In this interview, Thomas Eichenberger, a member of the Group Executive Board at Sygnum Bank, explains why he thinks that NFTs have vast untapped potential. Thomas also elaborates on what role a bank should play in developing the Web3 and NFT industry and his thoughts on regulatory questions surrounding NFTs.
Jonas Kasper Jensen (JKJ): What is Sygnum Bank, and how do you integrate NFTs into your services?
Thomas Eichenberger (TE): Sygnum is the world’s first digital asset bank. We were the first financial institution to obtain a full banking licence from the Swiss regulator FINMA whose range of products and services is fully dedicated to digital assets.
In our terminology, digital assets are comprised of cryptocurrencies and tokenised assets with our products and services ranging from custody to trading to credit and lending to asset management, tokenisation of assets, but also regulatory technology and crypto compliance services. We extend all these services to institutional clients and wealthy private individuals, corporates and other financial institutions, particularly traditional banks that would like to extend digital asset banking services to their end clients without building up the entire technology stack to operate such digital asset banking services.
NFTs are the latest addition to the scope of our activities. The approach we have taken is slightly different compared to the banking services that we extend to the groups of clients that I just referred to. With the NFT offering, we aim to, on the creator side, address a very similar target group that is professional issuers such as large corporates, luxury and consumer brands, but also associations, sports clubs and artists who would like to explore the NFT space, but maybe have concerns about how to approach the space. This could be a lack of knowledge concerning the requirements from a legal and regulatory perspective or the tech side of things when it comes to issuing NFTs – or both. Questions could be: How do I handle the proceeds or the cryptocurrency I receive in return for the NFT that I issue and sell? How do I make sure such proceeds are compliant from a money laundering perspective? Or from a sanctions perspective, how can I adhere to all these requirements and ensure I’m not in breach? That’s where we come in because we, on the one hand, know how to develop and operate solutions built on blockchain technology. And on the other hand, we know how to develop products and services that are compliant with all applicable legal, regulatory and tax requirements.
So that was the creator side. Now on the collector side, in contrast to the target client segments that we address on the banking side, we are targeting the wider public, the entire Web3 community, so everyone can connect with their wallets to the Sygnum NFT platform and buy the NFTs that have been created by the luxury goods brands and sports clubs I mentioned earlier. With the NFT offering, we aim to take the first step into providing compliant DeFi/Web3 services to a broader audience.
JKJ: Besides being digital tokens, is there something in the use cases NFT provides that is interesting from a bank’s point of view?
TE: NFTs have a promising potential to revolutionise digital community and consumer engagement and retention strategies. It is a tool to engage with your community, be it consumers, fans or other stakeholders, in a digital way. It’s important that large corporates and associations think through how to meaningfully and sustainably embed NFTs into their digital consumer engagement and retention strategies. NFTs shouldn’t be used as a one-off tool to engage and create media buzz. They should have a lasting impact by ensuring that both the imagery used as well as the utility embedded in the NFT are meaningful and attractive.
NFTs may come with additional digital benefits in terms of access to metaverse rooms or other digital events or happenings. And they may be connected to real-life benefits. Owning an NFT could give you the right to, for instance, join a meet and greet session with your favourite player of your favourite sports club or attend a training session with your National Soccer Team or talk to the coach for 15 minutes.
Hence, NFTs can be used as a tool to help creators reach a broad audience and through associated benefits create an even closer connection with their communities. And the other element we shouldn’t neglect is that NFTs provide an excellent opportunity to further monetise brand and other intellectual property rights. It’s not only about engagement with a particular brand, it’s also about clever monetisation of associated rights, especially in the digital space.
JKJ: What kind of clients are looking to issue NFTs on your service?
TE: Currently, we are in various stages with numerous prospects who would like to use our services. We see a clear overweight of interest from the luxury brand space. Some of the more prominent brands already have experience in issuing NFTs. For them, there are two main questions: First, how to develop sustainable NFT strategies, so making sure it’s not just a one-off experiment, but has a long-lasting effect that follows a certain strategy and second, how to ensure that not only the marketing and digital innovation labs feel comfortable dealing with NFTs, but also the legal, finance and other relevant corporate functions. The other area where we see a lot of engagement and interest is sports, and especially football and ice hockey. From a sports marketing point of view, there’s quite a lot of interest from clubs, leagues and associations.
JKJ: What role should banks have in developing the NFT ecosystem?
TE: I don’t necessarily think that NFTs are a space that should only be covered by banks. You might wonder why I say that, given that we are a bank. But I should clarify that we don’t necessarily see ourselves only as a bank. We rather see ourselves as a technology company with a banking license. So, of course, we extend products and services in a fully regulated environment to professional and institutional clients. This is our bread and butter. This is where we currently see the most traction and the biggest share of our revenues. But at the same time, we believe that there must be trusted institutions who bring the DeFi and the Web3 space closer to the regulated environment. And that’s where we believe we can play a role because we understand these legal, regulatory, tax and other compliance requirements.
At Sygnum we can do both – develop applications built on blockchain technology for the different players in the Web3 space and create products and services in line with regulatory, tax and compliance requirements. I think that combining these two areas of deep expertise is a beautiful value proposition which helps us bring the entire DeFi and Web3 space closer to the regulated environment.
JKJ: How do you think different NFT projects will be regulated sometime in the not-too-distant future?
TE: Earlier, I said that we are also providing tokenisation services on the banking side. There, we are creating fungible tokens that qualify as securities under Swiss law. So, we’re dealing with securities where owning the token represents owning (a fraction of) the underlying asset. When it comes to NFTs, we are currently structuring them as such that they qualify as utility tokens from a regulatory perspective.
This means that we avoid that NFTs issued through our platform exhibit certain characteristics that are more similar to security tokens than utility tokens. In case, for instance, an NFT gave the owner the right to participate in specific revenue or profit streams of the issuer, the NFT may be considered to have similar characteristics as a security, because for instance as a shareholder you’re also entitled to receive your share of a company’s profit in terms of a dividend.
So, for us, it is important to make sure that we do not offer NFTs with features that may make them qualify as security or payment tokens, because regulation is much stricter when it comes to dealing in these two types of tokens in Switzerland. I think the approach that the Swiss regulator has taken by stating that, ultimately, the classification or qualification of a token depends on the characteristics of the benefits you are entitled to when owning the token, is quite smart, because it is fairly simple to relate to it.
JKJ: The NFT will then be regulated differently depending on what benefits the NFT gives?
TE: Exactly. An NFT doesn’t equal an NFT in every case. The question of the legal and regulatory qualification is very much tied to the benefits that are associated with it.
JKJ: Can you give an example of when an NFT might be categorised as a security?
TE: There are already successful examples of musicians who have issued songs as NFTs, where NFT holders participate in the sales proceeds of these songs. I think this is a possible example, because the owner of the music NFT would be entitled to receive revenue or profit shares, which is a right that is usually reserved for rights- or shareholders.
The good thing is that, given that we are a bank, we are also allowed to issue securities. So even if we were confronted with a situation where one of our creators would say, look, I want to do precisely this, because I want to have my community benefit from the commercial success of what I’m doing.
If we believe it makes sense, we can look into the additional legal and regulatory requirements to facilitate it and thanks to being a bank help issue such NFTs and deal with them. That’s the beauty of being a technology company with a banking license, we are not restricted in doing this, while many pure tech players would be. We might need to take other aspects into consideration when it comes to the distribution of such NFTs and the applicability of additional KYC and AML requirements, but ultimately we can find ways to do it without putting ourselves, the issuers or the buyers at risk.
We are dealing with these requirements on a daily basis. So it’s not a hurdle for us. And I think it also provides quite a significant amount of peace of mind to creators that, whatever happens, they have been working with a provider that is also allowed to operate and deal in both utility and security tokens.
JKJ: What will the future bring for NFTs?
TE: That’s very hard to say. I wish I knew, so we could manage our offering and roadmap accordingly. I think so far, we have seen an NFT hype cycle. You only have to look at the price developments over the last couple of months to see that the entire market has crashed significantly. Nevertheless, we are convinced that the market will pick up again and further evolve. I think one element that we haven’t seen so far yet, which I believe will have quite a significant impact, is the adoption and integration of NFTs into social media platforms and their services. The same applies to digital wearables such as Apple Watches where NFTs could be embedded seamlessly with people beginning to also use NFTs as a status symbol on these digital wearables.
But I don’t expect it to only be about showing that you could afford to spend a large amount of money to buy a particularly rare NFT, it will also be about showing the public, for instance, that you are such a big fan of a particular sports club that you invested 1’000 CHF to buy an NFT in their recent sale where only 100 NFTs were issued. You are, of course, proud of that and want to show it to everyone. This may give the entire NFT space quite a bit of further tailwind, so I am curious to see by when the next, hopefully more sustainable, hype cycle will start.