Social media companies are on a new gold rush. Nearly 20 years after the birth of Facebook, Mark Zuckerberg launched Threads, a new micro-blogging app that aims to rival Elon Musk’s X, nee Twitter.

This might sound familiar, but this time it is different. The race to stay relevant in this hyper-connected era comes from within, from invisible changes to protocols, servers and computer coding, rather than from new logos and features.

The thinking is about turning social media into open, decentralized platforms where users can own and share content and contacts across platforms.

The idea is at least a decade old. Still, it has gained popularity among users who want complete control over their communities without the limits of content moderation and paid subscriptions, such as on Twitter and Facebook.

The change will affect individual users but could be transformative also for millions of companies around the globe that communicate, promote, and connect with customers on traditional platforms.

“I’m already seeing some companies engaging on Nostr, a decentralized social media network,” says Caitlin Long, founder and CEO of Custodia Bank, which specializes in digital assets.

The codeword for these federated social networking services is “the Fediverse.” It runs on open standards such as ActivityPub. Tech companies like Flipboard, Tumblr, Medium, WordPress and Mozilla have already adopted it. Mastodon, the leading decentralized alternative to Twitter, runs on ActivityPub.

Meta launched Threads with plans to support Mastodon in the future. Twitter co-founder Jack Dorsey is rolling out his decentralized social Bluesky, powered by its own protocol.

For businesses, the advantage of entering the Fediverse would come from controlling their content and contacts and sharing communities across the platform of choice.

“Right now, companies are at the provider’s mercy, which decides what message can be posted and what to pay to spread a certain message,” says Samir Al-Battran, CEO and founder of Canada-based Fedica, a cross-platform social media management tool for marketing firms. “Instead, the Fediverse should be considered as email, where everyone has their servers but can communicate with other people via a messaging protocol that links them all together.

In terms of engagement and users, the size of the Fediverse is small compared to the entrenched platforms. Some apps may take off; others may not. “There have been waves; some small have become bigger. The arrival of Meta would be a big wave,” he adds. “Eventually, all social media will join it. I don’t see it as a threat to them. I think it will open the door for them.”

In the past year, banking powerhouses started to lend financial support to innovative companies in the crypto sector looking for fundraising and consolidation, overcoming their initial skepticism about a volatile and mostly unregulated industry.The total value of crypto M&A deals in 2021 grew over 50 times the total of 2020, with each of the top 10 deals valued at over $1 billion, according to a PwC report. The average M&A deal size more than tripled to $179.7 million in 2021 from the prior year, while the total value of crypto fundraising deals soared by 645%. Momentum will continue in 2022, the report also states.

“The increased demand we see coming from our clients shows that institutional investors are becoming more and more interested in entering the digital asset market,” Drew Forman, head of Cowen Digital, tells Global Finance.

Blockchain lawyers are guiding firms through a regulatory maze. “Digital assets are unlike debt or equity and therefore represent a new frontier in terms of working out financing structures and valuations,” says Timothy Spangler, partner at law firm Dechert.  “Lawyers working on these transactions today must anticipate what positions regulators and courts will take in the coming years.”

Lending Support

Lending to crypto companies is the next step for traditional financial institutions already offering custody and management of digital assets. This was unthinkable only a few years ago when decentralized finance (DeFi) and traditional finance had firm boundaries.

In March, New York-based financial firm Cowen launched a digital asset division to offer trading and custody solutions for institutional investors. The company said it spent 15 months building the institutional-grade, fully integrated platform. Cowen Digital says it plans to offer lending capabilities this year. “There is increasingly a recognition that digital assets are here to stay and that institutional clients want safe exposure to them,” Forman says. “During 2022, we plan to offer lending capabilities and also aim to launch swaps and derivatives.” Cowen also intends to roll out algorithmic technology and plans to expand in the U.S., Europe, and Asia. 

After launching its bitcoin desk last year, Goldman Sachs in March became the first major investment bank to execute an over-the-counter cryptocurrency trade. The bank says it recently extended a secured lending facility where they lent fiat collateralized on bitcoin owned by the borrower.

“The interesting piece for us was the structure and the 24-7-365-day risk management,” a Goldman spokesperson says. 

The Collateral Issue

Traditional financial institutions with institutional-grade platforms claim an advantage over DeFi lenders when it comes to financial risk. “In the past, the challenges for regulated firms have always been around making sure there is robust custody, and that they can access this new asset class in the same secure and seamless way as they would access any other asset,” says Cowen Digital’s Forman.

Collateral, however, remains a concern due to the volatile nature of crypto assets, as seen with the selloff that followed the collapse of the TerraUSD stablecoin and its twin coin Luna in May.

“Recent drops in crypto asset prices will lead many to approach this with caution and set high collateralization requirements,” says John Garvey, leader of  PwC Global Financial Services. Traditional players will monitor any high-profile liquidations and margin calls from borrowers that took loans during the bull market and face a downgrade in the value of their collateral, he explained. “For some this could also be a time to build and refine models and collateral levels, so when market conditions turn, they are prepared and stronger than ever,” he adds.

The Bank of International Settlements (BIS) in its latest Annual Economic Report warns against the “deeper structural limitations” of crypto and DeFI “that prevent them from achieving the levels of efficiency, stability and integrity required for an adequate monetary system.”

Regulation Hurdles

Dealmaking will move to geographies where regulation is more advanced and friendlier than the US, experts say. The US has been a catalyst for crypto M&A deals, accounting for 51% of transaction count in 2021, up from 41% the previous year, PwC shows. However, Europe, the Middle East and Africa recorded the highest M&A deal value last year, helped by SPACs including the $8.1 billion Bullish deal.

“I know for a fact that very large investors, some of the largest family offices, have invested in the United States, in bitcoin and bitcoin mining, and have started to pressure the regulators to leave them alone,” says Ralf Kubli, a Switzerland-based executive specializing in blockchain, cryptocurrency and decentralized technology. 

Kubli sounds confident that globally there will be more clarity in future regulation. “The problem in the US is that you get clarity by litigation,” he says. Countries like Switzerland are attracting the parents of crypto exchanges like FTX, which opened its European headquarters there.

“We are seeing a number of jurisdictions establish specialist regulatory regimes with the objective of providing better regulation but also attracting internationally mobile crypto businesses,” says Garvey. Market players are actively establishing a locally regulated presence in the markets where they expect to get larger customers, like the US, parts of Europe and Japan. “We expect this trend to continue with more and more locally regulated entities being established,” he adds.

The Risk Factor

Fresh money is flowing into crypto and blockchain deals from traditional and crypto-focused venture capitalists and funds, which combined became the largest source (38%) of M&A activity in 2021, according to PwC.

Kubli warned that there may be a problem of overvaluations as venture capital and funds must deploy large amounts of cash.Last year, the average size of the top 10 M&A deals in the crypto industry was $3.3 billion, over nine times larger than Binance’s $400 million acquisition of CoinMarketCap in 2020, PwC shows. “The reason why there is so much chaos and so much risk in finance is because the cash flows of these financial instruments are not properly defined and standardized,” says Kubli, a board member of the Casper Association, which oversees the Casper Network, a modular blockchain designed to issue and manage crypto-based financial solutions.

Kubli believes that the digitization of traditional finance requires standardized, digital, algorithmic financial contracts that define the cash flows between parties. Without such contracts, it won’t work: “We’re building capital markets the right way, from ground up again.”

Global Finance: What is the metaverse and do all businesses need to be there?

Philip Rosedale: When people say ‘metaverse,’ they think of a live social version of the Internet, combining two changes. First is moving from 2D to 3D. Many things we do on the Internet will make more sense in 3D. Second is interaction with other people in real time.

When I started in Second Life, I would have told you ‘yes’ every business would need to be in the metaverse but now I don’t think that’s necessarily so. We will almost certainly do some types of shopping in 3D environments where we have a live presence with others. I wouldn’t say, though, that it’s necessary for everything.

GF: What have you learned these past 20 years about virtual social interaction?

Rosedale: Second Life demonstrates specifically that technology can be a good thing as it relates to improving human relationships. You can read lots about this from other people than us—in academic papers. We know there’s a lot of good that can happen when people are in virtual World’s together. 

GF: How does the platform support or encourage that?

Rosedale: Second Life shows that the business of providing a virtual world can be done with the highest possible profitability through fees. It’s not based on advertising. It doesn’t have any mission to manipulate your behavior or watch you. Social media, as a business, has grown through surveillance and behavioral targeting. To extend that business model to the virtual world, well, the potential harm is inestimable. Because if I know from your body movement that you’re nervous, or that you’re suffering from a certain disease—which, by the way, very, very much works—then I’m going to be able to manipulate you in ways that are insanely beyond anything we’ve seen.

And you don’t know where the advertisements are. In the real world, we put ads in little squares so there’s a fair fight between consumer and advertiser. But with social media, we broke that rule. We said, Now I can be a pretend person that tries to sell you things, and you don’t even know. That’s true already on social media, and look what harm it’s done.

I don’t think most of us mean to cause harm. I have talked to a lot of people who are very reasonable yet don’t understand the risks with advertising.

GF: How does the Linden dollar compare to crypto?

Rosedale: The Linden Dollar, Second Life’s currency, was in many ways the first digital currency—certainly the first that traded against the dollar. Second Life also built a whole business (Tilia) that provides currency exchange functions to virtual World’s. We’re one of the few companies that has all the regulatory licenses, particularly in the US, to do legal transfer of money.

Linden Lab has a very different way of managing the money in the system than either traditional banking or cryptocurrencies: essentially a combination of a basic income and a transparent sale of new currency on an open market. With Second Life, we were able to increase the money supply in the world in proportion to the productivity and the new people that were coming in. But cryptocurrencies do not have an increasing supply; they are a poker game. And at the end of that game, there will be one winner. If you have a fixed number of tokens and a free market, very quickly, you have only one winner—Elon.

GF: What is the metaverse?

Rosedale: When people say ‘metaverse,’ they think of a live social version of the Internet, combining two changes. First is moving from 2D to 3D. Many things we do on the Internet will make more sense in 3D. Second is interaction with other people in real time. But it’s an aspirational term. Nobody has built it exactly yet.

The use cases aren’t strong yet. If you’re talking about kids between seven and 14, everything they’re doing is video games, but at the same time, I don’t think they really care to have a metaverse. When 20-year-olds communicate with each other, they do not use avatars, they use their real faces or audio. The interesting question of the metaverse is: If you’re older than 14 and want to go online and be with other people, how would that work? What would that be like? Other than Second Life and a couple of other small examples, there’s no adults communicating with each other in metaverse-like spaces. So I think we’re likely to see companies continuing to ship things that are experiments in this regard, and that process is likely to go on for the next, say, five years.

GF: Will all businesses need to be there?

Rosedale: When I started Second Life, I would have told you ‘yes’ every business would need to be in the metaverse. Now I don’t think that’s necessarily so. We will almost certainly do some types of shopping in 3D environments where we have a live presence with others. I wouldn’t say, though, that it’s necessary for everything.

Why would people want to live in a virtual world, even simulated with a lot of detail? What we’re going to find is that that’s not everybody. It is a lot of people, and it’s going to be a big business, no question about that. But it’s not everybody.

GF: What have you learned these past 20 years about virtual social interaction?

Rosedale: People can be good to each other and can help each other and can learn together and can grow to know each other well. Online. That insight, by the way, is an important one because right now we’re all sort of well, some of us are feeling like technology is just a bad thing, and that isn’t true at all.

Second Life demonstrates specifically that technology can be a good thing as it relates to improving human relationships. You can read lots about this from other people than us—in academic papers. We know there’s a lot of good that can happen when people are in virtual World’s together.

GF: How does the platform support or encourage that?

Rosedale: It’s not based on advertising. It doesn’t have any mission to manipulate your behavior or watch you. Social media, as a business, has grown through surveillance and behavioral targeting. To extend that business model to the virtual world, well, the potential harm is inestimable. Because if I know from your body movement that you’re nervous, or that you’re suffering from a certain disease—which, by the way, very, very much works—then I’m going to be able to manipulate you in ways that are insanely beyond anything we’ve seen.

And you don’t know where the advertisements are. In the real world, we put ads in little squares so there’s a fair fight between consumer and advertiser. But with social media, we broke that rule. We said, Now I can be a pretend person that tries to sell you things, and you don’t even know. That’s true already on social media, and look what harm it’s done.

I don’t think most of us mean to cause harm. I have talked to a lot of people who are very reasonable yet don’t understand the risks with advertising.

GF: How does that impact the business model?

Rosedale: The good news is Second Life makes more money per user than Facebook does on Instagram with advertisements. It makes more money per user per year, for example, than YouTube does with advertisements. So Second Life shows that the business of providing a virtual world can be done with the highest possible profitability through fees.

Second Life is run on two different types of fees. First, some transactions have fees. If you buy glasses from somebody in the virtual world, they’re going to cost about $2, and there’s a small transaction fee. Second, you don’t have to own land in Second Life, but if you do, there is a fixed monthly fee, a hosting fee, that is essentially a property tax. So the point here is Second Life is a tremendous business. I mean, it’s relatively small, but it’s a very good business that’s making a lot of money. And you can do that without causing harm.

GF: Tell us about the development of the Linden Dollar.

Rosedale: The Linden Dollar, Second Life’s currency, was in many ways the first digital currency—certainly the first that traded against the dollar. Second Life also built a whole business (Tilia) that provides currency exchange functions to virtual World’s. We’re one of the few companies that has all the regulatory licenses, particularly in the US, to do legal transfer of money.

The distribution of Second Life users actually matches pretty well the global distribution of Internet users, with significant exceptions like China where there’s no access. From the very beginning it was very global. Even something like Venmo wouldn’t be good enough. Virtual World’s need to have perfect cross-border transactions because you don’t want to say where you’re from as an avatar. You need to have a money system that works no matter where you’re from. The second thing is you need to support small transactions with low fees—our average transaction is $2. So you can’t use the Internet or blockchain for settlement.

GF: How does the Linden dollar compare to crypto?

Rosedale: Cryptocurrency is an experiment to say, could we create a kind of digital currency where no one trusted any one and no one was in control of it? The answer is yes, and that’s Bitcoin and Ethereum. The problem is, is that the price of doing that is very high. One is the ecological impact. We have this very dangerous situation where cryptocurrencies are creating an enormous amount of carbon.

In addition, cryptocurrencies are problematic in that they do not distribute the currency fairly. That concept of fairness is very much the subject of experiment and debate— as in the United States debate around basic income. It is probably a reasonable argument to say that as a human society becomes more sophisticated, people should have some sort of basic income rather than, say, an allocation of food or something like that. Cryptocurrencies are going to be very important because they make it possible to distribute resources better than we have done with central banks.

GF: As you did with Second Life?

Rosedale: Yes. Linden Lab has a very different way of managing the money in the system than either traditional banking or cryptocurrencies: essentially a combination of a basic income and a transparent sale of new currency on an open market. With Second Life, we were able to increase the money supply in the world in proportion to the productivity and the new people that were coming in. which is of course what economists try to do. That’s what a country tries to do, is it tries to print new money at a pace so that the exchange rate stays constant, and we did that successfully.

It’s one of the things that I have to kind of figure out how to explain to people now to try to help, because a cryptocurrency, for it to be useful as a currency, has to have an increasing supply. I’ll just say that. I mean, it’s not very debatable to economists. It’s obvious.

But cryptocurrencies do not have an increasing supply; they are a poker game. And at the end of that game, there will be one winner. If you have a fixed number of tokens and a free market, very quickly, you have only one winner—Elon.

GF: Do you think that virtual asset valuations are effectively too high?

Rosedale: Second Life tells us that many non-fungible token (NFT) prices are too high. The price of an NFT would be related to its utility. Virtual shoes should be worth what, say, a teenager would be willing to pay to look cool, which might be $100, but it’s certainly not $100,000.

There’s certainly an argument to be made that every new technology is exploited by greed at the beginning, and traditionally that drives some kind of a bubble. The Internet, of course, was like that. Similarly, right now with cryptocurrency, virtual land, or NFTS for art and virtual stuff, probably almost all of the value of those things is just a bubble.

Science fiction writers always lead the way, imagining impossible possibilities. Then Hollywood comes along to raise expectations. Slap on some gloves and a headset and suddenly you’re in a richly detailed imaginary world—with potential real-world implications.

That’s the promise of the “metaverse,” a word credited to author Neal Stephenson in his 1992 novel, Snow Crash. Stephen Spielberg presented a vision of what it might look like in his 2018 adaptation of the Ernest Cline novel Ready Player One. Also called Web 3.0, the metaverse will be the internet on steroids: like the real world, in three dimensions and real time. On today’s internet, you cannot interact with other customers at an online store; the metaverse is supposed to make that possible.

But there’s one thing digital insiders agree on: We’re not there yet. Despite the hype of recent months, driven in part by Facebook’s high-profile attempt to rebrand itself as “Meta,” the technology has a long way to go. “‘Metaverse,’ the way most people use it, is an aspirational term,” says Philip Rosedale, founder of Second Life, one of the earliest virtual social World’s. “Nobody has built it exactly yet.”

The metaverse should not be confused with the virtual World’s that will populate it. Much as the web is a medium for sites as diverse as CNN, Reddit and Pokemon GO, so too the metaverse will be a medium for multiple types of virtual World’s like Decentraland, Roblox and Minecraft. In the most advanced visions, the physical world could be populated everywhere with cameras and scanners that would generate data to create parallel virtual World’s. Virtual visitors would then be able to stroll through the Ginza without going to Tokyo and see the same things as someone standing there in real time. “It’s about a seamless convergence of physical and digital lives,” says Cathy Hackl, CEO and chief metaverse officer of the Futures Intelligence Group consultancy (FIG). “We’re building toward that greater vision.”

From computing power to networking bandwidth to payment systems, many problems must be solved. “It is very nascent,” says Hackl, a virtual reality (VR) expert who has worked with companies such as the producers of virtual reality platform and headset brand HTC Vive; and Magic Leap, producer of the Magic Leap One system and the Magicverse. “There are what I call glimpses of the metaverse.”

Still, the enormous potential seen in those glimpses powers real hopes. Consider the masses of people gathering online in virtual World’s. Popular online games, such as Fortnite and Roblox, notch the biggest numbers—more than 20 million daily active users on Fortnite, for example. But there are people congregating to socialize, attend concerts, view digital art and more. Rapper Travis Scott performed for 12 million fans in a virtual concert on Fortnite that ultimately grabbed more than 25 million unique views.

And people are already spending billions for virtual goods—approximately $54 billion annually, according to research from JPMorgan Chase, twice the annual spending on music. Second Life, with roughly a million active users, quietly earns more per user from fees than Facebook does from Instagram via advertising. Anshe Chung, the avatar identity of Ailin Graef, became the first virtual real estate millionaire, in Second Life, way back in 2006. She has since built a real-world empire, playing a significant role in the development of IMVU, a leading virtual social world, and other metaverse projects. Overall, the metaverse was estimated to be a $500 billion revenue opportunity in 2020 that could approach $800 billion by 2024, Bloomberg reported. Global consultancy PwC estimates that metaverse revenue could hit $1.5 trillion by 2030.

The Big Barriers

Technology aside, two central problems remain. First, who really needs it? Virtual World’s as they exist appeal mostly to gamers, mostly under-20-year-olds. So far, they show appeal to a limited group of adults. As Rosedale discovered with Second Life, getting comfortable with an avatar takes a significant investment of time, which makes it easier to sign up young gamers keen to play than corporate executives seeking efficiency. “People still tend to use virtual World’s when for one of a variety of reasons they must. If they don’t have to, they won’t,” Rosedale explains. “And successful executives in New York or wherever, don’t.”

The pandemic started to change the equation. “Covid is one of the drivers of why Facebook would rename itself and why everybody is getting excited about the metaverse now,” Rosedale says, “because, of course, we’re thinking, what happens if live events or school have to go online forever? What would that mean?”

Formerly uncomfortable ideas—like a virtual doctor visit—suddenly became popular. In February, virtual-clinic provider XRHealth raised $10 million in funding to expand its treatment via VR and augmented reality (AR). “You’ll be able to put a headset on and enter the metaverse, and you just have a full variety of different types of treatment rooms operated by certified clinicians,” says Eran Orr, CEO of XRHealth. “Today, we are already conducting virtual treatment in the US, Australia and Israel.” Last year, the company conducted over 100,000 physical therapy treatments virtually. The average age of patients is 62. These are neither gamers nor early adopters, Orr noted. Of course, limitations are apparent, too: Prescriptions can be dispensed, and surgery done remotely, but not virtually. Still, virtual health care could become a $250 billion market, according to a McKinsey report.

Prior to Covid, the focus was on “gamification”—making useful activities gamelike—to spur adoption. “I am a firm believer that gaming is going to be the adoption curve for the metaverse,” says Brian Wilneff, who took the helm as CEO at Alpha Metaverse Technologies after the Canadian company bought his e-sports firm GamerzArena in 2020. “Gamification will be a leading part of our world, especially as the metaverse continues to expand.”

Indeed, a goodly portion of today’s pre-metaverse economy can be traced to blockchain-based play-to-earn (P2E) games in which users earn nonfungible tokens (NFTs) that they can convert into sovereign currencies. Axie Infinity, “a virtual world full of fierce, adorable pets called Axies” that “can be battled, collected and even used to earn cryptocurrencies with real value,” per the company, was the first crypto metaverse game to surpass $4 billion in NFTs, according to an all-time ranking by NFT tracker CryptoSlam.

The second set of big problems, in addition to the challenge of enticing users, is made up of security issues, particularly around storage and use of virtual assets. Most of the Web 3.0 executives interviewed by Global Finance say they do not own a cryptowallet.

Jason Desimone, founder of virtual world Rove and head of blockchain at software developer Ubik Group, does have a cryptowallet—and he uses six different laptops when he moves between different blockchains. “You must be extremely careful about the sites you go on, about what you connect your wallet to, about how you lock it after you store it,” he explains. “If you make a mistake at any of these steps along the way, you’re at risk to lose everything.”

Hypervolatility is also at play, Desimone adds: “I try to warn people away from getting into the space unless they give their money to someone who knows what they’re doing or unless they really take the time to learn.”

Nevertheless, corporate actors are increasingly diving in. Luxury brands Gucci and Balenciaga are making virtual fashion, as are more-prosaic brands such as Nike.

Chick’nCone, an American restaurant chain that specializes in fried chicken served in a waffle cone, issued NFTs in February to fund expansion. Each “Chick’nCoin” token (cost: $14,500) gives its owner rights to some franchise fees and royalties for six years if any new restaurants open in a specific geographic area. But they are not investors and make no money if no new restaurants open. Still, “the response has been good,” explains Jonathan Almanzar, CEO and co-founder. “I think we’ve only begun to tap the potential of smart contracts.”

 Global financial institutions are eager players: JPMorgan Chase and HSBC have staked out virtual real estate claims on the Decentraland and Sandbox blockchain-based platforms respectively, for example. JPMorgan is no stranger to digital ledger technologies and launched its JPM Coin for cross-border payments in 2019. The bank’s metaverse presence in Decentraland, Onyx, relies on JPM Coins to handle metaverse-related transactions.

“They want to be the bank of the metaverse,” explains Brad Oberwager, executive chairman of Linden Lab. “They want to show that they are on board with the future. They believe money is a major part of that future, and that the blockchain is going to be a major part of money.”

They’re not alone. “We see great potential to create new experiences through emerging platforms, opening up a world of opportunity for our current and future customers and for the communities we serve,” writes Suresh Balaji, chief marketing officer for Asia-Pacific at HSBC, in a press statement. “Through our partnership with The Sandbox, we are making our foray into the metaverse.”

“Everyday brands are rushing into this space, trying to figure out how to get their market share,” says Desimone. “It’s like a modern-day Renaissance.”

Building Blocks

Right now, the biggest business opportunities aren’t in the metaverse—which doesn’t exist—but in building it. And there is plenty of work to do. On his website, The Metaverse Primer, venture capital investor and VR guru Matthew Ball breaks out eight areas needing development to attain the metaverse, including networking and computing power, a vast range of hardware (consumer and enterprise level) and a robust array of virtual platforms, content, services and assets. Ball also marks payment systems, asset custody and standard-setting as developmental necessities.

Meta, née Facebook, isn’t seeking to simply join the metaverse, but to own its core building blocks. The social media behemoth said last year that it would spend more than $10 billion this year on its VR headsets and Horizon World’s, a platform of its subsidiary Reality Labs. Global spending in VR/AR technologies is estimated to increase fivefold to $72.8 billion in 2024 from $12 billion in 2020, according to Morgan Stanley research. To date, VR headsets have been something of a disappointment, as they make many people nauseated.

Meta is not alone in seeking to own a piece of the metaverse. Microsoft’s $68.7 billion deal to buy videogame publishing giant Activision Blizzard was the Xbox maker’s largest acquisition move since acquiring LinkedIn for $26.2 billion in 2016. Alphabet, Google’s parent company, also plans to acquire Shape, a company that enables holograms, P2E games and 3D NFTs for technologies like Red Bull’s Rampage AR app and Nike’s RTFKT (pronounced artifact) virtual sneaker vendor.

Virtual World, Real Economy

One critical piece of the metaverse economy will be digital payments, which have drawn the interest of the financial sector. Although it’s easy to develop a digital economy if it stays in a single game or online platform, it’s harder to make one that crosses multiple games or environments. Linden Lab, the creator of Second Life, has some of the longest experience in this area.

Second Life’s digital items exist only within its platform. On the other hand, owners of NFTs can purchase, trade or sell their NFTs without being tied to a specific platform.

Over its 19-year life span, Second Life has increased the amount of its proprietary online currency as the platform usage has grown. The exchange rate of the Linden dollar, Second Life’s currency, has remained relatively steady between 240 and 270 Linden dollars to the dollar; and it has been used in 1.6 million transactions daily, far more than Decentraland, according to Oberwager.

The price of minting and trading NFTs on their respective blockchains could prove prohibitive due to their individual operating models, he adds. The metaverse needs to support small transactions. “You can’t move [just] a penny on the blockchain,” he says. “The price to move it is too expensive.”

Interest in such NFTs has surged over the past two years to approximately 500,000 all-time users with active wallets compared to 50,000 in 2020, according to digital-native asset manager Grayscale Investments, which had $55 billion of assets under management at end of October 2021.

The hyped valuations of NFTs raises concerns among regulators and investors alike. After Nike acquired RTFKT, the price of its digital shoes skyrocketed. A pair of Jeff Staple Metapigeon K-minus sneakers sold for more than $25,000 on the NFT marketplace OpenSea. “This is a bubble that is unsustainable,” warns Ubik Group’s Desimone. “Unfortunately, a lot of these NFT collections that are worth exorbitant amounts of money will go to zero.”

And many such experiments have flopped. McDonald’s issued a McRib NFT in November, but it didn’t take off. “Just because you can put something on the blockchain, it does not mean you should,” says Linden Lab’s Oberwager. NFTs are beloved of crypto enthusiasts but they have a shakier reputation among the general public as well as artists.

At this time of experimentation, “there’s just a lot of projects,” says FIG’s Hackl, “and not every project will retain its value.”

Sheltering in basements during Russian air raids, a team of managers and designers for Ukrainian software company Skylum worked on their laptops amid air raid sirens to deliver important updates to a global audience of photo enthusiasts.

The Kyiv-based photo editing app—known for its user-friendly artificial intelligence-based features—had just released its new product Luminar NEO when Russia launched its full-scale invasion of Ukraine in late February. Nevertheless, Skylum was one of several Ukrainian software firms, such as Serpstat, Ardas and eSputnik, that continued to function while overcoming unprecedented business and personal challenges.

Providing software updates while caring for families and colleagues was the only option for a business launching a new important product, according to CEO Ivan Kutanin.

“We understood that our customers would ask whether they should buy a product from a company that could disappear tomorrow or be compromised,” says Kutanin, who took on the CEO role last year. “We wanted to show that we are reliable partners.”

The war is testing the creativity and team spirit of the 14-year-old, $30-million company, whose main development center for all major products like Luminar and Aurora HDR remains in Kyiv. In contrast, the company’s 130 employees are scattered across Ukraine and abroad.

“The invasion affected our overall capacity,” he adds. “We needed to transfer almost 70% of our employees to safer places inside Ukraine.”

Some employees moved to safer places in western Ukraine or other countries in Europe. Some volunteered to fight. Employees who remained in Kyiv throughout the invasion were later joined by others who returned to the city once the Russian offensive moved to the east. Similar stories of businesses adapting to a wartime environment as employees change cities and volunteer to help are posted on search engine optimization (SEO) platform provider Serpstat’s website.

“The safety of our employees is much more valuable than our products,” says Kutanin. “We didn’t push staff to work: It became personal. There was also a psychological factor because when you work, at least you have something that connects you to your previous life.”

A month after the start of the war, the company’s Luminar Neo was available in the Microsoft store and compatible with the newest Windows 11 edition.

With safety becoming an even more significant concern, Skylum has reassured its customers that all the infrastructure and user data was already securely hosted on Amazon Web Services using EU-based servers. In addition, the company posts regular updates about its products and engages users daily via a forum.

The war transformed all aspects of Skylum’s business organization, including communications. A scrolling blue-and-yellow banner on its website leads to a call for relief from the war and urges partners to donate money and supplies—including surveillance drones—to help the army and people in need. Skylum also published personal stories from employees affected by the war.

Cryptocurrencies as borderless, decentralized assets are helping Kyiv fund its resistance against the Russian invasion while Russia might use them to mitigate the impact of punitive sanctions imposed by the West and Japan.

“Russia can leverage cryptocurrency to evade the sanctions that are being put in place in response to their invasion of Ukraine,” says Salman Banaei, Head of Public Policy, North America, at blockchain data platform Chainalysis.

In January, the Russian central bank called for a ban on cryptocurrencies and crypto mining. Yet, Russian citizens already own more than 12 million crypto wallets that hold assets with a total value of about 2 trillion rubles ($18.3 billion), according to an estimate provided by the Russian government.

According to the Cambridge University Center for Alternative Finance, Russia is the third bitcoin-mining superpower behind the US and Kazakhstan, which monitors the computational power used to mine the virtual currency. In addition, Iran has used Bitcoin mining to evade sanctions, explains Tom Robinson, co-founder of Elliptic, a provider of blockchain analytics and crypto compliance solutions.

“Russia’s elite and financial authorities have been preparing for sanctions for some time,” Chainalysis’ Banaei says. Cryptocurrency was most probably deployed over the past several months, he believes. “It is unlikely that designated persons would move around large quantities of crypto now,” says Banaei.

Yet there are real limits to what Russia can do by using crypto as a work-around, especially given that EU officials vowed to sanction Russian cryptocurrencies and crypto assets to prevent this from happening. “It is likely that Russia already owns cryptocurrencies,” says Rance Mashek, President and Founder of trading platform iVest+. “However, even though this would allow Russia to transact some business away from global sanctions and away from the Swift system, it is a limited solution.”

As Mashek points out, Russia would need trading partners willing to do business with it and accept virtual currencies in exchange for actual goods. Furthermore, “at some point, cryptos need to be converted back to regular currencies, usually the US dollar, to be spent in the global economy,” he adds. “Those transactions would happen on crypto exchanges and be trackable, which means it could expose entities doing business with Russia.”

Russia’s central bank digital currency—the digital ruble—is still being developed and the current conflict may be over by the time it is rolled out. By then, finding entities that would accept the digital ruble might be difficult given Russia’s growing diplomatic and economic isolation.

“Any country, be that one currently involved in a conflict or not, will eventually adopt and accept crypto as the technology their financial system will run on,” says Mark Basa, global brand and business manager at $800 million crypto company HOKK Finance. “It’s either going to be introduced by a government or forced by the people.”

As the conflict escalates, analysts fear Russia could turn to cybercrime as a weapon against the West. Criminal organizations believed to be affiliated with Russia generated about 74% of global ransomware revenue in 2021, or more than $400 million worth of cryptocurrency, according to Chainalysis.

But the sword has another edge: The transparency and streamlined system of the blockchain combined with analytics tools could help governments get ahead of Russian efforts to hide transactions, Banaei says.

Meanwhile, Ukraine is using crypto to build its war chest. According to Elliptic, the government used the official Ukraine Twitter account to solicit donations for its defense. Along with non-government organizations supporting the military, Kiev raised more than $38 million in crypto assets since the start of the Russian invasion so far, according to Elliptic. Virtual assets include Bitcoin, Ethereum, TRON, Polkadot and non-fungible tokens (NFTs).

As the pandemic enters its third year, top executives worldwide are rethinking their operations in the face of new and ongoing threats expected to last at least until 2023.

Inflation has risen to be the No. 2 concern for businesses worldwide this year, up from No. 22 just a year ago, according to C-Suite Outlook 2022, a survey of more than 1,600 top-ranking corporate executives. This annual survey by The Conference Board (TCB) supports and impacts the agenda at global conferences such as Davos and is now in its 23rd year. Global Finance collaborated with TCB this year to enhance participation from CEOs and CFOs outside the United States.

Supply bottlenecks and labor shortages complicated by record infections due to the highly infectious Omicron variant have pushed inflation higher. In December, US consumer prices recorded their fastest rise in 40 years. Globally, 82% of CEOs say they face rising input prices, according to the survey, which was carried out between October and November 2021. Over half say they expect prices to stay elevated until mid-2023 or beyond.

Beyond shared global concerns, the survey reveals differences in priorities across geographies and sectors. While supply chain disruption is a top stress factor for CEOs in the US and Europe, Chinese executives worry more about an economic slowdown. Close to 40% of Chinese CEOs say they fear a recession over the next 12 months, the research shows.

Supply Headwinds

Supply chain disruptions are overwhelmingly felt by executives in the manufacturing sector, who rank them as the top external impact issue in the coming year. However, only 28% of CEOs globally say their organizations are well prepared to address future supply chain shocks (C-suite executives generally are more optimistic at 34%).

Manufacturing executives cite cutting costs and passing higher prices onto consumers as a short-term solution, leaving questions about a more permanent strategy.

“Many of our clients are contending with inflation by increasing prices, and supply chain related challenges by executing supply risk management contingency plans,” says Gina Gutzeit, who leads the Office of the CFO Solutions practice at FTI Consulting.

CFOs polled in FTI’s annual survey say supply chain issues and slowdown are “obliterating our projections and severely draining our cash reserves.”

Refocusing Priorities

In health care, companies have faced headwinds from delayed elective procedures and labor shortages, among other problems; and tailwinds from testing, vaccines and telemedicine.

“It remains uncertain when those winds are going to shift and when companies are going to have to deal with those consequences, providing an elevated level of uncertainty and difficulty in thinking about corporate strategies,” says Andreas Dirnagl, global head of health care research with Mitsubishi UFJ Financial Group (MUFG), one of the world’s top lenders to the health care industry.

Favored by strong public capital markets, health care executives refocused their portfolios around their core business, leading to corporate divestitures, spinouts and bolt-on acquisitions.

“I think the pandemic has forced CEOs to further define their strategies and what they do well,” says Beth Everett, managing director of health care banking and head of middle-market health care at MUFG. “As a result of this internal focus, we are seeing a good deal of larger companies sell, spin off or deprioritize parts of their business. I think we will continue to see this on a regular basis in 2022 and 2023.”

Labor shortages have prompted CEOs in the US, Europe and China to consider attracting and retaining talent as their No. 1 priority for 2022. Some are shortening the interview process and offering higher wages and benefits to retain staff. A hybrid model of remote and in-person work is likely to last beyond the pandemic. Such logistics are just one part of the equation, however; and the TCB survey shows an acute awareness of the need to offer a vision of the future that compels attention from both the talent and the markets.

CFOs are themselves facing challenges amid shorter tenure and more responsibilities. Nearly half the corporate finance executives polled by FTI say they expect their CFO to stay in that role less than five years. The pandemic accelerated a trend that started before the health crisis. The CFO’s success or failure is defined in just two to three years, according to the global business advisory firm.

“For some, the increased pressures and the risks associated with the role have diminished [the CFO role] as the pedestal of a career, resulting in pursuing other opportunities,” Gutzeit says.

Overall, the results show a growing acceptance of stakeholder capitalism and strong incentives to reinvent business models to align with social intercourse via digital media and modes of work as transformed under Covid. The challenge is not merely to take advantage of technology to make things faster, but to meet the new and different needs of this rapidly changing world.

The full survey can be read here.

This summer, US President Joe Biden put into motion an overhaul of an American corporate consolidation culture dating back at least 40 years. In a sweeping executive order listing 72 initiatives and involving more than a dozen federal agencies, the Democrat detailed his plan to target big tech, big pharma, big agriculture and big banks. The president wants to promote greater merger scrutiny and drive down prices of prescription drugs and internet services.

“To keep our country moving, we have to bring fair competition back to this economy,” Biden said.

Over the past four decades, the world’s largest economy has lost 70% of its banks, with more than 10,000 bank closures, the White House said, citing data from the St. Louis Federal Reserve. The rate of creation of new businesses, an indicator of economic health, has fallen by almost 50% over the same period, according to Economic Innovation Group.

Biden directed the Department of Justice and other federal agencies to update guidelines on banking consolidation. Federal agencies haven’t formally rejected a bank merger application in more than 15 years, White House officials said. 

The move comes amid expectations of further consolidation among regional lenders such as PNC, Huntington Bank and M&T, following BB&T’s acquisition of SunTrust in 2019.

Critics of Biden’s policy say imposing new regulations without cutting the red tape may have the opposite effect of encouraging mergers to share the compliance burden.

“Open banking is a goal worth pursuing but smaller banks are going to be hit by the costs of changing their organization,” says John Berlau, senior fellow for banking and finance at Competitive Enterprise Institute, a Washington-based think tank known for its libertarian views.

Berlau cited a study from Harvard’s John F. Kennedy School of Government, concluding that the regulatory costs of Dodd-Frank Wall Street reforms have accelerated the decline of community banks.

Global trade rebounded more than expected from the pandemic as the US and Europe rush to secure containers and goods from Asia, according to recent research.

This year, global trade is expected to grow by 7.7% in volume and 15.9% in value, according to a July report by trade credit insurer Euler Hermes. In 2020, volume declined 8.0% and prices tumbled 9.9%. Analysts expect the upwards trend to continue.

“Global trade growth is expected to remain above pre-crisis trend by 2023. In 2022, we expect growth to reach 6.2% in volume terms and 8.4% in value terms,” says Ana Boata, Head of Macroeconomic Research at Euler Hermes.

The United Nations Conference on Trade and Development (UNCTAD) predicts that global trade will recover from the Covid-19 crisis faster than from the past two recessions, with the 2021 forecast showing a 16% rise from the lowest level of 2020.

“Global demand is likely to remain sustained thanks to the new infrastructure cycle, fiscal stimuli in both the US and Europe, residual savings in the advanced economies and the growing liberalization of trade, even if still modest,” Boata explains.

The World Trade Organization warned that weakness in the services sector and slow vaccination rates in poorer countries could weigh on merchandise trade volume.

“Keeping international markets open will be essential for economies to recover from this crisis, and a rapid, global and equitable vaccine rollout is a prerequisite for the strong and sustained recovery we all need,” WTO Director-General Ngozi Okonjo-Iweala said in the report.

UNCTAD expects an uneven recovery, with China’s export growth exceeding pre-pandemic levels and Russia remaining below 2019 averages in the first quarter of 2021.

Shortages of raw materials and containers are the main reason trade prices are outpacing volumes. “The global race for inputs is supporting trade volumes and, more importantly, pushing prices up,” Euler Hermes economists said. Europe has been forced to pay more for freight as North America rushes to get containers out of Asia.