You work with a lot of corporates interested in the Web3 space – what are the things they’re most keen on doing?
If we look at the more traditional corporates, they are asking questions about what they should do if they want to accept crypto as payments. If we believe crypto will be a thing, most large organisations will have to decide whether they’re going to accept crypto or not, and that comes with quite a few issues. They are also looking at buying crypto as part of a corporate treasury diversification strategy.
We have also seen a rise in venture capital investment in or buying Web3 companies. These deals have complexity around both the economics of the tokens and how they fit with existing laws. Tokenisation generally has become big. This includes the tokenisation of physical assets like property, but also NFTs which have become popular with marketing execs as a new channel to customers.
The most fascinating area is regarding employees. I think I did one of the first employee token option plans in Australia. Different to employee share option plans, ETOPs are where employees get crypto tokens instead of equity. And we’re seeing that be quite popular with employees because as soon as a token vests you can sell it, unlike equity which can be illiquid.
I can imagine there’s quite a lot of risk for companies when they’re looking at doing these things, especially with the current lack of regulation?
The underlying technology is powerful, and the opportunities are interesting. There are ways to embrace Web3 technologies that don’t involve punting.
Norton Rose Fullbright lawyer Nick Abrahams
We can slot in tokens under existing laws, it would be helpful to have some slightly more specific laws. But we can make do right now.
Regarding risk, tokens are an unusual proposition – it’s an entirely new asset class. So, you’ve got to think ahead as to what are all the different circumstances under which you may want to use them.
And then the big thing for me is that Web3 is very different to normal software. With normal software, you release it, and if it has bugs in it, those bugs get fixed over time. With Web3, the code needs to be 100% right on release because it’s incredibly difficult to change it after the tokens have been issued. So from a technical point of view, it’s a level of complexity and requirement for accuracy which we haven’t had before.
Do you think there’s potentially significant risk in major corporates – especially financial institutions – getting involved with crypto? With the inherent volatility and lack of regulation, could we see situations where companies take massive hits to earnings, or their balance sheet because they’ve gone too deep into crypto?
There is a risk, but I don’t think any large company is going into this in a foolhardy way. Last year, you had crypto markets sitting around $US2 trillion and obviously those markets have come off significantly, but the question I ask most organisations I’m talking to is: do you think digital assets will still be a thing in five years’ time?
Because either you say that all of that value that’s been created will evaporate, or you say that no, I think it’ll stick around. I’m a believer in digital assets, but I don’t think the trajectory will be linear. There’s going to be an enormous amount of volatility, there will be fraud, there will be technology failures – it’s fraught with risk.
But the underlying technology is powerful, and the opportunities are interesting. And there are ways to embrace Web3 technologies that don’t involve punting, like it’s fascinating to see ANZ doing a stablecoin, and JP Morgan has had its stablecoin out for a couple of years, so you’ve got to think that stablecoins are part of the payments landscape of the future.
Unless they’re called Terra.
[laughs] I think even the crypto diehards would have agreed that algorithmic stablecoins were at the very edge. It was elegant maths but with incorrect assumptions.
I think we’ll see large organisations really focus on more utility-based use cases and sort of experiment around the edges. I don’t think anyone’s betting the farm on bitcoin or Bored Apes at the moment.
Though I was speaking to a fund manager at a Web3 fund the other day and I asked him how the fund was going, and he said ‘well our Ether position isn’t great, but our apes are doing really well’.
They have a very broad mandate!
On that, from a legal perspective, when we’re looking at things like NFTs, is it cut and dry concerning ownership and intellectual property? Are there still questions to be answered there?
Yes. It’s not plain vanilla, every NFT comes with its own idiosyncrasies – some of them you’re buying the intellectual property, others you’re just getting a line of code that points to an image that sits on a URL, so there needs to be an assessment of what is being provided. The NFT market has really only been around for two years, so we’re still trying to figure out what a ‘standard’ NFT really looks like.
Not sure if I would buy an ape, but I think gaming NFTs are where the future digital asset and metaverse business models are being developed.