What Businesses Should Know Before Investing in Digital Assets

The scope of digital assets (DAs) is continuously evolving. However, firms that wish to include these assets, in a scalable manner, in business strategies need to understand the first-principles foundation of the emerging paradigm of these assets. DAs' emerging nature has forced participants to revisit traditional definitions of assets, i.e., tangible and intangible assets. In contrast to traditional assets, DA’s are classified into at least two categories. The first category is mapped to assets in the physical world (Virtualized DAs), and the second is not mapped to any asset in the physical world and exists only in the virtual world (Digital Native DA’s).

Although the virtualized DA’s have been known for some time, the Digital Native DA’s have grown exponentially. These assets exist only in the virtualized world, like the Metaverse. A typical process of conversion or tokenization is followed to identify and enable transactions of DAs in the virtual world. Transactions of tokens are often powered by blockchain technology a method to record and secure transactions in the virtual and decentralized world. DAs are available in each of the categories, and some of the common examples are:

Virtualized DA’s:
Cryptocurrencies - Cryptocurrencies, such as Bitcoin and Ethereum, are one of the most popular digital currencies secured by cryptography via the block chain. Cryptocurrency users can use these digital assets for a variety of purposes, including paying or investing.

Asset Backed Tokens- Tokenization allows traditional tangible assets like gold, oil, equity, debt, and real estate to be traded using blockchain technology. Tokenizing these assets can make them accessible to a broader group of investors, create transparency for proofs of ownership, and simplify the transaction.

Non-Fungible Tokens (NFT)-NFTs stand for 'non-fungible token,' which implies that the asset's token is one-of-a-kind and can be authenticated to ensure that it belongs to its owner. Users increasingly use NFTs to own unique goods such as artwork and audio recordings. They can also be mapped to intangible assets such as intellectual property (patents and trademarks).

Digital Native DAs:
These exist only in the 3-dimensional virtual world Metaverse. They are linked to virtual assets like logos, imageries, designs, symbols, etc that are native to the Metaverse and do not have an identity in the physical world. The world of Metaverse has been used commonly in the gaming industry, consumer goods, to create experiences of the real world in the virtual world.

DAs' growth presents many opportunities in a fast-growing sector underpinned by scalable technology. Indian firms, too, can leverage the opportunities in the DA world as they have the potential to reach a massive number of people cost-effectively with the advantages of security and immutability due to peer-to-peer verification. The use of these technologies can digitally change organizations and assets, such as -

•The financial services industry can digitally secure transactions and customer experience using blockchain technology with the benefits of lower transaction costs and transaction authentication mechanisms. For example, the scalability of blockchain technology can also be utilized for financial inclusion and for reaching the unbanked.

•The ITES services industry can work on marketplace development where DAs can be bought and sold and function as custodians for the digitally native assets in the Metaverse world.

•The Consumer goods industry can look at creating assets in upcoming metaverse environments like Comearth, where they can buy virtual estate (land parcels in Metaverse). And build their brand presence to market their offerings for customers who will spend time in these digital marketplaces. For example, companies like Ceat (tyre manufacturer), Metro Brands (footwear), and Mafatlal industries (textiles) have all agreed to join Comearth. They also have open opportunities to create native digital virtual products. For example, recently online version of the Gucci Bag was sold on Metaverse on a gaming platform for more than $4000.

•The idea of virtual spaces and metaverse has always been tied to gaming. The Gaming industry has been one of the fastest adopters of the DAs and has taken advantage of the Metaverse world to create unique experiences for players. This potential amplifies when the definition of gaming is expanded to include gamification of books, reading, education, etc. For example, a metaverse-based startup, Hero Maker Studios, is taking comic books to the metaverse and investing in digital assets to pioneer a new era of superhero franchises. Intriguingly this company is investing not only in familiar DAs like mobile content, short-form animation, and virtual experiences but also in digital collectibles using NFTs.

Although the DA world presents multiple opportunities, it has numerous challenges that one should consider before investing in such initiatives:
•They are characterized by complexities in treatment and definitions, emergent nature, and rapid evolution, which would need a recalibration of the companies’ strategies rapidly
•The regulatory landscape is continuously evolving, and companies face added challenges due to cross-border transactions and operations in multiple geographies
•They are often associated with terror funding and ransomware, due to which firms need to communicate these strategies to shareholders, regulators, and policy makers in a clear and transparent manner
•The DA world has challenges of intellectual property protection, especially in the world of Metaverse, as ways of asset creation and transaction are continuously evolving, such as the creation and transaction of digital real estate on Metaverse.

To overcome these challenges, firms can have experts in the strategic decision-making team (technical, financial-and-accounting, and regulatory-and-taxation). Such a team can highlight managerial choices such as operating on a public blockchain platform (benefit of trust and immutability) or a private blockchain platform (control over process and flexibility). Overall, while firms can reap short-term benefits, the enduring value from these strategies could be achieved by understanding them deeply and embracing the inherent uncertainty around them.