A New Digital Footprint for Enterprises?

With big companies like Walmart getting more and more immersed in cryptocurrency and metaverse, the definition of digital footprint seems poised for change.

It used to be that websites, social media, and mobile apps made up the primary digital presence of businesses. The decentralized world of Web 3.0, with its distributed blockchain-based networks, decentralized finance, and the emergence of non-fungible tokens (NFTs) is creating new opportunities for enterprises to explore.

But what are companies engaging in by diving into the deep digital waters known for fast currents and unpredictable and rapidly changing tides? Experts from Shyft Network, Dropp, and Dorsey & Whitney offered their views on some of the potential risks, responsibilities and rewards that may come to the fore.

Walmart recently turned heads with the discovery that the company filed for trademark applications at the end of 2021 for potential cryptocurrencies, blockchain assets, and other digital currencies. Other companies and brands such as Visa, Tesla, Nike, Pizza Hut, EA (Electronic Arts), Under Armor, and Gap have made strides in cryptocurrencies, NFTs, blockchain, and the metaverse.

Efficiency promises

Sushil Prabhu, CEO of Dropp, a micro-payments platform, says the world of decentralized finance (DeFi), which is based on blockchain, is evolving. “What the DeFi world offers is that payments are made instantly without anyone in the middle,” he says.

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

DeFi world describes it as a huge machine that anyone can get into and if they want to create their own token, they can start trading without owning any foundation. “The concept of a machine that does a lot of work, and which now requires the participation of a lot of different organizations, is an indication that it is very effective.”

Prabhu says the hype surrounding NFTs and the metaverse may bring more non-banking institutions into this space. Banks are probably not far behind. “We talk to the banks ourselves,” he says. “It is no secret: they want to participate. They want to use a distributed ledger of blockchain technologies to build products that will be much more efficient and cheaper.”

Prabhu says that getting into DeFi is not risk-free. “Cryptocurrency prices are very volatile,” he says. “It means that the average person inherits a lot of risks. You can lose everything and have no one to contact.” He says stablecoins have become popular because they are designed to maintain a constant value and remove some of the risk from the equation by converting those assets into a stable currency.

Undiscovered decentralized country

There can be a dark side to this new front. The increasing use of decentralized assets has led to concerns about exploits – such as money laundering in cryptocurrencies. The Financial Action Task Force (FATF), a global anti-money laundering organization, is studying how to mitigate crypto-related risks, says Malcolm Wright, head of global regulatory solutions and compliance strategy at Shyft Network. He says US regulators already have policy and guidance in place in this area, but the task force has proposed broader suggestions for dealing with these emerging issues.

“The FATF does not put in place legislation but it makes recommendations and rates countries in terms of how well they are being implemented,” Wright says. Shyft is a public identity verification protocol to secure cryptocurrency and build trust in blockchain data.

The FATF made recommendations in 2019 with the expectation that states will regulate within two years and the industry will look to compliance within two years, he says. This was a way to mitigate the risks posed by illegal actors. “That started the journey primarily for central financial exchanges and custodians,” Wright says, referring to the platforms that host the buying and selling of cryptocurrencies.

One of the main issues he says needs to be resolved is the “travel rule” in crypto, which is the transmission of originator information between exchanges about buyers and sellers when cryptocurrency is sold. “The purpose of this is for law enforcement to knock on the door of the exchange and say, ‘Hey, who were the parties to this deal?'” says Wright. “

While such oversight has been a part of banking for years and has become an integral part of transactions, getting it done with crypto is more complex, he says, but the industry has found a way forward.

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

More bored monkeys

NFTs have created new ripples in the blockchain with questions about their actual value and volatility. Video game publishers and others are getting in on the action — selling images, in-game items, and other visual assets like NFTs, which come with unique markup that indicates ownership and may find use across the metaverse’s 3D virtual landscape. There are tales of sellers earning millions in cryptocurrency from NFTs as well as cases of NFT hacking and theft.

Kor Lavra via Alamy Stock Photo

Regulators are still figuring out how to approach this part of the market, with countries’ Financial Action Task Force leaving countries to determine what risks may be inherent in the NFT and what they might do to mitigate those risks, Wright says. “If a country does not have NFTS, they may decide that the risk is lower than where it is prosperous [NFT] Economie.”

With tech experts building and expanding the backbone of decentralized assets and networks, he says there must also be a sense of obligation to build solutions to manage potential risks at the same time.

In an ideal world, everyone would use NFTs and cryptocurrencies without a problem, but the reality is that bad actors might try to hack, manipulate, or directly misuse these resources, says Wright. “We have to look at this through the lens of, ‘If I’m going to develop a financial service, I need to do it as a responsible innovator. “

Crabs in a virtual barrel

The volatile value of digital assets, which can rise and fall dramatically, and the heavy evangelism associated with them have sparked concerns and comparisons with some dubious old business schemes. If an endless chain of investors is the primary driver of an enterprise or asset, it can create an unsustainable mathematical model, says Robert L. Fitzpatrick, president of Pyramid Scheme Alert and author of “Ponzinomics: The Untold Story of Multi-Level Marketing.” This continuous can only reach about 14 levels, even exceeding the population of the human planet.

This kind of unsustainable thinking can plague other investment markets such as real estate, Fitzpatrick says, where there may be an assumption of continued growth. “City dwellers, people talk cheerfully about, ‘We want to grow 10% a year,'” he says. “They have no idea what that might lead to.”

Looking at cryptocurrency, FitzPatrick wonders what actually supports these assets. “What do you have there? It’s supposed to be currency, but it doesn’t really work as useful currency.” It has not earned its value as a currency. It gained its value as a commodity – a commodity that was difficult to comprehend but was said to have value. A group of people accumulated and bought it, and the more people bought it, the higher the price.” This raises fears of volatility and the possibility of collapse if new buyers do not continue investing and existing investors respond to the rescue. “There is nothing under it,” Fitzpatrick says.

The value assigned to NFTs might similarly derive from buyers’ trust, but he says there is a difference between these assets and a country’s currency that is based on belief in effective government. The government has soldiers. “It has the potential to force its own way and drive out rival currencies,” Fitzpatrick says.

New Financial Limits Liabilities

Joseph Linnack III, partner in the Finance and Restructuring Group with the law firm Dorsey & Whitney, says that investing in cryptocurrency may in some ways be similar to buying orange juice futures. “You don’t really have orange juice – you have an idea of ​​value.”

He says there are unaddressed concerns as to whether there is an incredible catastrophe affecting the valuation of cryptocurrency across the system. “I think this is why there is such a reluctance on the part of the banking industry to hold cryptocurrencies other than the clients who are holding them as an investment alternative,” Lynyak says.

He says that the way cryptocurrency works in the global banking payment system is a fundamental problem that has yet to be resolved. “Honestly, I don’t think it will be resolved for some time.”

This does not mean that companies based among financial institutions completely ignore this space. The Federal Reserve is examining a potential US central bank digital currency, for example, a move other countries are exploring as well.

“China is coming out with its own digital currency, which if it is not a brother or sister to cryptocurrency, is really very close,” Lynyak says. “It’s a way to move away from any kind of hard currency into a globally usable currency.”

Where banks factor

This raises questions about the ability of individuals to conduct electronic transactions directly and whether banks will be necessary. How does the bank raise deposits for the purpose of providing loans? This is all part and parcel of the issue, he says.

Linyak says that while the Fed is developing a revised payment system to speed up delivery, they are also looking at the issue of digital currency. It remains to be seen if this means that any individual will be able to hold accounts at the Federal Reserve with this digital currency issued, or the banks will continue to act as intermediaries. “These developments could profoundly affect the market’s perception of cryptocurrencies and what they could do if they became a province of the king,” he says.

Cryptocurrency proponents have pointed out that international money transfers are slow, which can take days through the current payment system compared to domestic bank transfers, Lynyak says. “This is an area where cryptocurrency or blockchain can speed things up,” he says. “How does the international community approach this as something that can be beneficial and done in a way that doesn’t take a huge toll on people – it’s very far out of the way before we have any of these answers.”

There is still a functional barrier to the mainstream use of cryptocurrencies in everyday transactions. “Cryptocurrency does not work in many consumer transactions,” says Linyak. “You cannot reverse the sale of cryptocurrency. Under US law, if you buy something and extend credit for the purchase with a credit card, one of the most important consumer protections is the ability to reverse the charges and dispute them with the merchant.” He adds that it is difficult, if not impossible, to reverse fees once there is a cryptocurrency transfer on the blockchain.

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