To be or NFT?

If there’s one consistent lesson to be learned from Blockchain and crypto is that the enabling technology often outpaces our understanding of the viable use case, commercial application or sustainable business model. For example, smart contracts have only recently proven their value with the rise of decentralized finance (DeFi). Even then, they are not perfect and if not well-coded can result in hacks, losses or other damage. Plus, until scaling (transaction throughput) and gas fees (transaction costs) are properly resolved, mass adoption is still some way off.

CryptoPunk #7523 (Image sourced from Reuters)

The latest crypto phenomenon is the market for NFTs (non-fungible tokens). Artworks in the form of digital files are being created, auctioned and traded for serious (or very silly?) amounts of money – just Google EtherRock, Beeple, CryptoPunk or Rare Pepe for recent examples.

NFTs are not just confined to digital art – animation, video, music and text are all being created in the form of NFTs. In addition, NFTs are being minted to represent ownership or other IP rights for physical artworks, real estate assets, collectibles and luxury goods.

Why would anyone pay the best part of US$12m for the original digital file of CryptoPunk #7523, a copy of which I have displayed above?

Perhaps we need to consider the following:

First, the image above is simply a low-res web image, easily reproduced via copy and paste – it’s not the “real” image as represented by the code or digital file embedded in the NFT. The original file is owned by the NFT buyer, and if it is an edition of one, then that is the only authentic version. Scarcity (as well as kudos) is a key market driver in NFTs – but only if someone else attaches financial value to the work (just as in any art market).

Second, owning the NFT does not necessarily mean you own the copyright or other rights associated with the art work. (I may own a Picasso painting, but I don’t own the image contained in the work.) So, apart from holding an NFT in your digital wallet or displaying it in a virtual art gallery, the only right you have is to re-sell the work. This means you can’t commercialise the image for t-shirts, on-line redistribution or reproduction (unless the owner has agreed to grant such rights within the NFT). (My use of the image here would be covered by the “fair use” principle, for the purposes of illustration and/or critical analysis.)

Third, unless you are able to export the NFT from the marketplace or platform that sold it, the NFT may “vanish” if the platform goes offline for any reason. (Doubtless, platforms need to enable token transfers to other market places and to users’ own digital wallets, otherwise there could be a lot of stranded and/or worthless NFTs in years to come.)

Fourth, the creator of the original work may be entitled to a % of the resale value of the NFT. This is obviously an important consideration for artists and other content creators, and I see this as a positive development. By extension, musicians, authors, film-makers and designers can more easily track and control the downstream revenue generated by the use and licensing of their works by third-party marketplaces, streaming platforms or 3D printing and fabrication services.

Fifth, NFTs support improved authentication, provenance and chain of ownership, as well as bringing more transparency to the world of art auctions – valuations, bidding and prices could all be hashed on the Blockchains that track the NFTs.

Finally, if NFTs are seen as a form of bearer bond (linking ownership to whomever controls the token), they could also be used to package up a portfolio of different crypto or digital assets, and auctioned as a single lot. The buyer could then unlock the disparate assets, and combine them into subsequent bundles – bringing a new dimension to block trades and the transfer of large bundles of stocks.

Next week: I got nothing

 

Accounting for Crypto

The period leading up to June 30 saw the usual raft of end of financial year updates, special offers and reminders from equipment suppliers, business service providers, accountants, tax specialists and even the ATO itself.

Crypto is certainly getting a lot of attention in Australia at the moment.

First, there is a Senate Select Committee on Australia as a Technology and Financial Centre, including “opportunities and risks in the digital asset and cryptocurrency sector”. The Select Committee is also looking at ways to define and/or potentially regulate crypto assets.

Second, ASIC has launched a public consultation process on crypto ETFs. This follows a desire from the regulator for more policy guidance from the Federal Government on the “regulatory perimeter” for crypto assets.

Third, the CPA published an op ed on the need for more clarity in crypto asset accounting. Not just in Australia, but across the world of International Financial Reporting Standards.

None of this should be surprising, as governments, regulators, tax authorities, professional bodies and institutional investors are still struggling to comprehend this new asset class, and the technology that underpins it.

Do crypto and digital assets represent currency, commodity, real estate, software license, network membership, utility access, payment mechanism, store of value, financial security, or unique property rights? Depending on the design, use case and origination of a token and its economic properties, the answer could be “yes” in each case – albeit not all at the same time.

In my consulting work with Brave New Coin, I get to speak to clients on a daily basis about their own crypto activities – be they exchanges, asset managers, accountants, tax authorities, regulators or investors. A lot of the discussion involves education – helping them to make sense of the technology and its potential. Some of the time they are simply asking our advice about how to address a particular issue, or they need a recommendation for a custodian or broker. A few share the regulatory challenges they face, and seek our perspective in how to navigate them. Others need more technical help, in building software solutions, or with on-chain analysis and wallet tracking (even though “free” block explorers already do a pretty good job in that regard). While many simply need a source of market data and indices for price discovery and NAV calculations, or a process to capture and track the crypto equivalents of corporate actions.

If anyone wonders how we are doing to make the reporting of crypto holdings as simple as equities or fixed income assets, my own experiences suggest we have a way to go. Legacy accounting and portfolio tools struggle with crypto: for example, can they calculate to 8 decimal places? how do they deal with an air drop? and how do they distinguish between Ether and Ethan Minerals (both use ETH as their ticker symbols), or Cardano and Adacel Technologies (both use ADA). And if I am an accountant, auditor, financial planner or adviser, how can I make sure I understand my clients’ portfolio of crypto investments, if I don’t have the appropriate tools?

Next week: Goya – allegories and reportage for the modern age

Cryptopia – The Movie

A quick plug for Torsten Hoffman‘s new documentary, Cryptopia: Bitcoin, Blockchains and the Future of the Internet. After a series of preview screenings around Australia and  New Zealand last last year, the film has its world premiere tonight in Melbourne.

Five years after producing Bitcoin: The End of Money As We Know it, the director has gone back and interviewed a number of key figures who appeared in the last film, to update their stories, and to dig deeper into the whole Blockchain, Bitcoin and crypto narrative.

I haven’t yet seen the latest film, but I first met Torsten when he was screening the previous documentary on the meetup circuit. He was kind enough to show me some early edits of Cryptopia, and I have to say the new content looks very promising.

Given the speed at which Blockchain and Bitcoin markets move (a week in crypto is often referred to as a year in any other asset class), it’s actually important that we stand back and take stock of where we are in this new paradigm for FinTech, decentralisation and distributed ledger technology.

Even if you can’t make it to the Melbourne premiere, look out for Cryptopia the movie as it tours globally.

Next week: Tarantino vs Ritchie

Startup Victoria – Best of the Startup State Pitch Night

In support of Victoria’s reputation as “Australia’s Startup State”, last week’s Startup Victoria pitch night was designed to showcase four of the best local startups. Hosted by Stone & Chalk, the judges were drawn from Mentorloop, Brosa, Giant Leap Fund, Rampersand and Vinomofo.

The pitches in order of presentation were (website links embedded in the titles):

Code Like A Girl

Founded four years ago, Code Like A Girl’s stated mission is to bring greater gender diversity to the ICT sector (information and communications technology), within both the industry and education spheres. To do this, the founders say we need more female coders, which they plan to achieve via coding camps, internships, and community events. Positioning itself as a social impact enterprise, the business is active in four States, and 75% of interns are placed into full time roles.

To support the ongoing development of its “role ready” value chain and to prepare for possible overseas expansion, Code Like A Girl is seeking $1.5m in seed funding. Currently piloting the training model via education providers (RTOs, boot camps, universities, online code schools), the business takes a 10% commission on courses sold (held twice a year), plus it charges placement fees of $2k per person.

But the model is difficult to scale, especially as Code Like A Girl does not own or create the actual training content – it is acting as a sales channel for third party courseware, and providing platform for advocacy, engagement and influence. Its key metrics are based on things like social impact scores – such as 30% of kids return to boot camps. The panel felt that the community platform is a huge cost centre, and it might be preferable to try a TedX model, where Code Like A Girl provides branding and foundational support to build more of a network effect – but without its own curriculum, the business will still struggle to scale.

Seer Medical

The business claims to make epilepsy diagnosis easier, and is currently raising $14m for European expansion (UK & Germany). To improve current diagnosis, the model needs to capture time series data to distinguish epilepsy from other conditions, but do so faster, cheaper and more efficiently than current processes. Founded in 2017, Seer has already serviced more than 1500 patients via 200 clinicians.

Using the Seer Cloud infrastructure,  it can achieve diagnostic outcomes 10x faster than traditional methods, and the platform is using machine learning to train its algorithms. The service is subject to Medicare reimbursement, which has no doubt assisted adoption.

Asked by the judges if the platform could be used to diagnose other conditions, the founders mentioned cardio, sleep and other health domains. As for competition, this comes mainly from the status quo – i.e., hospital based services. With advocacy from neurologists, giving them access to customers, the founders have a strong track record in the research field, which helps to open doors with clinicians. Along with research partnerships, plus the public health cost reimbursement, data is the fuel of the business –  Seer even have access to some third party data on which to train their diagnostic.

Liven

A dining rewards app, Liven is also bringing a behavioral gamification layer to a real world use case. Currently, there is a poor linkage between loyalty programmes and gamification. So, Liven has launched a universal reward token (the LVN token) for use in a digital/real world context.  The details were scant, and the status of the LVN token sale is unclear, but it seems users can earn LVN tokens from completing certain “missions”. The token (using a standard ERC 20 token format on the Ethereum blockchain), is designed to be interoperable and fungible (but Liven does not yet appear to use blockchain in its end user app or merchant point of sale solution).

The said merchants pay a 10-25% commission on app-based sales, of which upto 40% is paid back to the end user in the form of LVN tokens – if I got the maths right, Liven itself is securing $15 profit on every $100 of sales. Currently only available in Melbourne and Sydney, the judges wanted to know what the appeal is to merchants. According to the founders, users typically spend more in an average transaction when they use the app. It also seems that the app only works in brick and mortar restaurants, cafes and bars. The path to scaling will be via channel partners such as PoS systems.

Although not yet deployed, in future, it was suggested that users will be able to pay in any crypto – which raises all sorts of questions about the tokenomics of the LVN token, and whether LVN will be subject to exchange rate volatility (and even token speculation) or act as a stable coin; if the latter, what will it be backed by or pegged to?

Phoria

Phoria is in the business of extended reality technology (XR). Started in 2014, Phoria was an entrant to the Melbourne Accelerator Programme (MAP), with the stated goal of moving VR into a mobile experience (“democratize VR”).  Having gained some clinical VR research experience, Phoria has since worked on commercial projects such as “Captured” (turning a 3D scan of a building or structure into a Digital Twin), “Rewild Our Planet” (a Singapore-based AR experience), and various art installations museum exhibits.

Phoria is commissioned by tech and media brands to create XR content. It has developed a SaaS model, whereby it can turn real space into virtual space (“virtualising internal space”).

The judges wondered where we are along the cycle of mass adoption vs peak hype. In response, the founders mentioned that the first wireless headsets are now available, although consumer-facing mixed reality hardware is still 3-5 years away. With a growing customer base in engineering and architecture applications, Phoria’s main focus is on spatial information.

After the votes were counted, the People’s choice was Seer Medical, who also won the overall prize.

Next week: 30 years in publishing