractional NFTs will allow investors to purchase shares in these projects and participate in the price appreciation, as well as receive dividend payments from the operations.

This may seem like stretch to some, but there are those of us who are old enough to remember what it was like owning and trading stocks before brokerages went online.  There used to be paper shares issued by companies that one would have keep safe in your drawer and companies would issue dividend cheques, which had to be deposited manually.  It was not so long ago that the thought of buying goods and services online or through your phone was considered untrustworthy.  We are in the early stages, but property ownership is changing with the wider adoption of blockchain technology, smart contracts and NFTs.  It’s already starting to happen around the world; it is simply a matter of time before it happens here at home.