As the next generation of the world wide web comes to fruition, new economic and technological infrastructures are on the horizon. With this new generation, known as Web3, concepts including decentralization, digital currencies, token-based economics, and non-fungible tokens (NFTs) are making their way into the mainstream economy. As the new technology brings terms and tools foreign to even the highest academically credentialed individuals, this new arena of commerce has created an even playing field for companies of all sizes to leverage.
Experts from across the current economic infrastructure of Web3 and beyond shared their thoughts with CFO on how exactly financial executives can use the economy’s newest and trendiest phenomenon in order to better their businesses.
Recognize the Potential of Decentralized Finance (DeFi)
Lars Seier Christensen, co-founder of Saxo Bank and founder of Seier Capital, spoke to CFO about how finance without a middleman can be done. Christensen believes objective ledgers powered by blockchain technology can provide unprecedented secure transactions at instantaneous speeds.
“[In DeFi], the data is completely secure and cannot be manipulated or rolled back,” said Christensen. “A lot of infrastructures will, in the future, be built on blockchain. Keeping up to date with a rapidly developing industry is highly advisable. With a growing younger generation taking an increasing interest in crypto, accepting these as payments and means of transaction can open up significant new business opportunities.”
By removing middlemen from financial transactions, fees and wait times on large-scale transfers of capital can be eliminated. As moving large amounts of money from one account to another involves both time and fees for the sender and receiver in the current financial infrastructure, blockchain technology can disrupt how banking transactions are completed. With the removal of things like Venmo, Visa, Mastercard, and PayPal from transactions, Web3 can make moving money easier and cheaper.
NFTs Aren’t Just Pictures, But Tools with Utility
NFTs offer utility for companies that deal with tracking and distributing large amounts of secure data. Both NFTs and non-transferable tokens (NTTs) allow data’s location and use to be monitored. “An NFT can be enriched with a set of data that you can track throughout a company, its suppliers, and clients,” said Christensen, increasing financial transparency and improving logistical processes.
NTTs, or a one-way NFT, can act as a virtual identity card or credentialing document for organizations that deal with giving individuals access to precious information. Through NTTs, these types of credentials can be granted, tracked, and taken away in an instant. “NTTs are by nature linked to an individual and can be an efficient way to link certain information to an employee or a business area, such as registration of credentials, access control, and personal achievements,” Christensen said.
Other executives believe NFTs have the potential to earn the business of a recurring client and can hold real value to organizations invested in repeat business.
“There are a lot of ways NFTs can be useful, but most notably in rewarding employees or customers,” said Christos Makridis, chief technology officer, COO, and co-founder of Living Opera, a Web3-based tech startup. As a professor of Web3-related topics at both Columbia Business School and the University of Nicosia, Makridis’ thoughts on blockchain’s potential to disrupt corporate finance are extensive.
When evaluating the use of NFTs — and blockchain technology as a whole — the Web3 professor instructs executives to gauge how these types of tools can be useful within their own companies. He says one question must be asked: “What does the organization want to do that cannot be done now?”
Makridis explained the value of these types of tokens lies in not only their use case, but also the ability to speak on their value is imperative for any executive looking to offer Web3-induced bonuses. Developing a method for compensating and rewarding employees with internal tokens is certainly one use case, but managers would have to explain why that’s more valuable than other non-wage benefits — or simply higher wages.
For business-to-consumer (B2C) companies, especially those who rely on repeat business, Makridis believes NFTs may be a way to solidify brand loyalty in a customer base. “Organizations, especially the consumer-facing ones, can also think about how to use NFTs to reward their customers and learn more about them,” Makridis said. “An organization could buy NFTs that are valued by the market and use those as gifts or tokens of appreciation.”
NFTs have been created to give their holders certain benefits. For example, social media phenom Gary Vaynerchuck’s line of NFTs provide membership perks such as access to certain restaurants, and even meet-and-greets with him. Even the gaming industry has leveraged NFTs and blockchain technology, offering tokens as playable characters that can be traded among gamers.
Modernization of Accounting Principles, Particularly in Fraud Detection
With the massive amount of data transferred, reviewed, and sent around in accounting tasks, the idea of decentralized information transfer via an objective ledger brings the potential to transform how numbers are accounted for and tracked.
“Because data and accounting entries are time-ordered, immutable, with a clear view of the source of the entry, I believe a blockchain ledger implemented across a company can be highly efficient in both managing accounts, auditing them, and preventing fraudulent activity,” said Christensen, when asked about blockchain’s potential in accounting and bookkeeping.
Permissioned blockchains can very much help with internal accounting and developing a credible audit trail. — Christos Makridis, CTO, COO, and co-founder of Living Opera
Makridis agrees with Christensen, especially in regard to the potential to detect fraud. “Permissioned blockchains can very much help with internal accounting and developing a credible audit trail,” said Makridis. “Since the value chain of activity is recorded, the application of a permissioned blockchain can not only detect fraudulent activity more easily but also deter it more often.”
ENS Domains are Web3’s Dot-com
The Ethereum Naming Service, better known as ENS, is a naming system that allows users conducting transactions on the Ethereum blockchain the ability to have a unique name for a digital wallet or Web3-based website. Rather than being known as a 64-character code that must be used when sending tokens to a particular wallet or website, an ENS domain allows a wallet holder, business, or individual to have a name to their wallet. With ENS, businesses can have a name like CFO.eth instead of randomly generated characters.
“The current internet-based domain names system is not very safe,” said Christensen, when asked about the value of ENS domain names in Web3. While a blockchain is a safer and more independent way to store important brand names and company identity, there are many of them — in fact so many that companies could not hope to secure all of their brands across all platforms. Christensen said it is better to choose a few of the key platforms where you expect to interact with your clients, and don’t worry too much about the irrelevant services.
“ENS is a great use case around distributed ownership,” said Makridis. He believes businesses that are already functioning in Web3 must have their own ENS domains in order to maximize the value of their venture into blockchain-based technologies and promotions.
Especially involving customer-facing organizations, “[they] will be able to reach consumers directly in a privacy-preserving way by airdropping NFTs or fungible tokens,” Makridis said. “The bigger theme that corporate finance should care about is the move towards decentralization and ENS is just one use case around individuals owning their domain names and data around it.”
A Future Hedge Against Never-Ending Inflation
Elena Garadis, CFO of Defy Trends, an algorithmic data-driven crypto intelligence and education platform, gave CFO her thoughts on why investing in cryptocurrencies may be a viable long-term hedge against inflation in the future. Garadis noted how intrinsic qualities of blockchain-based currency can help preserve the overall value of capital sometime in the future.
In the long term, there is a high probability that crypto, particularly Bitcoin, can serve as an inflation hedge due to its pre-programmed supply and demand characteristics, namely its fixed supply. — Elena Garadis, CFO of Defy Trends
“In the long term, there is a high probability that crypto, particularly Bitcoin, can serve as an inflation hedge due to its pre-programmed supply and demand characteristics — namely its fixed supply,” said Garadis. “At its core, inflation is all about supply and demand dynamics. Right now, the US economy, and many global economies, are experiencing inflation because of both increasing raw material costs due to COVID supply chain disruptions and the Russian-Ukrainian war.”
Garadis said the devaluation of fiat currencies is also powering the idea of cryptocurrencies as a hedge against inflation. “High levels of money in circulation mean people are accepting and paying higher prices due to higher available disposable income, fueled by COVID stimulus and a decade of suppressed interest rates.”
While speaking on short-term protections against inflation via cryptocurrencies, Garadis warned against allocating wholeheartedly towards cryptocurrencies for short-term hedges against economic turmoil. “I would be careful to allocate cash reserves to cryptocurrencies to preserve value, especially for short [and] medium-term operating cash reserves,” she said. “The market is still too immature and volatile to protect operating capital.”
The blockchain-based financial executive noted the demand for things like Bitcoin needs to continue to rise with further adoption of blockchain technology into mainstream business and corporate finance processes in order to be a viable hedge long term.
“What is missing from Bitcoin’s ability to act as an inflation hedge is the demand side,” said Garadis. “[Bitcoin] has to either remain stable or increase over time. For this to happen, we need to see mass adoption and utility which will steadily build trust and perceived value for crypto.”
“Crypto is not just a store of value but also a rich ecosystem that can transform entire industries,” Garadis said. “This includes solving privacy, mining, and interoperability issues. I believe this will also lead institutional investors to uncouple crypto from traditional risk assets in their investing strategies. In the long term, there is a high probability that crypto, particularly Bitcoin, can serve as an inflation hedge due to its pre-programmed supply and demand characteristics, namely its fixed supply.”