Crypto and NFTs: A New Digital Footprint for Enterprises?

With big companies like Walmart dabbling more and more in cryptocurrency and the metaverse, the definition of a digital footprint seems poised to change.

It used to be that websites, social media, and mobile apps made up the core digital presence for companies. The decentralized world of Web 3.0, with its distributed networks built on the blockchain, decentralized finance, and the rise of nonfungible tokens (NFTs) lay out new opportunities for enterprises to explore.

But what are companies getting themselves into by diving into deeper digital waters known for fast-moving currents and unpredictable tides that change rapidly? Experts from Shyft Network, Dropp, and Dorsey & Whitney offered their perspectives on some risks, liabilities, and potential rewards that might rise to the surface.

Walmart turned heads recently with the discovery that the company filed trademark applications at the end of 2021 for potential cryptocurrency, blockchain assets, and other digital currency. Other companies and brands, such as Visa, Tesla, Nike, Pizza Hut, EA (Electronic Arts), Under Armour, and Gap, have all been making moves in the realm of cryptocurrency, NFTs, blockchain, and the metaverse.

Promises of Efficiency

The decentralized finance (DeFi) world, which has its foundation on blockchain, is evolving, says Sushil Prabhu, CEO of Dropp, a micropayments platform. “What the DeFi world offers is payments are made instantly without anyone in-between,” he says.

Another benefit he sees is the ability through smart contracts to take custody of digital assets, then release them when conditions are met. “If you look at lending, borrowing, and crowdfunding, all of those use cases could be made incredibly efficient and cheap,” Prabhu says.

He describes the DeFi world as a huge machine that anyone can enter and if they want, create their own token they can start trading with no single organization owning it. “This concept of a machine doing a lot of work, which right now requires lots of different institutions to be involved, is an indication that it’s extremely efficient.”

The buzz surrounding NFTs and the metaverse, Prabhu says, may bring more non-banking institutions to this space. Banks are likely not far behind. “We’re talking to banks ourselves,” he says. “It’s no secret: they want to get involved. They want to use the distributed ledger of blockchain technologies to build products, which would be a lot more efficient, a lot cheaper.”

Getting into DeFi is not free of peril, Prabhu says. “The prices of cryptocurrencies are very volatile,” he says. “That means a common person inherits a lot of risk. You could lose it all and there’s no one to call.” Stablecoins, he says, are becoming popular because they are designed to maintain a fixed value and remove some risk from the equation by converting those assets to a stable currency.

Undiscovered Decentralized Country

There can be a dark side to this new frontier. Increased use of decentralized assets has brought concerns of exploits -- such as cryptocurrency money laundering. The Financial Action Task Force (FATF), a global organization that combats money laundering, has been looking at how to mitigate risks around cryptocurrency, says Malcolm Wright, head of strategy for global regulatory and compliance solutions with Shyft Network. Regulators in the United States already had policy and guidance in this arena in place, he says, but the task force proposed wider suggestions on dealing with these emerging issues.

“FATF doesn’t create legislation but it does lay down recommendations and evaluates countries against how well they’ve implemented them,” Wright says. Shyft is a public protocol for validating identity to secure cryptocurrency, establishing trust in blockchain data.

FATF laid out recommendations in 2019 with the expectation that countries would regulate within two years and industry would look to comply within two years, he says. This was a way to mitigate the risk that illicit actors pose. “That began the journey primarily for centralized finance exchanges and custodians,” Wright says, referring to platforms that host the purchase and sale of cryptocurrency.

One of the major problems he says needed to be solved was the "travel rule" in crypto, which is the sending of originator information between exchanges about buyers and sellers when cryptocurrency is sold. “The purpose of this is so law enforcement could knock on the door of an exchange and says, ‘Hey, who were the parties to that transaction?’” says Wright.

While such oversight has been part of banking for years, becoming part and parcel of transactions, it is more complex to accomplish through crypto, he says, but the industry has found a way forward. 

“I fully expect 2022 is going to be the year of compliance,” Wright says, with legislation on this front likely to pass in Europe or Asia.

More Than Bored Apes

NFTs have set off new ripples in the blockchain with questions about their actual value and volatility. Video game publishers and others have gotten into the act -- selling photos, in-game items, and other visual assets as NFTs, which come with unique coding that denotes ownership and may find use across the 3D virtual landscape of the metaverse. There are tales of sellers making millions in digital currency from their NFTs as well as instances of NFTs being hacked and stolen.

Cor Laffra via Alamy Stock Photo

Regulators are still sorting out how to approach this segment of the market, with FATF leaving countries to determine what risks may be inherent to NFTs and what they might do to mitigate such risks, Wright says. “If a country has no NFTS, they may determine the risk is lower than somewhere there is a thriving [NFT] economy.”

As technologists build and scale up the backbone for decentralized assets and networks, he says there should also be a sense of obligation to build solutions to manage potential risks at the same time. 

In a perfect world, everyone would use NFTs and crypto without issue, but the reality is bad actors may attempt to hack, manipulate, or outright abuse such resources, Wright says. “We have to look at this through the lens of, ‘If I’m going to develop a financial service, I need to be doing this as a responsible innovator.’”

Crabs in a Virtual Barrel

The churning worth of digital assets, which can rise and plummet drastically, and the heavy evangelizing associated with them, have drawn concerns and comparisons with some questionable, old-school business schemes. If an endless chain of investors is essentially the driver of an enterprise or asset, it can create a mathematically unsustainable paradigm, says Robert L. FitzPatrick, president of Pyramid Scheme Alert and author of “Ponzinomics: The Untold Story of Multi-Level Marketing.” Such continuous expansion plans can only go about 14 levels, he says, until they exceed the human population of the planet.

This kind of unsustainable thinking can befall other investments markets such as real estate, FitzPatrick says, where there might be a presumption of continuous growth. “Populations of towns, people just blithely speak about, ‘We want to grow 10% a year,’” he says. “They have no idea what that would lead to.”

When looking at cryptocurrency, FitzPatrick questions what actually backs such assets. “What have you got there? It’s supposed to be a currency, but it doesn’t really function as a useful currency,” he says. “It didn’t gain its value as a currency. It gained its value as a commodity -- a commodity that was hard to understand but was said to have value. A bunch of people piled in and bought it, and the more people that bought it, the higher the price went.” This raises concerns of volatility and the potential for collapse if new buyers do not continue to invest and existing investors bailout in response. “There’s nothing underneath it,” FitzPatrick says.

Value assigned to NFTs may be similarly derived from the confidence of the buyers, but he says there is a difference between such assets and the currency of a country that is based on the faith in a functioning government. “The government has soldiers; it has the ability to enforce its way and drive out competitive currencies,” FitzPatrick says.

Liabilities of a New Financial Frontier

In some ways, cryptocurrency investment may be comparable to buying orange juice futures, says Joseph Lynyak III, partner in the finance and restructuring group with law firm Dorsey & Whitney. “You really don’t have orange juice -- you’ve got some perception of value.”

There is an unaddressed concern, he says, whether there might be an incredible debacle that hits cryptocurrency valuation across the system. “I think this is why there is such hesitancy on the part of the banking industry of holding cryptocurrency other than for customers holding it as an investment alternative,” Lynyak says.

How cryptocurrency works its way into the global banking payment system is a bottom-line issue that has yet to be resolved, he says. “Frankly, I don’t think it’s going to be resolved for a while.”

This does not mean the incumbents among financial institutions are totally ignoring this space. The Federal Reserve Board is examining a potential US central bank digital currency, for example, a move being explored by other countries as well. 

“China is coming out with its own digital currency, which if it’s not the brother or sister to crypto, it’s really, really close,” Lynyak says. “It’s a way of moving away from any type of hard currency to more universally useable currency.”

Where Banks Factor In

That raises questions about individuals being able to conduct electronic transactions directly and whether banks would be necessary. “How does a bank raise deposits for the purpose of making loans? That’s all embedded into this issue,” he says.

As the Federal Reserve Board develops a revised payment system to speed up delivery, they are also looking at the issue of digital currency, Lynyak says. It remains to be seen if that means any individual will be able to have accounts at the Federal Reserve with such an issued digital currency, or banks will remain to act as the intermediary. “These developments could profoundly affect the market perception of crypto and what it can do if it becomes the province of the sovereign,” he says.

Proponents of crypto, Lynyak says, have pointed out the slowness of transferring funds internationally, which can take days through the current payment system compared with domestic wire transfers. “That is an area where cryptocurrency or blockchain could speed things up,” he says. “How the international community deals with this as something that could be useful and done in a manner that doesn’t incur significant losses for people -- it’s way far down the road before we get any of those answers.”

There is still a functional barrier to more mainstream use of crypto for everyday transactions. “Cryptocurrency does not work for many consumer transactions,” Lynyak says. “You can’t reverse a cryptocurrency sale. Under US law, if you buy something and you extend credit to buy on a credit card, one of the most significant consumer protections is the ability to reverse charges and contest it with a merchant.” It is difficult, if not impossible, to reverse a charge once there has been a transfer of cryptocurrency on a blockchain, he says.

Related Content: