The idea of the metaverse has rapidly seized the public conversation, for good or bad, and is a recurring theme in a good number of crypto conversations. Even with all of this conversation, however, there still is a gap between what crypto native organizations or experts perceive the metaverse to be, and what the – much larger – non-expert population understands the concept to represent. Despite this, the trend and pivot toward augmented and virtual reality applications is seeming to continue unabated, and this has several important implications for the cryptoasset marketplace going forward.
Accounting, auditing, and the valuation of cryptoassets all represent issues and open items for every market participant seeking to integrate these financial instruments into ongoing operations. Even though the market valuation for cryptoassets at large has exceeded $3 trillion at certain times during the past year, there is no crypto-specific accounting, reporting, or auditing guidance issued by an authoritative body as of yet. With newer iterations of cryptoassets, specifically non-fungible tokens (NFTs) having burst into the mainstream financial conversation, there is another layer of complication that has been introduced.
So, what exactly does the rise of the metaverse mean for cryptoasset reporting and valuations?
What is the metaverse. Much has been written and said about the metaverse recently, and it is easy to get lost in the buzz and hyperbole that can so often surround an emerging technology or versions of technology. The best way to summarize the idea of the metaverse in a way that is understandable is that the metaverse is a blockchain-based digital representation of the physical world. In other words, people, places, things, and events can now take place entirely in virtual reality versus occurring in the physical world.
This might seem dystopian to some, and there have been conversations about whether or not the metaverse will be an appropriate venue for every type of event. Setting these concerns aside, the prospects of truly immersive (and virtual) events – especially as the world has become more used to those types of events, is not something to take lightly. Exciting as these possibilities are, it also opens the door for further integration of blockchain into this new augmented reality landscape.
How does crypto fit in? As outlined above a differentiating characteristic of the metaverse is the fact that it is supported and underpinned by blockchain. Building on that point, the following question should be self-evident; what will serve as currency or a medium of exchange in this virtual, blockchain-based world? Cryptocurrencies and cryptoassets seem an obvious answer to this question, but the answer is not as simplistic as it might initially appear.
Cryptocurrencies might be fine for transactions, or even micro-transactions that are connected to online gaming, role-playing, or other such activities. Transactions are only small part of the what the metaverse promises, and new crypto iterations and required to recognize the true potential of this virtual reality ecosystem. Digging deeper, the potential for non-fungible tokens (NFTs) to move beyond speculative investments is becoming clearer. NFTs represent an immutable record of ownership (which is provable instantaneously as well) that will prove immensely valuable in the metaverse.
Think about it. What better way to not only establish and maintain ownership and records in a virtual reality environment than with a blockchain enabled and secured record of ownership? Better yet, NFTs have already proven a viable method of establishing, verifying, and connecting ownership between the digital and physical worlds.
Metaverse applications will drive valuations. More than ever before it seems evident that the dominance long enjoyed by bitcoin over the cryptoasset landscape is on the decline. This is not to say that bitcoin will lose all value, become irrelevant, or be rendered obsolete; far from it. Bitcoin, the developer community supporting it, and the investor appetite for this asset, continue to dominate much of the crypto investing conversation, with little sign of this abating any time soon.
What has – and will continue to occur – is that as 1) bitcoin continues to morph into an institutional investment option, 2) cryptoassets become more mainstream and well understood, and 3) the connection between metaverse applications and crypto becomes clearer, the need for consistent and effective valuations will continue to increase. Put another way, policymakers and regulators will quickly need to understand that crypto has become too-big-to-ignore (TBTI); reasonable and flexible guidance must accompany this growth.
The year is still in its early days, but it should be clear that the rise of the NFTs, the metaverse, and cryptoassets at large are not distinct and separate events. Rather, they are all influencing and being influenced by each other. A critical step in the maturation of how cryptoassets are treated centers around how these assets are treated from a financial reporting perspective. As emerging and controversial of some of the metaverse ideas may be, they have an important role to play in addressing and clarifying many of the items that continued to hold crypto back.