ThinkTWENTY20

By Eric E. Cohen, CPA

George Parker, William McCloundy, Joseph Weil, and Henry Gondorf are all names associated with conmen who found marks and then “sold” the Brooklyn Bridge to gullible people. Mae West’s character “Peaches O’Day” attempted the same in the 1937 film “Every Day’s a Holiday.” So I’d be interested in knowing if you would like to buy an NFT? How about an NFT of the Brooklyn Bridge?

The Collins Dictionary's "word" of the year 2021 is “NFT”, short for non-fungible token. I am surprised that it counts as a "word" according to Collins, but it does. I am nonetheless concerned about the dictionary’s NFT definition, which speaks to "ownership" of a digital asset.

Everyone Wants a Piece of the Action
The way everyone is jumping into the NFT craze, you'd think it stood for "Next Funding Trick" rather than non-fungible token. The catalyst for my thoughts in this blog entry is a recent Marriott PR piece with the headline "Marriott Bonvoy Logs into the Metaverse with Debut of Travel-Inspired NFTs", which explains "NFTs are one-of-a-kind digital collectibles that can be traded on the blockchain, often referred to as the ‘key’ to the metaverse. "

I have a lot of emotional capital tied up in the Marriott brand, due to spending almost as much time in Marriott properties as I did at home during my non-pandemic XBRL years, earning lifetime Adamantium status (or whatever it is called now). Having my Lifetime Adamantium Elite card as an NFT instead of the two-kilo, metal monstrosity (ok, it's only 28 grams) might make it easier to have at hand, although less satisfying to clunk down at check in.

The proof of the pudding of Marriott’s news is in the reality of their deliverable, yet to be seen, and yes – of course – I want Marriott NFTs; a collection of all the properties I have visited would be amazing. Like badges or pins or collectible cards, it sounds fun, especially if it is 3D virtual reality enabled in some way.

Some Quick Parsing/Comments
1. While NFTs are "one-of-a kind," it’s not what it sounds like. They are unique only because an NFT is a unique and non-interchangeable unit of data stored on a digital ledger controlled by a private key, not because any digital collectible associated with them is unique. There are no NFT police making sure something of value is associated with an NFT only once. How many people have stayed at the Marriott in Hilo, Hawaii? If we all got an NFT, it would be special to us as part of our collection, but my NFT may be interchangeable with your NFT unless it has distinguishing features from others.

Comparing NFTs and their uniqueness is, at its best, limited to set of Thomas Kincaid prints, which differ from each other only by having a different serial number (1 of 1000, 899 of 1000) on them. I have some Binance US and Decentraland digital wearables as NFTs that are indistinguishable from tons for sale on Opensea.io, but they are NFTs nonetheless. While the token itself is unique, the objects behind them are certainly capable of mutual substitution between the individual units (or fungibles).

2. The right of “ownership” of any associated asset is not inherently proven by the private key, only control over the record itself. This is no different than ownership of art today. Rights and obligations are a legal issue, not a technical one. And the associated asset (a digital collectible, an intangible right, a physical item by some manner of proxy) is not paired. I’ve mentioned before the young techy couple that exchanged NFTs with wedding rings as a symbol of their love. Should I by some means gain control over one of those NFTs, I do not become married to one of the members of the imaginative couple.

3. The “metaverse” of the Marriott release implies 3D virtual worlds, a la Decentraland (or legacy Second Life). I have not seen anything other than static pictures of the first Marriott NFTs, and not seen any technical information to associate them with a specific blockchain or virtual environment. The text “3D surrealistic depictions” is in the press release, but NFTs are nor inherently dynamic nor 3D; my cryptokitties are happy in their 2D world for now, my NFT certificates for attending conferences nothing but an image. Nothing about a record on the blockchain assumes or assists 3D.

That is not to say that Marriott and its partners might not deliver some new experience that brings together the Pokemon Go augmented reality craze with NFTs in a new travel theme.

But that’s also not to say some NFTs (if not all NFTs) can’t be a potential “key to the metaverse.” A search on Google has delivered many hits on that topic. They say that NFTs can set you free from the bonds and reliance on a single developer or vendor. If you have accumulated items in a game (as I did on Second Life 10 years back), you are completely reliant on the game’s owner to have access to those items and cannot use them in other environments. NFTs on a public blockchain are in some manner independent of the origination points and may have greater interoperable power; I can show you on the Ethereum blockchain the records pointing to my Cryptokitties and Decentraland/Binance US swag. Of course, without the Cryptokitties folks, I can’t do anything with my kitties.

As one of the major sites for buying and selling NFTs notes, with a little internal commentary from me:

“There was also the belief that just because a smart contract was deployed [EEC: on a public blockchain, not under the control of the original developer], the assets would last forever [EEC: independently of any source]. This overlooked the fact that there are other entities (websites, mobile apps) that serve as the portal for regular users to interact with these applications. If these portals go down, the assets lose a lot of their worth. Of course, there may be a future where decentralized applications can be deployed in a fully distributed, ‘unstoppable’ way, but for now, we live very much in a hybrid world.”

Some Take-Aways as I Look Forward to Hearing More from Marriott
• I believe NFTs have tremendous potential, and they will be tomorrow’s digital collectible as well as an incredible tool in business for tracking digital, intangible and even physical items, across enterprises. But I can’t even find half of the NFTs I’ve gotten from conferences and other sources, across many blockchains.
• An NFT is just a unique digital record, and the legal rights between that record and any digital, intangible, or physical item should bring to mind George C. Parker, who made the old saw “If you believe that, I have a bridge in Brooklyn to sell to you” popular.

Getting A Handle on Blockchain
The community of financial professionals needs to take a place at the table with other stakeholders around the emergence of blockchain (used here synonymously with distributed ledger technologies, or “DLT”) as an enabling technology. The profession’s formal leadership on reliable blockchains has the possibility of being as important, if not more important, than our informal role in establishing the spreadsheet as the core of all we do, some 40 years ago. Like the spreadsheet, blockchain – and smart contracts in particular – has the potential for much benefit, but also great error when we underestimate the risks.

Blockchain, the underlying logic for the development of Bitcoin and most later cryptocurrencies, has great potential beyond Bitcoin or even the more recent craze of non-fungible tokens (NFTs), where art and other digital collectibles are being snapped up for huge amounts of money. In particular, many observers believe blockchain, in conjunction with smart contracts, can revolutionize business-to-business interactions as no human intermediary could.

Smart Contracts Are Key
The International Organization for Standardization (ISO) defines a smart contract as a “computer program stored in a DLT system wherein the outcome of any execution of the program is recorded on the distributed ledger,” noting “[a] smart contract can represent terms in a contract in law and create a legally enforceable obligation under the legislation of an applicable jurisdiction.”
The website supported by the Ethereum Foundation says that a smart contract is “a collection of code (its functions) and data (its state) that resides at a specific address on the … blockchain ... they have a balance and they can send transactions over the network … not controlled by a user … can define rules, like a regular contract, and automatically enforce them via the code.”

So, smart contracts are code, written onto an “immutable” blockchain, which can autonomously act as an enforcer between parties and make entries to the blockchain on their behalf.
What’s the Problem?

So, what’s the problem? As we know, looking back on 40 years of spreadsheets, we have never learned our lesson on taking programming seriously. I would like to focus on two major issues. Spreadsheets are still getting us into trouble, and the “immutable” nature of the blockchain means fixing errors isn’t going to be as easy as it is with spreadsheets.

1983-2021: Spreadsheets are still getting us into trouble
Spreadsheets brought a lot of power into the hands of managers, and financial professionals led the way with spreadsheets and PCs 40 years ago. But, despite great guidance and frameworks for evaluating the risks and concerns, we still get them wrong.

Lotus 1-2-3 was released in January 1983. I was there. The partner asked for a financial projection, and the staff person created one. “Things are looking good,” the partner said. “Add a new line for management bonuses of $100k each month.” The staff person added the new line, and the partner was pleased. “Make sure this is right.” I reviewed the spreadsheet and found the staff person had not extended the summation formula to include the new bonuses. Of course, it looked great.

We are far past the 1-2-3 days, and Microsoft builds in many checks into Excel to look for things like added lines that aren’t included in the summations. Yet we hear about major problems related to spreadsheets all the time. The Institute of Chartered Accountants of England and Wales (ICAEW) has an Excel Community, which has developed materials and methodologies such as “Twenty Principles for Good Spreadsheet Practice,” “Spreadsheet Competency Framework” and the “Financial Modelling Code.” They recently issued a “Call for comments – How to review a spreadsheet.” And they recently cited an October 2020 PR failure as a Public Health England’s spreadsheet “error could have resulted in 125,000 additional infections and at least 1,500 additional deaths.”

This despite many calling for the community to understand how the power the spreadsheet brought to users comes at a cost of the loss of formality and rigor. Professor Ray Panko of the Shidler College of Business has been calling attention to the risks for a quarter of a century. Nevertheless, the concentration of issues related to human error of the 1980s has largely gone unheeded.

605 BC-2021: Laws are still getting us into trouble
It is more than just the errors you might find in a spreadsheet that is the problem here. Smart contracts are, by design, implemented within blockchains and, therefore, inherit many of the blockchain's properties: As far as a blockchain is immutable, smart contracts can never be revised or changed.

Generally, law can be changed. Perhaps you’ve seen the highly parodied 1976 video from the television show “Schoolhouse Rock!” on how a bill becomes law in the US. But there is one famous story of laws that cannot be changed.

In the Old Testament book of Daniel, faithful young man Daniel has risen to a place of high position, as King Darius knew he could trust Daniel’s stewardship; King Darius would have made him responsible for his entire realm. Others were jealous, but finding no way to accuse Daniel of wrongdoing, they tricked the king into making a decree to catch Daniel in his devotion to God. The rivals forced Darius to punish Daniel, noting that, once the King has made a law, it cannot be changed. Daniel’s well-known time in the lion’s den was the outcome.

Immutable laws created by people like us seem to be a very bad thing. I have been unable to find proof that it is, or was, illegal to eat ice cream on Sunday on Bank Street in Ottawa, and the restriction against whistling in Petrolia, Ontario is only from 11 p.m. and 7 a.m. and when used for selling or advertising purposes, but there are many other outdated laws on the books. Why put something in motion that can never be stopped – not by agreement of the parties involved, nor the law, nor anyone else?

Need To Collaborate
The financial professional community needs to collaborate to assess what a blockchain-enabled future
can look like, and to consider the pitfalls, hurdles and barriers, both over the short and long term.

During a recent call with the New York State Society of CPAs’ (NYSSCPA) Digital Assets Committee, we had a fascinating discussion. It makes me think about our role as financial professionals and success in communicating the value of things. Mind you, in today’s highly speculative investment environment, where qualitative and quantitative information and related disclosures have – I hope temporarily – given way to the pump-and-dump (or pump-and-hold) mindset that turns a parody (Shiba Inu, or SHIB) of a parody (Dogecoin, or DOGE) into a 5 billion USD asset (while DOGE is 50 billion USD market cap at the moment), perhaps the fine distinctions I will discuss don’t matter as much.

Have you heard about Discord, Telegram, Airtable or Slack? Have you been asked to fill out a Doodle? Are you part of a cross-organizational effort with a shared information base where none of the work seems to be taking place in the official shared information base? This column on informal collaboration system may be useful to you.

Some people say that blockchain is to money what HTML (HyperText Markup Language) is to information and XML (Extensible Markup Language) is to data. If so, then financial professionals potentially have a greater responsibility to understanding and overseeing blockchain efforts than they did with the investor relations page and to their XBRL filings.

Do you keep your keys in your wallet? Few people carry house, business or car keys in the wallet carried in their pocket or purse, unless the “key” is a key card. But when we are discussing Bitcoin and its friends, that is precisely what is in your wallet. As financial professionals, understanding this emerging world of cryptographic wallets and keys will become increasingly important, as the value represented by amounts or goods controlled by those addresses become more mainstream and only accessible with those keys, with limited backup and no backdoor.