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A Journey into the Metaverse

Earlier this year, Newfront’s Sheri Jamme, in partnership with Private Risk Management Associations’ Pacific Southwest Chapter, took viewers on a ‘Journey into the Metaverse’. The webinar broke down non-fungible tokens (NFT’s), Cryptocurrency, and highlighted challenges and rewards involved in ownership.

What is the Metaverse?

The metaverse is how we digitally connect with our family, friends, companies, coworkers, and charitable organizations. It delivers the next version of social media and commerce. The first iteration of the metaverse was television, which resulted in us living in the metaverse 10% of the time; then came computers and smart phones bringing us to 60% of our day. This includes shopping in virtual stores, watching holiday specials on tv, and playing basketball in NFT purchased tennis shoes. Companies are also purchasing digital real estate for office space and store fronts. For example, Samsung opened a virtual store with an immersive experience modeled after its flagship New York store.

What is Web 3?

Web 3 is the decentralized arm of the metaverse in that it utilizes new blockchain technology that establishes ownership of digital assets and employs smart contracts. It puts control in the hands of creators, users, and communities and allows them to own, transact, and trade.

What differentiates it from web 2?

Web 2 [Facebook, Netflix, amazon] is a centralized platform with data, power, and revenue aggregated towards the platform. Web 3 embodies the idea that the people who are building the internet and creating contact are going to be the same people who will benefit from it. They own the data and/or content. Web 3 puts it all in the hands of the individuals. For example, in “Portals” (11:38), you can create a room and use it for business, hosting parties, or other events. You own the room, invite guests, and can even sell it and generate revenue from doing so.

What infrastructure is needed to support massively scalable applications like gaming and metaverses?

Everything from Layer 1 solutions, like programmable blockchains as well as an entity like Pinata which is doing NFTs and Web3 storage such Amazon Work Spaces (AWS) or Google Drive, that allows it to be stored in a decentralized manor.

What is blockchain?

A database(s) that is shared and allows financial transactions to record instantly, rather than relying on traditional financial institution systems, which are notoriously slow. For example, Venmo, a service that allows user to transfer money between two entities, is a database that is not maintained by any third parties. This allows for transactional expediency, in one database that everyone, everywhere, agrees is true. Compare that to traditional banking whereas bank number one would have to check with bank number two, not to mention multiple other banks, to make sure a check hasn’t been overwritten or duplicated. It also allows for the programing of money like software; omitting the if/then involved in setting up a trust at a traditional bank. Finally, blockchain allows for creation of digital property rights. Prior to blockchain a third party would have to maintain a database.

Why is blockchain important to the metaverse?

It is hard to imagine a comprehensive digitally engaging world without property rights and financial services. Any non-dystopian version of the metaverse would be dependent on digital property rights where there are dependencies on cryptocurrency and blockchain.

What are the differences between coins and what is the public gravitating towards?

Each type of crypto is optimized for a different purpose. e.g.: Microsoft office utilizes the same technology as Slack but is optimized in different ways. Bitcoin and Ethereum are very different. Bitcoin’s blockchain is a limited programming interface which only allows for sending, receiving, and destroying; escrow-like transactions. Ethereum’s blockchain is term-complete and can be programmed like software. It can be the underlying basis for a decentralized securities exchange or to process insurance contracts. While that does make Ethereum seem “better” the more a blockchain can do, the less secure the underlying database becomes.

The right way to think of the crypto asset space is in three categories:

  1. Bitcoin goes after digital gold or non-sovereign money space
  2. Ethereum and competitors go after base layer multipurpose blockchain space
  3. Individual applications going after specific uses such as Uniswap which is a decentralized version of Coinbase

Art and the digital NFT space

Art is always at the forefront of the market compared to other industries. The value of art has been increasing, but the timeliness of creating laws that correspond with that was slower paced. NFT’s are now another version in that the creatives are moving things forward quickly, but regulation seems to be lagging.

What are NFTs?

They are similar to cryptocurrency in that they are bought and sold using blockchain technology and tracked on a digital ledger. However, they are non-fungible and not readily exchangeable with one another for an equal value. Rather, you have a token that points to a unique underlying asset. Digital artwork, YouTube videos, or songs are considered an expression of ownership over a unique underlying asset.

How are family’s adjusting/buying digital assets?

Senior citizens are still trying to wrap their heads around what NFT’s are. Whereas the younger generation may better understand meta possessions rather than physical ones and their value. Wealthy families are having challenges with trust structures due to a fiduciary liability to beneficiaries as cryptocurrency can be hacked or is considered volatile in nature. Currently, we are playing catch up in the trust estate space in terms mitigating how to best deal with and understand it while also making sure people feel they’re meeting their fiduciary obligations in regards to this asset class.

How to insure NFT’s and Digital Assets?

In 2018 there was litigated case regarding what cryptocurrency is considered. An Ohio court found in favor of a policyholder stating cryptocurrency was considered property coverage. In response, ISO has responded by explicitly stating cryptocurrency is excluded from coverage on the 2022 insurance form.

In general, insurance companies are shying away from providing crypto coverage but there are a few options available to individual policyholders such as Cyber Liability Coverage. NFTs, as opposed to cryptocurrency, have posed a challenge as far what coverages are available.

Different risk management strategies can be deployed such as hot storage (wallets to trade smaller amounts on phone), cold storage (something not connected online) or a crypto custodian who has corporate grade security. Security is one of the biggest things to take into consideration.

What are some of the legal challenges?

Appraisers are not well-versed in NFT’s and it can be challenging when it comes to determining their actual value. This specifically comes into play regarding estate tax returns.

What is the benefit of NFTs?

NFTs don’t carry the weight of needing physical space or storage. They also allow for digital art experiences which can be enjoyed by those with physical or economic limitations who can’t otherwise travel to where art might be displayed.

What are some helpful resources?

Larger publications such as Messari, Forbes, Tech Crunch and Fortune. Discord and Twitter may provide the most rapid updates, especially if you carefully curate your Twitter feed. Podcasts such as Bankless are also a great resource. The best form of education is to buy the NFT yourself, join the discourse community, and immerse yourself in the project.

For more information on digital assets and how to keep them safe, contact Sheri Jamme: sheri.jamme@newfront.com

The information provided is of a general nature and an educational resource. It is not intended to provide advice or address the situation of any particular individual or entity. Any recipient shall be responsible for the use to which it puts this document. Newfront shall have no liability for the information provided. While care has been taken to produce this document, Newfront does not warrant, represent or guarantee the completeness, accuracy, adequacy, or fitness with respect to the information contained in this document. The information provided does not reflect new circumstances, or additional regulatory and legal changes. The issues addressed may have legal, financial, and health implications, and we recommend you speak to your legal, financial, and health advisors before acting on any of the information provided.

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