September 20, 2022 Demystifying NFTs: Webinar Highlights
Despite daily headlines and increasing interest in their adoption, NFTs remain far from widespread and their potential use cases are still being explored. Business leaders and marketers have deployed NFTs not merely as a new source of revenue but also as a way to improve customer engagement, build brand loyalty, and respect consumer privacy. Every company and brand will have a different calculus for entering the NFT market, depending on their strategic goals, audience, and available IP.
Quigley teamed with Grant Thornton LLP for a webcast introduction to NFTs, highlighting key considerations for activating them successfully.
- Daniel Quentin Zuber, Social and Web3 Strategist, Quigley
- Dan Kohler, EVP Strategy & Growth, Quigley
- Johnny Lee, Principal and Forensic Technology Practice Leader, Grant Thornton LLP
- Markus Veith, Partner and Digital Assets Practice Leader, Grant Thornton LLP
- Moderator: Katie Kempner, Kempner Communications
What’s an NFT anyway?
Daniel Zuber: Don’t worry about the term NFT (non-fungible token). It’s just technology. Like when we got started with smartphones and when we got started with social, there were a lot of buzzwords, there was a lot of terminology, and it was kind of intimidating. But like anything else, as we started to use these technologies more, it became part of our daily lives. Those terms, those expressions, and those concepts just became very natural to us. And that’s kind of where we hope to get eventually with NFTs.
Basically, NFTs allow people to own digital assets, like an art collector owns paintings. As a digital creator, the stuff you put out no longer has to be for love or exposure. When you’ve got a Facebook or an Instagram post or a tweet or a TikTok, you can actually take that digital asset and create value from it.
This is possible through the blockchain. Every time there’s an NFT drop, you might see someone ask, Why can’t I just take a screen capture of an NFT and say that I own it? And really the reason an NFT has value is because of the blockchain, which is essentially a decentralized ledger. It records a transaction not on just one computer system but across thousands of computers distributed across the world. There is no single owner of the blockchain, which makes proof of ownership very solid and very difficult to fake. And it’s unique to each NFT asset. One of the things you’ll hear a lot about in the world of NFTs is that it’s decentralized or democratized. What that really means is that no one single stakeholder or group has control—so there’s no Amazon or Facebook that is controlling all the doors.
So NFTs are just digital art?
Daniel Zuber: NFTs are more than just funky graphics. That’s definitely a big part of what NFTs are, but they’re much more than that. They can be things like tickets to events, actual physical-world events, or ways to unlock other experiences. They can be connected to actual physical-world objects. And in the metaverse or in gaming, they can permanently unlock a skill or a skin for an avatar in a game.
Dan Kohler: In unlocking experiences, NFTs can be rewards for loyal customers. A loyalty card can get lost very easily. An NFT-style loyalty card will not get lost (unless you lose your unique NFT phrase), and you can use that NFT to give away freebies or give loyal customers access to aspects of the brand experience or brand products that they wouldn’t have otherwise.
The best marketing from brands adds value to customers’ lives. It could be through entertainment. It could be through some kind of utility. It could be through technology, and it could be an app that makes their lives better in some way. NFT marketing should have that same mindset.
Why are people so excited about NFTs?
Daniel Zuber: The thing that is very exciting, I think, especially for content creators, is that revenue is generated each time an NFT is sold in perpetuity. For example, if I’m a painter and I sell a painting for $1,000, that painting gets resold and resold and resold. Eventually, it’s worth a million dollars, but I still only made $1,000. But with an NFT, I get a percentage each time it’s sold, so it generates revenue across my career in perpetuity. That’s why people are excited.
Are NFTs bad for the environment?
Daniel Zuber: It’s a complicated question, because the current crypto-model forces minors to solve complex problems using energy-guzzling machines similar to gaming computers. Currently, a lot of energy is being used. People are aware of it, and there are initiatives out there to build NFTs with sustainable energy, like solar and wind. Ethereum has moved from proof-of-work blockchain to a more efficient proof-of-stake system.
I think that brands also need to consider the environmental costs of NFTs versus traditional promotions. I worked a lot in the QSR (quick service restaurant) world, and for companies, like McDonald’s and Carl’s Jr., we used to print up little plastic toys and wrap them in plastic. So, if a digital file as a promotional item is less environmentally impactful than creating an actual physical object, that’s something to consider as a brand.
How are brands using NFTs?
Dan Kohler: A lot of it has to do with generating earned media capitalizing on buzz, creating PR and creating excitement around the brand hype. It’s definitely connecting with younger tech-savvy audiences, especially Gen Z and millennials, offering or unlocking new experiences for customers.
In the beginning, brands were selling NFTs. Nowadays, when brands are selling NFTs, oftentimes what they’re doing is capturing that income and donating it to charity. And then, of course, some of that revenue gets split with the artists that they’re working with. They’re using it not so much as a revenue generator but to help causes that they believe in and artists as well.
How are NFTs different from other digital or Web3 marketing?
Dan Kohler: NFTs are really about community, and you have to be authentic in order to build that community. The most successful NFT drops are authentic to the brand and relevant to the audience. Think of how a consumer wants to collect a rare Air Jordan shoe in the real world—same with a rare Air Jordan 1 in the NFT world, because that can be a really cool, unique symbol or badge for their avatar in Roblox. That is a very motivating thing for consumers. You don’t necessarily have to be edgy or wacky, if that’s not your brand. But think about what you know about your current audience.
What are some of the basic things about NFTs that should be considered from an accounting perspective?
Markus Veitch: Currently, there’s no authoritative guidance on accounting for digital assets. You have to interpret existing guidance. How do you account for NFTs? The answer is, it depends.
If a company actually mints its own NFTs, then they’re treated from an accounting perspective as an internally generated intangible asset, which is recognized only upon sale. This means that if you mint it, you hold it in inventory, and don’t recognize it until you sell it.
If a company is, instead, buying NFTs, then the assets are classified as nontangible assets and are recorded at cost admission for impairment, unless there are other rights and obligations. It’s just the same treatment if you have bitcoin. If you acquire bitcoin as a company that doesn’t qualify for some exemptions, that lets you treat them at fair value. You record them at cost, and you have to constantly be measured for impairment. It means that you can only write them down, not up. There is this exception, however, if you’re an investment company, or a nonprofit organization, you can mark to market those assets. Otherwise, you’re stuck with the cost model.
The valuation aspect is another critical component. NFTs are non-fungible, which means that none is like another. Bitcoin is fungible. One bitcoin is like another. NFTs are all unique. If one board ape in yellow gets sold, that doesn’t actually mean that a big blue has the same value. It may be the same image but with different pixeling or some other different thing. That makes valuation difficult. From an accounting perspective, we are stuck in a cost-impairment model that makes the impairment assessment very, very tricky.
From a forensic perspective, what happens in investigations involving digital assets?
Johnny Lee: This is a novel arena, but it’s not so new that we have no grounding to conduct traditional exercises, like audits, accounting, or investigations.
There are numerous blockchains—hundreds and thousands. Any programmer can take the code set of an existing blockchain and alter it slightly and create a new blockchain. The reason the question becomes tricky to homogenize into a pat answer is that you have to comment at a level that is true across all, or at least most, blockchains. And to that point, keep in mind that most blockchains, by their nature, are designed to publish a ledger that is accessible to and transparent for anybody with the authority or permission to see it. That’s the value of blockchain.
If you think about the traditional sort of forensic notions of unraveling a fraud—let’s say you’ve identified the actor, you’ve, more or less, quantified the nature of the damage done to the defrauded company or entity or nonprofit organization or whatever. Now you have to go find the assets. And you have to try and recover it. Where did it go? And where did it land? And where does it live now? With blockchain, I don’t need access to your corporate database, I don’t need access to your general ledger or your journal entries, your IP systems. I can just go on the public blockchain and see all those bounces, whether it was liquidated, whether it went onto an exchange, or anything else. I can do all of that with basic access to the ledger, which is public.
What I can’t do in an elegant digitized way is recover those assets. So then, you go back to old-world methodologies, which require someone being situated in the jurisdiction to which you’ve traded the asset, to go into a court to present a reasonable case to get the court to issue a seizure or freeze order, depending on where you are in the world. That’s a very old world, low-tech, old-school kind of recovery efforts. But it’s informed by this eminently richer audit trail that you can use to get to that result.
That’s the dynamic that we’re seeing in this new arena: a lot of old-school problems, business concerns like forensic investigations, financial statement audits, and internal audits and compliance. All those things are not novel, and crypto companies face them like any other regulated entity. But the way you solve it is very different because of the technology layer being used.
Recognize that these pitfalls are true for traditional companies. You wouldn’t launch a product without knowing its tax implications, its legal implications, or its regulatory implications. I would encourage companies just to be as circumspect when they do NFT launches, because there are accounting complexities around evaluation, tax treatment, recording things on the books, and impairment.
What do you think are some of the best brand NFTs out there and why?
Dan Kohler: I love what Johnnie Walker is doing. Basically, they’re combining the real world with the NFT world of Web3. There’s a limited-edition Johnnie Walker bottle that you can buy that is a very unique blend and is hand-signed by the master blender. As part of it, you can buy an NFT of that bottle.
An interesting thing that we didn’t really talk about yet is the idea of burning NFTs. Damien Hirst did a physical and an NFT art activation recently, called The Currency, and gave an option: You could either buy the painting or the NFT. At the end of the day, the edition size was going to be determined by if you decided that you really wanted the painting at the end of the day. If you made a mistake buying the NFT, you could “burn” it, or basically get rid of it and keep the painting. So, to the Johnnie Walker example, if you burn your NFT of the bottle, then that will unlock the opportunity for you to get unique, super-limited-edition blends of future whiskies.
Johnny Lee: We work with a fair number of media and entertainment companies who are going deep into the NFT space. And the ones that really do well are the ones that are not focused initially or immediately on monetization. They are focused on engagement. All of their strategic thinking about the adoption of this technology, and NFTs in particular, is about how to bring the audience closer to us, our brand, our interactions, and our events—whatever it is that they’re trying to engage with. And that’s really been the secret.
To watch the full webinar, please reach out to QuigleyEvents@quigleysimpson.com.