AGEFI Luxembourg - Mai 2022

Mai 2022 47 AGEFI Luxembourg Informatique / Télécom By Corentin CHRISTOPHE, Initio (Square Group) O ver the course of 2021, the interest innon-fungible to- kens (NFTs) has skyrocke- ted, primarily following the sale by MikeWinckelmann - a digital ar- tist known as Beeple - of a $69mil- lion artwork in the formof anNFT. In 2022, thismassive interest still does not showany signs of slo- wing asOpenSea, the largest NFT marketplace, raised an additional $300 billion in a series C funding round at the beginning of this year, thereby bringing it to a total $13.3 billion valuation. Yet, despite a soa- ring interest in the topic, NFTs re- main largelymisunderstoodby many and two groups of people oftendistinguish themselves: those who consider themas the future of the digital world and thosewho consider themas yet another far- fetched invention. Yet, their use cases go far beyond fancy digital items, andmajor lending institu- tions are beginning to acknow- ledge that aswell. The Emergence of Non-Fungible Tokens Backin2014,AnilDashandKevinMcGoy envisioned a system that would enable digital artists to sell their works and take ownership of them to counter illegal sha- ring on streaming platforms. Indeed, as digital assets such as videos and images can be easily copied and largely distribu- ted, it is often challenging to determine whether the distributor is the legal owner oftheassetsold.Thetwoartistsresponded to this pain point by "minting" the first NFT-ever by relying on the blockchain technology,whichallowstostorearecord ofwho created the asset aswell as of each subsequent transaction. Inherent to the blockchain technology, such records reside in "digital ledgers" of thousands of computers across the interest, thereby making themextremely secure and relia- ble. Nowadays, most NFTs are created and traded using the Ethereumnetwork, as it provides a versatile platform which allows developers to implement smart contracts that allow physical people to legally owndigital assets. OptimizingYour Portfolio throughCollateralizedLoans Since the emergence of the very firstNFT, notonlydidtheconceptraisedtheinterest of many investors across the globe, but many companies also started heavily investing in them to capture a piece of the pie. For example, Facebook announ- ced its intention to build a metaverse - a digital world where people will be able to own, use, and expose digital artworks acquired from various companies and individual sellers. Yet, in the current state of things, NFTs remain solely used when playing specific games or visiting certain platforms, which makes them quite passive as part of an investor's portfolio. To improve that, NFT holders should be able to use their digital assets for other purposes. Since this limitationalso applies tophysi- calartworks,someinvestorsfoundawor- karound: taking out loans using their assets as collaterals. Hence, they are able to leverage on their assets which greatly improves their portfolio's efficiency. Yet, froma institutional investor's perspective (eg., banks), these loans represent extra risks that need to be tracked and mitiga- ted,rangingfromauthenticationissuesto aheightenedriskoftheftorloss.Similarly, a number of real-world techniques for evaluating traditional art-secured loans need to be reevaluated to consider provi- dingNFT-securedloansthatareattractive to both lenders and borrowers. Risk I -Authenticating theNFT Veryoften, traditional physical artworks' origins canbe tracedbackusing their cer- tificate of authenticity. While an NFT is by definition a unique crypto asset, it does not necessarily represent a unique artwork. Just as for real-world artworks, several copies of an NFT may be distri- buted. Another important aspect, yet often misunderstood, is that an NFT does not represent the artwork itself, but rather a smart contract that points towards it and which is stored in the blockchain. Hence, to evaluate the value of an NFT, one should be cautious that manyof themdonot include anyowner- ship interest nor transfer copyright on the underlyingwork. Some of themevenprohibit their display for commercial purposes. As a result, while the origin of anNFTmay be easily traced back, it is not necessarily the case oftheoriginalassetthatitrepresents.Last but not least, some NFT sellers impose licensing conditions such that a specific percentage must be paid in case of any futuresale.Forinstitutionallenders,these specificities need to be clearly analyzed as it may directly influence the valuation of thedigital asset, andhence theamount of the loan granted. Risk II - Reaching aReasonable Price For institutional lenders that provide col- lateralized loans, theexpectedvolatilityof the guaranteed assets is probably one of the most important factors. Yet, NFTs are farmore complex to evaluate thanmany other investment products since they are purely speculative. For example, a scarce NFTdevelopedbyanearlyadoptermay see its price skyrocketing as soon as the marketmaturesfollowingthelawofsup- ply and demand. For example, the block reported last year the story of an NFT holder who under- took a 3.5 ETH (Ethereum) NFT-secured loanbutcouldnotrepayit,whiletheNFT simultaneously surged to a $340,000 value over the duration of the loan - well above its original value. Hence, the value of NFTs remains quite artificial and intrinsically linked to their scarcity. There is thus an important need for experts in the field that combine both financial and technological knowledge to help institu- tional investors assessing the risks and opportunities offered by these solutions. Another point is that approaching insti- tutional lenders would offer borrowers the possibility to directly obtain fiat money. Yet, in case the borrower default, lenders will be left with an NFT that can only be sold using the cryptocurrency of the network on which it was created (mostlikelyEthereum),thereforemaking it intrinsically linked to the cryptocur- rency's value. In this regard, NFTs are a real challenge tovaluedue to theextreme volatility of the crypto environment. Hence, it is not only important for poten- tial lenders topredict thepotential future demand of the digital asset, but it is also extremely important to look at the stabi- lity of the cryptocurrency that was used to create the smart contract. Risk III - Ensuring a Security Interest in Case ofDefault In the banking sector, a security interest is the creditor's right to the debtor's pro- perty in the event the borrower fails to meet its loan repayment obligations. In the case of NFT-secured loans, the risk of seeing the asset disappearing is critical. Indeed, the rather "obscure" nature and lack of traceability of blockchain trans- actions wouldmake it difficult for a len- der to recover its due virtual asset in case of bad will from the borrower. For this reason, it is crucial to analyze the legal principles that couldbringmore serenity to institutional lenders. Yet, since the European Union currently lacks regulationregardingNFTs, the legal statusandregulatoryframeworksneedto beassessed individually for eachcountry. According to the international law firm CliffordChange, one of the possible solu- tionsinLuxembourgwouldbetoconsider NFTs as financial instruments, as it may meet the general definition provided by thecurrentregulation,andwouldthusfall under the European Directive MiFIDII. While this remains hypothetical, treating NFTs as financial instruments would allowtotransferNFTstoadedicatedsecu- ritiesaccount.Somelargebanks,including the Deustche Bank, already offer the pos- sibility to take out loans using securities account as collaterals, where the loan is then granted on the basis of the account's composition, both in terms of its overall valuation as well as the risk of the indivi- dual assets that compose it. Yet, in case of a sharp decrease of its value, additional guarantees may be asked after reevalua- tion. For NFT holders, these solutions would offer a major advantage as they could leverage on their virtual assets, hence increasing their possible returns whileretainingthechancetoseethevalue of their assets rising over time. Risk IV - Theft, loss, and scam Not so different from other artworks, NFTs are not exempt from theft, loss, or scam. While the smart contract resides in a secured blockchain environment, it is maintainedbytheplatformthatgenerated the NFT for the creator, and there have already been some reports of platforms mysteriouslydisappearing fromtheweb, as well as of heists on popular platforms. Another common scam regarding NFTs is "wash trading", which consists of crea- ting anNFT and buying it usingdifferent accounts to artificially inflate its value. To detectthese,anaccurateknowledgeofthe market as well as of the blockchain tech- nology is needed, and there will likely be an increasing need for cyber insurances thatprotectvirtualassetholders,including institutionallenders,incaseofsuchfrauds. Conclusion WhiletheinterestinNFTsisstillonasteep slope, chances are that NFT holders will attempt to optimize their portfolio in the future to avoid detaining assets that can- notbeusedtogeneratedirectreturns.One of the possible techniques to this endwill betotakeoutloansbyprovidingtheirvir- tual assets as guarantees, hoping to invest themoney borrowed in order to generate ahigherreturnthantheloan'sinterestrate. Yet, the growth of these kind of loanswill majorly be conditioned by institutional investors’ ability to transfer their existing knowledge and skills used for providing traditional art-secured loans, aswell as by the changes in legislation that will see the daylight in the next coming years. These will provide guidelines on how to treat NFTs, and will therefore determine how they will legally find their place in banks and investment companies. Yet, a major questionresides-Aretheyindeedamajor revolution in the financial arena, or are they another far-fetched invention? Taking out loans using NFTs as collaterals: utopia or reality? Abonnement aumensuel (journal + éditiondigitale) 1an(11numéros)=45€abonnementpourLuxembourgetBelgique-55€pourautrespays L’édition digitale du mensuel en ligne sur notre site Internet www.agefi.lu est accessible automatiquement aux souscripteurs de l’éditionpapier. NOM:....................................................................................................................................................................... ADRESSE:.............................................................................................................................................................. 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Abonnement aumensuel en ligne Sivouspréférezvousabonnerenligne,rendez-vousàlapage‘S’abonner’surnotresiteIn- ternet https://www.agefi.lu/Abonnements.aspx Abonnement à notre newsletter / Le Fax quotidien (5 jours/semaine, du lundi auvendredi) Recevezchaquejourlesinformationséconomiquesetfinancièresdansvotreboîteemail(envi- ron10pagesA4enPDF)ouconsulternosnewslettersenlignesurnotresite.Veuillezsélection- ner la durée d’abonnement souhaitée sur https://www.agefi.lu/Abonnements.aspx Abonnez-vous / Subscribe Les leçons de l’histoire et le pouvoir de l’innovation technologique Opinion - Par Pinaki DAS, Head of Thematic Research au sein deQuintet Private Bank I l y a 30 ans, le drapeau russe blanc, bleu et rouge était hissé à Moscou, marquant la finde l'Union soviétique. Àpeuprès à la même époque, l'informaticien an- glais TimBerners-Lee inventait le WorldWideWeb et lançait le tout premier siteweb. Aujourd'hui,nousreconnaissonstousl'im- pact de ce premier événement historique sur le conflit qui se déroule en Ukraine. D'innombrables commentateurs ont noté que le président russe Vladimir Poutine, un jeune officier duKGB en 1991, semble aumoins en partiemotivé par le désir de restaurer la place et la gloire passées de son pays. Mais ce second événement – la naissance de l'ère numérique – pourrait être tout aussi important, voire plus. La guerre enUkraine peut être envisagée comme le combat entre la dictature et la démocratie, le communisme et le capita- lisme, l'asservissement et la liberté. Cependant, à travers le prisme de l'his- toire, elle peut également être considérée commeunconflit entre l'ordreancienet le nouveau monde émergent : les tanks contrelatechnologie.LesforcesdePoutine attaquentl'Ukraineavecungrandnombre de véhicules blindés. Nous avons tous vu des images et des vidéos de ces énormes engins, souvent en flammes après avoir étédétruitspardesmissilesanticharspor- tatifs et, de plus en plus, par des drones téléguidés. Lebudgetannueldedéfensedel'Ukraine, qui s'élève à 5,5 milliards d'euros, repré- sente moins d'un dixième de celui de la Russie, selon l'Institut international de recherche sur la paix de Stockholm. C’est pourquoi certaines de ces armes défen- sives téléguidées sont achetées grâce au crowdfunding en ligne. En effet, le gou- vernement ukrainien a jusqu'à présent levé quelque 100 millions d'euros en bit- coins et autres crypto-monnaies, ce qui représente 60% de tous les dons privés. Cela va au-delà de l'écosystème financier numérique traditionnel vers la finance basée sur la blockchain. C’est là qu’on assiste littéralement à un combat entre les tanks et la technologie. L'Ukraine – dont le président, Volodymyr Zelensky, compte aujourd'hui près de 6 millions de follo- wers sur Twitter – exploite bien sûr aussi le pouvoir des médias sociaux. Qu'il s'agisse d'appeler à la résistance, de demanderde l'aideoudedocumenter en temps réel le coût humain du conflit, il s'agit de «la première guerre TikTok du monde», comme l'a récemment décrite Kyle Chayka dans leNewYorker. Sur ce champ de bataille, le bombarde- ment russe des tours de télévision afin d’empêcher le gouvernement ukrainien de coordonner ses forcespourrait s'avérer inutile. La résistance est en effet coordon- née par le haut débit et la téléphonie mobile, ainsi quepar le réseaudenanosa- tellites Starlink d'Elon Musk. Lorsque le président Zelensky s'est adressé au Congrès américain, il l'a fait depuis son iPad àKiev, sur Zoomvia Starlink. PourlesUkrainiens,cen'estprobablement pas surprenant. Jusqu'au début de la guerre, l'Ukraine était un hub informa- tique en pleine expansion. La technologie est l'une des principales exportations du pays,avecunecroissancedel'industriede 36%rienque l'année dernière. Un autre élément est également en jeu. L'Occident a réussi à isoler laRussie en la déconnectant largement du système financier «numérique» mondial, y com- prisSWIFT.Danslemonded'aujourd'hui, siunpaysn'estpasconnectéauxautres,il nepeut pas bénéficier de l'effet de réseau. Et même lorsque le prix du pétrole flambe, comme c'est le cas depuis février, le combustible fossile n'a pas la même valeur que les technologies ou propriété intellectuelle sous-jacentes. C'est pour- quoi, comme l'a dit le grand maître d'échecs russe Gary Kasparov lorsqu'il a plaidé en faveur de sanctions contre les oligarques,«lenerfdelaguerre,cenesont pas les tanksmais les banques.» Pour aller plus loin, nous pourrions dire que cette guerre pourrait finalement être gagnée par les applications et le code. Le temps nous le dira, bien sûr. Mais il est toujours utile de réfléchir aux leçons de l'histoire et de penser à l'avenir. L'un des héritages durables de la guerre en Ukraine, comme celui de la pandémie de Covid, pourrait être l'adoptionmondiale beaucoup plus importante de technolo- gies innovantes –que ce soit pour réduire les risques géopolitiques ou pour donner dupouvoir auxgens, pour faciliter ledia- logueetlacirculationdesinformationsou pour combattre l'injustice et aider à la reconstruction. Guerre en Ukraine: un combat tanks contre tech

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