For a family office to fulfill the needs of its clients, advisors often look beyond the constraints of traditional investment vehicles and explore evolving assets to determine their potential benefits. Non Fungible Tokens (NFTs) are one such evolving asset class many family offices are considering. With 75% percent of family offices either investing in or exploring cryptocurrencies, NFTs could be a modernizing step for your office’s investment strategy.
NFTs are digital assets that, through cryptography, have been turned into tokens whose ownership is tracked on a blockchain’s decentralized ledger, similarly to cryptocurrencies. NFTs often represent real-world items, including art, collectibles and property deeds. Not just the domain of unknown artists, even museums are getting in on the NFT action. Organizations like Russia’s Hermitage Museum are auctioning off NFT versions of Monet, Van Gogh and da Vinci works in their collection. NFTs even give us access to never-before-seen works created by famous artists, such as the 1,010 unseen Picasso ceramic pieces his family is tokenizing.
NFTs can also be used to transfer ownership of a digital product such as a JPEG or tweet. In 2021, Twitter founder Jack Dorsey sold his first-ever tweet as an NFT for $2.9 million. Other stars of the internet zeitgeist are joining in, with familiar memes like the fist-pumping beach baby known as Success Kid selling as NFTs.
Are NFTs Right for Your Family Office?
NFTs can play a critical role in helping a family office streamline and centralize a family’s assets while also maintaining value alignment and legacy expectations. NFTs have some practical benefits, as well. Provenance documents have a long history of being inaccurate or downright false. With NFTs, because a token’s entire ownership history is tracked on a decentralized, immutable ledger, both authenticity and proof of ownership become very simple to verify.
Much like fractional jet ownership, NFTs can allow multiple family members to own a “piece” of the asset, keeping the full NFT in the family while distributing ownership among the generations. This is especially easy with NFTs because rather than having to bring in a team of aviation experts, deal with FAA regulations, consult on liabilities, and so on, NFTs require far fewer intermediaries for transactions. Unlike jets, real estate and other property, NFTs do not need ongoing care and maintenance.
NFT Buyer Beware
One of the biggest concerns surrounding NFTs is that they are not yet regulated. We don’t know if they will pass the Howey Test, an analysis that determines whether an investment transaction qualifies as an investment contract, and what tax implications that might have.
While provenance is easier to prove with NFTs, there is still an issue with counterfeits. As forgery runs rampant in the art world, this isn’t exactly an unfamiliar problem for collectors. Because of the digital nature of NFTs, however, family offices that want to explore this asset must prepare to develop an expertise for identifying fakes.
As a speculative asset class, NFTs won’t fulfill a role for every family member, but they can provide an important option for those with a high risk tolerance. Further, they offer a creative way to support artists, a goal of many wealthy families.
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