NYC Taxi Medallions Should Be Fractionalized via NFTs To Drive Market Liquidity & Investment
Lowering barriers to investing in NYC Taxi Medallions could increase liquidity and valuations. Non-Fungible Tokens(NFTs) could help fractionalize medallion ownership allowing access to more investors
AutoMarketplace NYC Newsletter is written by Dawood Mian, Founder of AutoMarketplace (launching soon). He covers the NYC for-hire transportation industry and related news.
Although we haven’t launched AutoMarketplace yet (soon!) the idea involves decentralized blockchains, such as Ethereum, and their associated technological innovations. Native blockchain assets, often referred to as cryptocurrencies (or as I prefer to call them crypto assets), are in many ways more about technology than currency. Without getting too deep, at least for this piece, on what that all means I wanted to focus on one specific blockchain asset that’s gotten a lot of mainstream attention lately - Non-Fungible Tokens (NFTs). I briefly lay out below how NFT technology can be utilized to not only drive increased liquidity in the NYC taxi medallion market, but also increased investment (read: higher valuations) and even unique community involvement.
Let’s get into it!
What is a Non-Fungible Token or NFT?
Let’s first start by explaining the ‘NF’, or non-fungible, of the acronym NFT.
To use a simple example, a $1 bill is FUNGIBLE or perfectly interchangeable. It doesn’t matter if I put my $1 bill in or if you put your $1 bill in a vending machine, it’s the same thing to the vending machine’s computer.
NON-FUNGIBLE means something unique, uniquely rare/limited or not (at least not easily) interchangeable. For example, the Mona Lisa is a 1 of 1 painting by Leonardo da Vinci, only one original exists. An original copy of the American Declaration of Independence from 1776 is not 1 of 1, but is uniquely limited (i.e., there may only be a handful of originals in existence & in varying conditions).
As you probably can guess, non-fungible assets are often valuable because they are scarce. Asset scarcity is not necessarily the only driver of value (i.e., a painting I draw may not be worth anything vs. a da Vinci), but it is undoubtedly a key feature of many valuable things.
On that note, NYC taxi medallions are a good example of an asset that has many non-fungible asset characteristics, there only exists 13,587 for example. It should be noted more medallions could hypothetically be added by the NYC Taxi & Limousine Commission, so the asset’s scarcity is driven by regulation to be sure. As I laid out recently though, I think the TLC will proactively limit the additional supply of any new for-hire vehicles for several years.
To complete the definition of NFT the ‘T’, or token, of the acronym refers to how scarcity is technically represented. What do I mean by this? In this instance a digital token, native to a probabilistically unhackable blockchain (digital ledger), such as Ethereum, is used to confirm the authenticity of an asset.
For example, what if someone made a really good copy of a metal taxi medallion and stamped it to the hood of a yellow car and started cruising around Manhattan picking up passengers? If the NYPD or TLC pulled them over, how would they verify the medallion’s authenticity? There are few ways, but they probably would try to match the VIN (unique Vehicle Identification Number) to the medallion (fake in this instance) on the hood, checking against the NYC TLC database. So an official centralized government database is helping authorities confirm ownership.
Similarly, if someone wanted to sell you a unique digital asset (i.e., e-tickets to a concert that gave you backstage access) how would you confirm they aren’t fake? An NFT, acting as a sort of digital bar code, helps you verify authenticity. In this example, Ticketmaster may have “tokenized” these special e-tickets with backstage passes via an NFT that exists on Ethereum, a decentralized blockchain database, that is trusted by all, but not centrally controlled.
If someone wanted to sell you a unique digital asset (i.e., e-tickets to a concert that gave you backstage access) how would you confirm they aren’t fake? An NFT, acting as a sort of digital bar code, helps you verify authenticity
We could and will at another time explore NFTs more in-depth, but for the purposes of this article, an NFT simply allows one to represent and authenticate assets via a digital token which exists on a blockchain.
Creating an NFT for each NYC Taxi Medallion
I’ve been following the medallion debt crisis essentially since it began and have spoken with several players, including drivers, in the industry over the years. One thing you quickly realize about medallions, especially from people who’ve been in the industry for a while, is that at no point in time has anyone ever really thought they were going to zero. What most people were waiting for was regulatory clarity around Uber/Lyft TLC-plated cars and a “bottom” to buy-in. As I argued in a recent article, that bottom is likely in now and current valuations seem unreasonably distressed. In addition, you also unfortunately have a lot of current owner-operators stuck with punishing debt loads (average of ~$500,000 per driver) stemming from financing (and refinancing) medallion purchases at much higher valuations.
A core part of the ongoing debt restructuring is also agreeing to a base valuation for medallions related to a City guarantee and/or to facilitate a debt restructuring.
(Senator) Schumer is working with the New York Taxi Workers Alliance (NYTWA) to push the City to renegotiate the terms of the debt restructuring. One key ask is that the medallion valuation on which the deal is built upon is pushed higher to $175,000 vs. the current $125,000, in addition to adding a City guarantee. The example Crain’s gives is that if a medallion owner defaults on $200,000 of outstanding debt and the lender resells it for $190,000, the City would be on the hook for the $10,000 - AutoMarketplace
One of the key problems with valuing medallions is the market is extremely illiquid. In other words there aren’t a lot of bids and asks where an efficient market can be made to determine fair value. In my view, a main driver of that illiquidity relates to the fact that most medallions are bought and sold as a single “whole” asset when they should ideally be divisible. For example, what if someone was willing to make a $1,000 or $5,000 investment in a medallion, but couldn’t afford the current $100,000+ asking price for an entire medallion. The inability to easily buy (key word is easily as you could technically make direct arrangements with a seller) smaller ownership stakes in a medallion is actually depressing medallion values, because it’s causing the asset class to be extremely illiquid and shutting out many investors (i.e., thousands of New Yorkers, TLC drivers could invest thousands of dollars each if they were able to). Therefore, you need a mechanism that allows you to create liquidity, while also ensuring the underlying ownership can be tracked and regulation enforced. This is where NFT technology comes in.
A main driver of that illiquidity relates to the fact that most medallions are bought and sold as a single “whole” asset when they should ideally be divisible. For example, what if someone was willing to make a $1,000 or $5,000 investment in a medallion, but couldn’t afford the current $100,000+ asking price for an entire medallion
By “tokenizing” each NYC taxi medallion you create a liquid asset that has all the characteristics/security you would need, a verifiable tradeable asset existing on an probabilistically unhackable blockchain. Once you create the 13,587 Medallion NFTs you can then fractionalize those NFTs into smaller pieces (i.e. let’s say increments of 1% ownership stakes). Taking the structure to its full conclusion, the TLC could then create an online exchange where people and companies can buy and sell stakes of medallions in a trustable, trackable and secure way. There is actually a real life example of this mechanism going on right now at the site fractional.art, where fractions of very expensive (i.e. $1 million+) digital collectibles/art can be bought and sold.
The Medallion Market Needs Liquidity To Determine Fair Value & Drive Investment
Using NFTs and digital tokens is a relatively easy and practical way to increase liquidity and subsequent investment in the NYC taxi medallion market. If the only way an individual can take a bet on the NYC yellow cab industry is to make a $100,000+ investment then a whole swath of investors, many of which are probably TLC drivers themselves, are prevented from participating in the market. Furthermore, as NFTs and digital tokens gain more adoption, additional infrastructure and utility can come from making medallion assets “blockchain-native” from decentralized finance (DeFi) to enabling community ownership & engagement in the market (i.e., New Yorkers have a stake in the taxi network they use).
Some obvious questions might be that if 100 people own a medallion what would conflict resolution look like? What if the driver decides to quit, who is finding a new driver? Who is managing the driver and car? Who is collecting the lease income and distributing it? Who is managing tickets and vehicle maintenance, etc? These are good questions, but to not embrace innovation due to not having 100% clarity around these questions almost shows a lack of faith in the TLC community and New Yorkers. New investment communities will form, taxi garages will get involved, people and companies will think of interesting structures and will work together with the TLC.
What if the NYC taxi industry went from being disrupted to showing others how to disrupt?
Let me know your thoughts? What did and didn’t make sense? Do you have any ideas of your own on how to increase investment and community involvement in the taxi medallion industry?
AutoMarketplace NYC Newsletter is written by Dawood Mian, Founder of AutoMarketplace (launching soon). He covers the NYC for-hire transportation industry and related news.
Wasn't there an app that allowed you to buy a piece of a racehorse. Should be easy to adapt that to medallions.