In one of the weirdest things yet seen in the NFT space, someone has tokenized their FTX bankruptcy claim of $31,307. This minting of the NFT effectively converted their ownership of the bankruptcy claim into an NFT. They have since used the NFT to take a loan of $7,500, making them the first claimant to do this.
Terms of the loan
The implication of the loan for the owner is that they lose the right to their $31,307 FTX bankruptcy claim if they default on the loan. The 5-day loan at 243.33% APR will see the borrower pay back $7,750, according to the screenshot shared by Cirrus.
Tokenizing assets on the blockchain involves representing real-world assets, such as physical assets or financial instruments, as digital tokens that can be managed and traded on a blockchain network.
Process of tokenization
The process typically involves the following steps:
Asset Identification: The asset to be tokenized is identified, whether it’s a real estate property, a company’s shares, a piece of artwork, or any other valuable asset. In this case, the owner of the FTX claim was positively identified.
Asset Representation: A digital representation of the asset is created using smart contracts on a blockchain platform. Smart contracts are self-executing contracts with predefined rules and conditions encoded within them.
Token Creation: Tokens are generated to represent ownership or shares of the asset. These tokens can be created using various blockchain standards, such as ERC-20 (Ethereum), BEP-20 (Binance Smart Chain), or other custom token standards. The tokens are often referred to as security tokens or asset-backed tokens.
Legal Compliance: Depending on the jurisdiction and nature of the asset, regulatory compliance may be required. This can involve ensuring compliance with securities laws, Know Your Customer (KYC) requirements, Anti-Money Laundering (AML) regulations, and other relevant regulations.
Asset Verification: The authenticity and ownership of the asset are verified through appropriate mechanisms. This may involve conducting due diligence, verifying ownership records, or involving trusted third parties to validate the asset.
Token Distribution: The tokens representing the asset are distributed to the investors or participants who hold a stake or ownership in the asset. This can be done through a token sale, private placement, or other distribution methods. In this case, the contract made it possible for the lender to receive the tokenized FTX claim, while the owner of the claim received $7,500 as a loan.
The uncertainties in bankruptcy claims
By tokenizing assets on the blockchain, various benefits can be achieved, including increased liquidity, fractional ownership, enhanced transparency, and automated compliance processes.
With the low rate of success seen with bankruptcy claims, we can only wish the lender lots of luck. The success rate of claims can vary significantly. In some cases, creditors may recover the full or a substantial portion of their claims, while in other cases, the recovery may be minimal or even nonexistent.