In a unique financial transaction, an anonymous user has taken a loan of US$1.1 million (AU$1.7 million) from a stranger via Arcade, a DeFi platform that enables cryptocurrency lending. The loan was noticed by an observer browsing through blockchain records. According to Arcade’s records, the borrower is required to pay an annual interest rate of 40% and must repay the loan in 60 days.
Unlike traditional lending, where tangible assets are typically offered as collateral, the borrower in this transaction used an NFT (Non-Fungible Token) of his collection of Supreme t-shirts. The collection comprises 253 t-shirts from the iconic Box Logo Collection, released by the streetwear brand from 1994 to 2020. It was valued at US$2 million (AU$3.1 million) by Christie’s auction house in 2020.
Before the loan was granted, the Supreme t-shirts were examined by an escrow company, 4K, to confirm their authenticity. The company then provided the borrower with an NFT confirming ownership and authenticity of the t-shirts. After this, the loan was processed. If the borrower defaults, the lender can own the Supreme Box Logo Collection by using the NFT as proof.
This is not the first time NFTs have been used as collateral. Earlier, a US$35,000 (AU$54,200) loan was secured using an NFT of a Patek Philippe luxury watch as collateral.
In case of default, the anonymity of the borrower could pose challenges. However, blockchain trackers may be able to help law enforcement locate the borrower’s crypto wallet address and geographical location. Some blockchain tracking firms, such as Chainalysis, have previously partnered with authorities to solve financial crimes. To date, there have been no reports of borrowers defaulting on loans where NFTs have been used as collateral.
The use of NFTs as collateral suggests that they are being perceived not just as ‘JPEGs with a high price tag’, but as legitimate indicators of ownership. Some see this trend as an opportunity to reveal a practical utility for digital artwork.
