Crypto and NFTs can affect our financial decision-making process, as well as our children's growth and autonomy. In a fast-paced world where new technology keeps emerging, we need to understand how they all work.
New financial models like virtual money, blockchains, crypto and NFTs can't be avoided. They are becoming critical financial life skills everyone needs to be aware of and exposed to. That's why we need to make sure that our children understand the risks and opportunities that come with it. Even more so because they've become a new and quick way to make money, they’re viral, and they’re easily accessible. There are both benefits and drawbacks when it comes to crypto and NFTs, and kids should understand both.
What are Virtual Financial Assets?
Crypto and NFTs are categorized under a class of financial assets called "Virtual Financial Assets" or VFAs. They aren't usually backed by a central bank or formal banking institutions. We can use them as a medium of exchange like money, as investments, and we can trade them on the market like stocks and foreign currency.
VFAs have existed since the mid-2000s and have gained popularity over the past few years. We use them for gaming, entertainment, real estate, and virtual worlds like Second Life.
VFAs like crypto and NFTs are digital representations of real-world assets, such as stocks and bonds. They are traded on decentralized networks without central banks or formal banking institutions managing their transactions. Instead, trading is done electronically.
The Impact of VFAs
VFAs like crypto and NFTs have the potential to revolutionize the financial industry. They can make financial transactions more accessible for children and families. That’s why it’s important that we educate both ourselves and our children about them.
Part of that is teaching children basic money management like earning, saving, giving, investing, spending wisely, and budgeting. We can also introduce them to child safe VFA systems early on in life so they can learn how these tools work through play and experiential learning rather than traditional education methods.
This gives them the opportunity to explore different aspects of investing like risk levels, compounded interest and growth, the different assets that exist, valuations, and volatility of prices.
Non-fungible tokens (NFTs), for example, became popular because of how they allow fractional ownership. NFTs are unique assets that can be purchased, sold, or transferred to a new owner since they're non-fungible (they can’t be replicated, copied, or hacked). It’s important to understand the value of these types of investments before making any decisions.
Crypto and NFTs have multiple benefits when compared to traditional financial instruments. Some are:
- They can be used as a medium of exchange between parties without requiring third party intermediaries like banks or brokers. Transactions can easily happen online without necessarily using a specific banking service.
- There isn’t a need to identify users’ identities like in normal, banking services, so we can’t always know who is on the other end of the transactions but it makes it easier to access and trasact.
- Some have limited supplies which means there is no inflation risk for investors. However, the volatility risk of fast-changing prices remains, which means fast gains but also, fast losses.
There are several things to consider when we analyze the drawbacks of crypto and NFTs. First, although they have revolutionized the world of finance, they have a great potential for misuse and fraud. For example: a person could create an investment account and use fake identities and addresses. This makes it a risky market for children as we won’t know the real identity of the person on the other side and who you are actually buying or selling from.
Investors could open multiple accounts with unknown and different identities which can lead to financial abuse. This leaves their children unprotected in case of fraud.
Another concern is around the volatility of their value where one day the value can be high and next day it can drastically fall. This makes them a risky investment for children who may not understand this, and who may potentially lose all of a large chunk of their investment. Finally, the fact that they’re not regulated in many countries makes it difficult to prosecute financial abuse or fraud.
Becoming realists vs. risk-takers
To make smarter decisions when investing in a virtual world, it’s important that we understand the different technologies that are emerging in terms of their opportunities and challenges. With a better understanding of tools like crypto money, blockchains, NFTs, and others, we can become more informed to help guide our children in making decisions that are meaningful, safe and valuable.
By Dr. Hoda Alkhzaimi, Assistant Professor in NYU/NYUAD and Director of EMARATSEC