NFTs: Collateral? Or Collateral Damage?

Ashley Garrison: Hi, and welcome to Baker Hill's Lending Made Easy with the man, the myth, the legend David Catalano. And of course the ever affable Brian Peckinpah. Today in our episode, we're going to be talking about collateral and really collateral or collateral damage. I have a funny story to start this one off. My brother came home to help my husband work on our basement bar and in the process.

With him, his old baseball and basketball card collection. And between my brother and my husband, I felt like I lost them for hours in their like boyhood youth talking about like the value of their different cards. They found a Kobe Bryant that they think is worth a lot of money, about $5,000, according to eBay.

And one of the things that they got talking about is, baseball card trading. Is it still a thing? And, I would say you don't see a lot of baseball card trading, in raw form, but there is a growing group of people using NFT baseball cards to collect different baseball cards and different sports memorabilia digitally. So then the question kind of piqued my interest. We, I Googled a little bit about, NFT baseball card valuation, and there was a whole kind of article around baseball cards being potentially used as collateral in a digital format in tomorrow's banking space. So Brian, David fun topic thoughts on baseball cards as the new collateral?

Bryan Peckinpaugh: Well, first things first, I think we need to schedule when we're doing a podcast from Ashley's bar. That sounds like a great live location. You know, I collected all kinds of trading cars as a kid too. And, I got them in some of the latter stages of the last big boom in cards.

For a long time, they weren't worth the paper they were printed on. Now, maybe they're back. I could see the same thing happening in NFT. I mean, David, have you bought one yet? 

David Catalano: No, I have not. 

Bryan Peckinpaugh: Yeah. And nor have I, and I don't have any plans to, at least in the near future. I'm still not entirely sure what it is we're getting out of it.

I think there's a lot of evolution that's necessary in this world to make them a real viable asset, if you will, something that's not just completely speculative in nature. Because at the end of the day, I'm not actually buying the image or buying the video. Those don't live on the blockchain like the NFT itself does. You're buying the link, right?

And anybody can I have access to that exact same digital file, which makes it a little bit unique as you compare it to art or baseball cards or the things in the physical world where I can never get an exact replica, an exact copy. If I have a van Gogh painting, there's only one van Gogh painting.

It doesn't matter if you have the world's best artist replicate it with paints made to match paints that were available in van Gogh's time. There's only one van Gogh. I'm buying that uniqueness. I can't create an exact copy. Whereas, some of these NFT images that have gone for millions of dollars, I didn't actually buy it. I bought the link to it. I bought proof that yes, I'm the one that paid for it.

But anybody that wants to has access to that. Was it the, I think it was the second, most expensive NFT was from Beeple I think that sold for $30, $60 million, or something crazy. You can go on Wikipedia and see it. What are you paying for it? 

David Catalano: Well, you must admit the original van Goghs are worth more than the printed ones.

Bryan Peckinpaugh: Correct. 

David Catalano: So if I take a regional van Gogh and I hang it on a wall, that's my original van Gogh, all $36 million of it. So I really think from a collateral perspective an NFT is going to be probably not unlike other collateral, meaning it has a cash flow and a value to it versus just a market where the last purchase price of the asset was $30 million.

Does that mean there's another buyer there? How deep is that market? Because from a collateral perspective, how quickly can I turn it to get my money back and, wipe out this debt? You know, ran into an interesting use case for an NFT. So there's the world's greatest blues guitar player, Joe Bonamassa.

Matter of fact, it just saw him in concert on Saturday, he actually recorded a song. Created an NFT of that. And the NFT contains the master recording of the song and the publishing rights. I can buy that NFT and I become a publisher of that song. So if you want to play that song, if you want to use that song on your commercial, you've got to pay me for that.

So that's a pretty cool use of an NFT, and that would have a cashflow stream and potentially an intangible value that someone would pay for. Lending around. This is a little strange because typically you're going to be a high-net-worth person buying an NFT. Therefore, why would you need a loan?

Or why would you want to live with that? But if you were going to lever that you'd have to go to a specialty lender, they have to assign some loan to value to that. And if it did have a cash flow like you remember Michael Jackson purchased all the rights to the Beatles music library that has, yeah.

And that has cash flow. 

Ashley Garrison: Best purchase ever. Let's just say it right now. 

David Catalano: That has a cash flow attached to it. And you can do a loan to value against that cash flow. Yeah. Yeah, a little different than the picture of an ape or, you know, an artist rendering that I can get online.

So, I'm still unsure as to how I would use the ape as the collateral unless that was just getting the per personal guarantee of the ape owner, which would be a high net worth individual because typically those are relegated to rich people.

And you gotta wonder why. Cause I think the article I saw there was a borrower. That he got a, like a 5% interest rate over six months. Why would he want to borrow at such a high rate for such a short period of time what's going on there? It's kind of a unique scenario. 

Bryan Peckinpaugh: So a couple of things that popped to my mind, David, based on when some of the things you said, one, you mentioned that need to be able to resell and what I saw some analysis.

Only about 29, 30%. So, not a very big number yet.

Of all NFTs sold that had been resold have made money. So very few of them are being resold. And even when they are, they're not for a profit. So we don't, we aren't seeing any return on some of these investments.

Your example of, using the NFT to represent something tangible like publishing rights, that I can see. We're just not there yet. So much of this is still focused on I'm buying a video. And I'll all I'm getting is the video or I'm buying the art and all I'm getting is the art. I'm not getting the publishing rights or anything associated with it.

As that expands, I, as an example, it could see it expanding into titles for a house, or a car for example, where the NFT represents the ownership of the physical asset.

You start expanding and going down that path, it becomes really interesting, very quickly. But there's a lot to navigate in that ecosystem. You also talked about that high net worth and that's probably the scariest thing to me is you look at the world of cryptocurrency that we've already talked about, which is how a lot of these things are being purchased.

A lot of that cryptocurrency is still used for illicit purposes. And you look at what are my challenges when I have that? Potentially ill-gotten gains in cryptocurrency or even legitimate gains in cryptocurrency. You still run into that challenge of turning it into cash. How do I turn it into actual dollars? And I think we're going to see a lot of potential fraud, potential money laundering come out of this as well if traditional banks choose to accept it as collateral, because I can use that cryptocurrency to purchase any number of these NFTs, still in that kind of anonymity. And then turn that into an asset as collateral to get hard cash from a financial institution.

So let's say I've got $100 million in ill-gotten cryptocurrency that I use to borrow $10 million in actual cash from a financial institution. What do I care if I ever get those hundred million dollars back? And my goal was to get to the cash asset at the end of the day. And this gives a new avenue to do that.

Should these be accepted as collateral for a traditional loan? Now what I've seen so far is this is all sticking in the crypto world. I have not seen a whole lot of examples or any for that matter of somebody taking an NFT and turning it into cash.

I see it as turning it into more crypto. I think I even saw the same one you saw David of that, they got crypto for six months at 5% interest. Cause they wanted to invest in more crypto things, more crypto speculation. That is what I saw in what I was reading, but it's that turn into actual cash involvement of actual traditional financial institutions that, that I see is maybe a bridge too far right now.

David Catalano: Yeah. So levering your crypto investments. Wow, I guess that's definitely possible, but crypto cryptocurrencies are just really extremely volatile, and then lending on a short-term basis so that someone can buy crypto it's, it's kind of like a margin account at a brokerage shop.

Ashley Garrison: So to wrap up all the fun we're having here, guys, I'll just say this. I think my husband needs to sell that LeBron James card immediately while it has a lot of value in the market. And, maybe take me on vacation what do you think? 

Bryan Peckinpaugh: That sounds like a good idea to me. 

David Catalano: I think if you can make it an NFT first, then you'll get more money for it. 

Ashley Garrison: Thanks for having fun with us. A great topic, and we'll see you next time on Baker Hill's Lending Made Easy.