Diving Into the NFT Deep End: Auctions, Crypto Risk and ESG Concerns

By September 9, 2021No Comments

One AT helped marketing capitalize on the nonfungible token craze while minimizing financial and reputational risk.

Amid all the buzz and flurry of headlines around nonfungible tokens (NFTs), the actual process of creating, selling and maintaining them is somewhat cloudy. When one NeuGroup member was thrown into the deep end by his company’s marketing team, he had only six weeks to swim his way to the surface and prepare treasury for a public NFT auction.

  • NFTs are unique digital assets that can be bought and sold. Similar to most cryptocurrencies, they rely on a digital ledger known as a blockchain. The member is an assistant treasurer for a company with an internationally recognized brand that wanted to capitalize on IP recognition in the form of these digital collectibles.
  • The company planned to auction off a brand-related collectible and needed to figure out how to handle the cryptocurrency that would be used to pay for it. (The collectible ended up selling for crypto worth hundreds of thousands of dollars.)
  • Though there were a number of complications, the member said he sees “a huge upside” to NFT business.

What to do with the crypto. With only six weeks to prepare, the AT had to adapt quickly. “We were thankful we were brought in so we could at least ask our questions,” he said.

  • “Our marketing and licensing group had already done a lot of research,” but the planned deadline approached rapidly.
  • “It had gotten to the point where now they needed to talk about what they’d do with any cryptocurrency they’d be receiving.”
  • The company’s licensing team planned to sign on with a cryptocurrency exchange to assist with the auction and convert the crypto received into dollars.

Passing the risk to an ad agency. But the AT quickly found out that using a crypto exchange comes with a number of risks associated with holding crypto, most notably its extreme volatility.

  • After connecting with NeuGroup member peers who had experience selling NFTs, he learned that some artists and marketing agencies that corporates work with can eliminate the need to use an exchange.
  • “We found out that most of the ad agencies in the NFT space are willing to take on the crypto risk for you,” the AT said. He made an agreement for the cryptocurrency to go to the agency he was working with, which would then convert it into dollars and—in this case—donate it to a charitable partner.

Don’t forget about royalties. At the recommendation of other NeuGroup members, banking partners and more research, the member’s company decided to use OpenSea, a digital marketplace, to auction the NFT. The platform is built on the Ethereum blockchain, and only accepts payments in its native token, ether.

  • Coded into the token is a royalty contract, so each time it’s sold, the artist and the company get a percentage of the ether associated with that sale.
  • “So that opened it up to: Are we ready to accept cryptocurrency?” he said. “For now, the answer is no. I didn’t want the cryptocurrency risk.”
  • “We worked with our legal department to write in the code that it is also the agency’s job to receive the crypto on the royalties and make the conversion to dollars,” he said.

ESG and the backup plan. Though the member vetted the ad agency he was working with to handle the ether, he wanted treasury to have a backup plan—in the form of a crypto exchange, as it turned out.

  • The company needed to prepare for a scenario, however unlikely, “in case something goes wrong and I get the phone call that says ‘Hey, something happened with the agency and whoever was supposed to receive it; something went wrong—where can we put this [crypto]?’”
  • As NFTs have gained traction in recent months, the technology behind it has seen significant backlash from the public due to the energy consumption required. To offset this, the company’s marketing team initially had looked at working with an exchange that had a high ESG rating.
    • But the banks the AT consulted with strongly advised against working with that exchange, saying, “you want to stay away,” he said.
  • The member worked with a different exchange recommended by the banks and treasury “opened up an account just to see what the controls look like. We didn’t even have to have a deposit.
  • “We were up-and-running in like a day, it was very easy. We didn’t trade anything; our finance and tax folks were pleading with us not to” due to the extreme volatility and accounting complexities of the currencies.

Hazy future. Public concern around the environmental impact of NFTs and cryptocurrencies makes it tricky for corporates to hold crypto, even if they’re willing to weather the risk of volatility.

  • For now, the member plans to continue with the current process of never holding the crypto and donating all proceeds, wary that turning profits from digital collectibles could contradict the company’s other ESG-related efforts.
  • “We’ve got to figure out where the world lands with the ESG lens on this type of activity. Right now, it’s still frowned upon,” he said. “Until there’s a clear path ahead and someone makes it so that this sort of business is not destroying the environment or having a huge footprint, we’re going to be constantly looking to offset to any reputational impact.
  • “If we could ever get comfortable, and it evolves in a way that’s not impactful, this could be a new revenue stream for us as the next evolution of collectibles.”
Justin Jones

Author Justin Jones

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