33 minute read
How NFTS are Powering the Metaverse
By Matt Hawkins, Founder and CEO of Cudo Ventures
Metaverse, the next frontier in social connections, has captured the tech industry’s imagination with a promise of a futuristic vision. Ever since Facebook announced that the platform’s future would be in the metaverse, companies are clamouring to figure out how they can skew their businesses to align with this burgeoning space.
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Virtual worlds have been around for a couple of years, but Facebook, Microsoft, and Nvidia joining the metaverse bandwagon injected renewed interest in this area.
Pegged as the next-generation way that people will interact online, there isn’t a single way to define the metaverse. Instead, it is an embodied internet, a hybrid between the physical and digital world. This shared 3D environment lets people join with their avatars and shapes how the virtual “reality” looks.
Transferability and centralisation issues
While many virtual worlds exist online, users currently cannot travel between them. However, the future metaverse could solve this problem, letting users navigate a single, seamless entity. In that sense, the true metaverse is a long way from actualising, but these platforms could allow users to transfer the NFTs they buy or own between platforms.
So isn’t that how actual ownership should work in the metaverse? Ultimately, the future metaverse will allow unparalleled interoperability of digital assets and data across different virtual worlds.
Additionally, the metaverse expands the Web 3.0 concept, the antithesis of the current state of the Internet, crippled by centralisation and data ownership issues. Companies like Facebook, Google, Amazon own the information users share on their centralized networks, leaving the everyday user with no absolute
ownership or control of their accounts. However, at its core, the metaverse will challenge that by establishing decentralisation and giving users true sovereignty over their privacy and data.
Riding the NFT wave
NFTs will play a crucial role in driving purpose, commercial activity, and delivering utility in the evolving metaverse. In addition, NFT ownership could serve as a gateway to onboard millions of users into the metaverse. For instance, Dapper Lab’s NFT token marketplace, a leader in digital sports collectables, witnessed $500m in sales in April and around 150,000 to 250,000 daily logins in May. Simply put, adding the NFT component to the metaverse allows individuals to participate and define the experiences in these virtual spaces.
Seeing this potential, many have rushed to capitalise on the intersection between the metaverse and NFTs. For example, Dolce & Gabbana rolled out a collection of virtual clothing for digital avatars in the metaverse. Elsewhere, NFTs have had many use cases like utility tokens for exclusive concerts, display at virtual galleries, real estate investments, virtual sporting competition, among others.
Morgan Stanley forecasts that the digital demand for fashion and luxury brands, fuelled by NFTs and social gaming in the metaverse, is expected to reach $50 billion by 2030. Little wonder then that we will witness huge conglomerates shape the metaverse in innovative ways by crafting worlds involving gaming, fashion, entertainment, and social experiences in the coming days. But is this the direction we want to take?
A better way forward
It is difficult to imagine the metaverse without cryptocurrency and its underlying blockchain technology. Concepts such as transparent and traceable transactions, an open, interoperable network to ex-
change virtual assets, and storing virtual assets via a permissionless, trustless, verifiable ledger are all fundamental.
However, interoperability could emerge as a challenge even as NFTs create the foundations for the emerging metaverse. As tech companies build the infrastructure, solutions should keep the affordability of minting and transfer of NFTs in mind, making it accessible for the artist community. Further, it must facilitate frictionless integration with marketplaces and other custom smart contracts, allowing easy transfer of assets. Lastly, it’s crucial to embrace an environmentally sustainable way to ensure a positive lasting impact of NFTs in the metaverse.
While, undoubtedly, blockchain provides much promise to the metaverse, some limitations remain. For instance, scalability and our ever-increasing need for computing which, although available, is wastefully underutilised. There are two unresolved problems, however. First, some layer one and two technologies are working to alleviate slow, expensive transactions to solve scalability but are far from perfect. Second, centralised offerings can fuel the computing demand but are structurally vulnerable to mass outages and ideologically conflicted with Web 3.0.
Decentralised computing could be a sustainable solution to harness the underutilised capacity of inactive business and personal devices globally. The future is an open-source, permissionless blockchain ecosystem that allows developers to build and deploy smart contracts and DApps, relying on decentralised computing to scale.
As the influential corporations control the centralised real world, it will be refreshing to be part of a virtual universe with no central authority, no surveillance, no data theft, but community-driven governance. Imagine a parallel world where NFTs will be used to authenticate ownership over digital assets with an opportunity to monetise virtual creations in the metaverse. From not owning anything, individuals could become stakeholders in the NFT-powered metaverse of the future.
DEFI STAKING REWARDS
SETTING UP A STAKING PLATFORM
By Symmetric.finance
Staking has become known as a method of earning relatively high yield payouts in exchange for locking up ones crypto tokens. Staking is often confused with yield farming- another DeFi mechanism whereby users earn rewards in exchange for locking up their crypto. With yield farming, the sole purpose of sending ones crypto to a contract is for the potential profits. With staking, the primary purpose for the platforms offering staking, is to secure their blockchain network. For users, staking offers the chance to be part of the governance of a given platform and provides the chance to thus vote on key issues and updates affecting the network, as well as the rewards earned. Staking, in this sense, is a more environmentally friendly- as well as economically viable and lower risk method of securing a blockchain network as an alternative to mining.
Staking can benefit both the user- through earning rewards – as well as the platform – by offering an additional way of securing a blockchain network without using any of its own resources.
Blockchain Platforms that support decentralised finance – DeFi- are growing fast. Many have raised large amounts of money, either several years ago, through an Initial Coin Offering (ICO) or more recently. Many of these, thanks to APR Earn Deposite Fee Harvest Delay LP Type
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shrewd investments of that raise, now have far more resources than they initially raised. This could be either from having successfully held onto the money they raised in crypto, or from having invested it into other cryptocurrencies and watched the value rise through the last market cycles. For several others, their native token, through a combination of having a good product, skilled marketing, good timing and luck, has shot up exponentially, leaving some of these platforms with billions of dollars and demand to grow their platform security and userbase.
Such DeFi platforms wishing to grow their ecosystems now have the money to invest in DeFi projects willing to build on their platforms, to grow their userbase, as well as giving grants and funds to these projects to offer as staking rewards to bring more users – and network security- to their platforms.
Staking offers DeFi projects a way to win over new potential users. Platforms such as wallets and exchanges might use staking rewards to grow their user bases and attract new customers- as well as to bring in loyal users who will stay with the platform out of loyalty for the long term, either from their competitors or from the vast majority of crypto and even non crypto users who are just starting to look at defi.
Staking doesn’t require any additional or complex equipment, and is arguably a way to bring crypto – and DeFi – increasingly to the mainstream. Not everyone wants to deal with the risk- and stress- of volatile crypto markets, and those who see DeFi as a long term game might be happier trusting their crypto to a platform and earning regular interest payouts than watch the markets or worry about the volatility.
For those who want to hold onto a given cryptocurrency anyhow, HODL, in crypto terms, staking offers a good alternative to just holding that cryptocurrency in a wallet or on an exchange and hoping for a price increase which may or may not come. With staking, at least the holder gets regular rewards at an annual interest rate until they can withdraw the coins in full, depending on the length of the lockup period. On the downside, if that cryptocurrency drops in value, it’s locked up, so users can’t just cash out and sell. That risk shouldn’t be understated. The volatility of the crypto markets is such that a token might well crash whilst it’s locked up, and token holders then can’t just sell if they see or expect this to happen.
For stakers, there is always a risk that the network deems your transaction to be illegal or invalid, and then you might lose all or a big chunk of your stake, like a deposit. This could be due to not having kept up to date with the latest terms or developments, for example. If a network does deem your transaction to be valid, there’s not really generally much you can do. Some DeFi platforms go FARMS out of their way to work with HOME their users and play nicely, but not all do.
TRADE V1
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For stakers, whilst yes there is the benefit of high potential yield rewards, the risks are worth spelling out. There is the practicality that their crypto assets will then be locked up for longer, making them illiquid, which isn’t risk free in a space that a) is known for bad actors however good the intentions (and skill) of the good projects and b) is evolving so constantly and so rapidly that users might feel their resources are better allocated elsewhere. There is also the risk of losing their entire stake for perhaps allowing an illegal transaction to be validated. For many, the high potential passive rewards outweigh the risks.
Platforms, by offering staking, get a way to attract and reward loyal users who will tend to stay on the platform perhaps longer than they otherwise might. Staking will attract those who not only are motivated by the rewards but also who are willing to lock up their assets for a longer time on a platform they support. Most importantly for the platform, staking users also benefit the platform in other ways, such as adding security and validation to their platform at no environmental or economic cost to the platform. Stakers use their computing power to validate transactions, which can be set by predetermined rules governed by smart contracts. Stakers agree to validate only valid, legal transactions, for which they earn rewards. If stakers were to validate illegal transactions, they may lose their entire stake, so largely will be tempted to adhere to rules of the platform. Staking arguably also adds to a project’s community and gives a project many loyal followers.
Staking is more environmentally friendly than other methods such as proof of work and is fast getting more uptake within the community, especially as the safety and user experience of platforms improves.
Investors don’t need to stake alone. DeFi platforms will now offer staking pools. These allow investors to pool together their crypto which collectively used to increase chance of getting rewards. This can also be an easier, more passive way to get started and can allow for smaller values needed to get started.
DEFI AND CRYPTO 101
AN INTRO GUIDE TO BITCOIN AND DECENTRALISED FINANCE
By Brian Sanya Mondoh, Esq.
Decentralised finance (‘DeFi’) is a broad term for financial services that build on top of the decentralised foundations of blockchain technology. DeFi is a global, open alternative to every financial service used today; i.e. from savings, loans, trading, insurance and more. DeFi protocols use a non-custodial design, meaning assets issued or managed on DeFi platforms theoretically cannot be moved or expropriated unilaterally by parties other than the account owners. With legacy banking, all financial services are controlled by a central party who acts as a middleman between the sender and the receiver of funds.
Bitcoin Origins
Bitcoin in many ways can be seen as the first DeFi application; it enabled digital cash payments without needing to rely on costly third parties and prevented the double spending problem. Bitcoin arose due to severe economic pressures and a desire to regain control and ownership at the onset of the global financial crisis in 2008.
Bitcoin is based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for an intermediary. Bitcoin’s protocol encompasses a distributed timestamp server to generate computational proof of the chronological order of transactions. This way, the protocol remains secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes.
The accumulated “Proof-of-Work” of the whole
network acts as a signal that the miners, who are highly invested parties, have come to agreement as a means to determine the validity of any given block or transaction.
The steady addition of a constant amount of new coins is analogous to gold miners expending resources to add gold to circulation. In Bitcoin’s case, it is CPU time and electricity that is expended. Bitcoin is an open source protocol, its design is public and no one has the authority to change its rules of governance except through a vote or a fork.
There is a theoretical risk in the Bitcoin protocol of a so-called ‘51% attack’, meaning that a single miner–or a group of collaborating miners–might capture an absolute majority of the network’s computing power which could then be used to manipulate transactions.
Smart Contracts
In DeFi, a smart contract replaces the financial institution in the transaction. Smart contracts are self-executing pieces of code on a blockchain that execute business logic when predetermined conditions are met. Smart contracts work by following simple “if/when…then…” statements that are written into code on a blockchain. A smart contract cannot be altered once it is deployed – it will always run as programmed, however, in practice developers often do maintain the protocols with upgrades or bug fixes.
In 2015, Ethereum debuted as the first smart contract-enabled
blockchain. Today, Ethereum dominates as the protocol of choice for providing decentralised finance applications (DApps). Ethereum leverages the same principles of 'digital trust' and governance as Bitcoin and applies them to smart contracts.
Although Bitcoin has always possessed smart contract capability, it has never been utilized to its full potential due to the problems associated with the scaling of transactions. With Bitcoin’s November 2021 Taproot update, smart contracts will become more efficient on the Bitcoin blockchain and this will
definitely take a huge chunk out of Ethereum’s market share.
Ethereum’s native currency ETH commands the most funds in terms of Total value Locked (TVL) for different blockchain protocols in DeFi with $175.12 billion i.e. 65.87% of the entire DeFi. (At the time of writing - 29 November 2021)
Transparency -vs- Privacy
The three main properties of blockchains and other Distributed Ledger Technologies (DLTs) are transparency, immutability and decentralisation. Blockchain makes data open/transparent in a way that has not existed in financial systems, which is why many argue that blockchain could be used as the new standard for transparency.
With the Bitcoin protocol, all transactions are public, traceable and permanently stored in the network, which means anyone can see the balance and transactions of any Bitcoin address despite keeping public keys anonymous.
Bitcoin’s pseudonymous nature therefore provides the ultimate paper trail for law enforcement agencies, tax authorities and compliance professionals. This plainly suggests that Bitcoin is a terrible means to conduct illegal activity because the blockchain evidence trail is permanent. However, there is a whole set of cryptocurrency blockchains focusing on being anonymous like Monero and Zcash amongst others.
Although blockchain promises increased transparency and trust amongst parties, it may be incompatible with national data protection and privacy rules. The GDPR for instance enshrines various data protection rights including; a right to rectification, a right to erasure (“right to be forgotten”) and a right to object to the processing of personal data etc. The issue with blockchain is the absence of a central database. Consequently, decentralised nodes cannot respond to tasks the GDPR requires of centralised agents in their capacity as data controllers.
In legacy banking a level of privacy is maintained by limiting access to information to the parties involved and the trusted third party. Banks have an obligation to ensure that information relating to processing of personal data and the storage period are communicated to the data subjects (clients) prior to the start of processing, in fulfilment of information obligations.
Circumventing the Privacy hurdle in Bitcoin transactions
With Bitcoin, a network participant can ensure personal data privacy by;
I. using a new Bitcoin address each time they receive a new payment
II. Iusing clustered or multiple wallets for different purposes
III. not publishing a Bitcoin address and any transaction information on websites or social media networks
IV. hiding one’s computer's Internet Protocol (IP) address using VPNs or anonymizers such as
The Onion Router (Tor), the Invisible Internet
Project (I2P) and other anonymizing software or anonymity enhancements
Mixers’ or ‘tumblers’, could also be used to break up the paper trail by exchanging one set of bitcoins for another with different addresses and transaction histories. Although mixers/tumblers can break traceability for small amounts, it becomes increas-
ingly difficult to do the same for larger transactions. Mixers/Tumblers also require you to trust the individuals running them not to lose or steal your funds and not to keep a log of your requests.
Enhanced Privacy - Taproot 2021
Bitcoin’s Taproot upgrade aims to improve the privacy and efficiency of its network. Taproot only exposes the details of the executed transaction while also obscuring some private transaction information. Those auditing the Bitcoin chain would be unable to view unexecuted transaction conditions or outcomes, which may have contained sensitive private information such as what type of wallet was used. Committing less data also creates space in each block for more transactions, which should reduce fees and increase transaction throughput.
Privacy -vs- Anti-Money Laundering (AML)/Terror Financing (TF) Regulation
Financial Action Task Force (FATF) guidelines indicate that a lack of customer and counterparty identification is especially concerning in the context of cross-border Virtual Asset (VA) transactions. Although DeFi transactions are generally transparent and traceable, new privacy-enhancing protocols and/ or tools such as mixers/tumblers (discussed above) and Anonymity-Enhanced Cryptocurrencies (AEC) may create additional regulatory challenges.
The potential for increased anonymity or obfuscation undermines a Virtual Asset Service Provider’s
(VASP) ability to know its customers and implement effective Customer Due Diligence (CDD) and other AML/FT measures. Jurisdictions under FATFs purview should be aware of the intersection and potential impact AML/FT requirements have on other regulatory requirements and policy areas, such as data protection and privacy, financial inclusion, derisking, consumer and investor protection and financial innovation. Author: Brian Sanya Mondoh, Esq
Barrister, England and Wales (NP) and Attorney at Law, Trinidad and Tobago
Titan Chambers, 19 Dundonald Street, Port of Spain
Co-Founder: BLOCK6TY and NXTDIMEN$ION - ‘Empowering Women and Children in Tech’
Disclaimer: The information provided on this opinion does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this opinion are for general informational purposes only. Information on this opinion may not constitute the most up-to-date legal or other information. Readers of this opinion should contact their Barrister/Attorney to obtain advice with respect to any particular legal matter.
By Peter Johnson
T DON
It’s easy to get excited by crypto, with many following the latest crypto crazes, moving from one cryptocurrency to the next, trying to jump on the next new hot coin, never thinking of what the tax implications might be of what they are doing until it is too late and the taxman comes calling. This can be particularly dangerous in a bull market – as we find
ourselves in today. Many crypto traders and investors don’t realize that when they move from one cryptocurrency to the next, they are creating taxable transactions – they have sold one cryptocurrency to buy another. It is that sell transaction that the tax authorities are interested in.
The tax authorities view the sale of the first cryptocurrency as a taxable event and they want to know how much the trader or in-
FALL FALL FALL FALL
INTO A CRYPTO TRAP
vestor paid for that asset when they bought it. In a bull market, the chances are that the trader or investor paid a lot less for the coin or token then they sold it for – which means they made money. The taxman wants his share – and sometimes that’s a large share. The user may have actually just created a tax liability without realizing it, and more importantly, without having allocated any fiat currency (BP) to pay for that tax liability. And don’t forget – you can’t pay taxes with crypto yet. The new crypto that was bought – because it is a bull market – has been purchased at a relatively high price – perhaps the all time high. All this is fine and good as long the market stays high.
The problem is when we move into the next tax year. There might now be a significant tax liability in the previous year from selling our first coin – but taxes aren’t due to be filed and paid until 9 months later. The tax year ends on April 6, but we have up to January 31st of the following year to file and pay our taxes. A lot can happen in 9 months, and if it’s crypto, with massive bull runs, there can also be huge corrections – just look at a chart for BTC.
By the time that tax bill comes due – the market might have dropped and the new crypto we are holding, perhaps what we thought we would use to pay our crypto taxes (if we thought about taxes at all) may now be worth only a fraction of what it was worth when we bought it. We can still
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sell it – but perhaps it’s at a new recent low and the worst time to sell – and it may not even be close to enough to pay our tax bill. Even though we have losses in the current year – we can’t use those losses to offset our taxable gains for the previous year. We can end up paying far more in taxes than we earned in Crypto. There are countless nightmare stories of traders suffering real financial hardships from failing to understand that basic truth about crypto trading - that taxes are due whether we have the funds or not. Never paying attention to the tax implications of moving from coin to coin can put us in a crypto tax trap.
But what can we do about this – other than just stop trading crypto – or not moving our holdings from one coin to another? Not everyone might want to do that!
So then what? The first thing we should do is be aware of the tax consequences of every trade we undertake before we make the trade. This can sound difficult and intimidating – but there are portfolio tracking tools available with tax optimization features that tell us where all of our coins are located, what was paid for them, and how much profit or loss is imbedded in each coin no matter how many times we have moved it or in what wallet it is held. These tools can help say what the tax implications are of any trade we make before a trade is made. These are tasks that even a professional crypto tax preparer, if we can even find or afford one, will have difficulty helping us with.
Before we execute any trade, we also should know the answers to each of these questions. Will the trade cause a tax liability? In a worst-case scenario, will we have the funds to pay those taxes? If not, where will we get those funds when taxes are due? When will
the taxes be due? Will the trade create a
loss that we can offset against other gains? Should we set aside some fiat currency to pay for the taxes before the market has a chance to move against us? Can we delay our trade to a new tax year – so that we can use any losses occurring in that tax year to offset our gains? Should we trade a different coin with a better tax outcome? Should
we donate certain coins to a worthy cause instead if selling them? What is our tax strategy anyway and how will we implement it?
This is where strict monitoring of positions and trades is critical. A portfolio management system that tracks the gains and losses of each coin is needed – regardless of where we transfer it to, in which wallet it is held, or on which exchange it is traded. This kind of information can help users develop a tax trading strategy that can prevent headaches, lower stress, and save money.
About the author.
Peter Johnson is Head of Business Development at Accointing. Peter has years of experience working in Fintech, professional trading, business consulting, technology, business development, accounting and taxes.
AVAILABLE
FROM ALL GOOD BOOK SELLERS AND ON AMAZON
The buzzword on Wall Street, Decentralized Finance, or ‘DeFi’, refers to the new financial structured products built for blockchain-based digital assets. Anyone with assets such as Ether (native to the Ethereum blockchain; market capitalization ~$520bn) can unlock a range of platforms to trade and earn high yields on their holdings. From decentralized borrowing and lending protocols to automated market makers and numerous staking opportunities, the DeFi ecosystem is unfurling exponentially. Over nine hundred projects have emerged in the decentralized financial ecosystem over the past few years (see Electric Capital’s non-exhaustive list) with new protocols launching and raising funds on a weekly basis. There is currently over $100bn of digital asset value locked in DeFi today and according to Pitchbook, over $17bn of VC funds have been invested in crypto solutions this year alone. Understandably, the ecosystem growth and yields have turned a lot of heads. So how can newcomers participate?
WALL St
By Max Luck-Hille, Alkemi Network
How can digital asset adoption lead to DeFi?
The first step to accessing smart contract-based DeFi protocols is holding the associated native underlying blockchain tokens, such as $ETH, $SOL or $AVAX. Until recently, retail customers were the main protagonists driving digital asset adoption and buying tokens. However, the market reached a new level of maturity when the “institutional investors arrived in 2020”, contributing to a total market capitalization of around $2 trillion. MicroStrategy and Tesla were amongst the first corporations to allocate treasury balances to digital assets with Blackrock and hedge funds such as Paul Tudor Jones joining the fray. Customer demand was so high America’s oldest bank, BNY Mellon, formed a Digital Asset unit to issue and handle crypto. So what finally prompted institutional investment after years of dismissing digital assets and why are the structured products of decentralized finance trending now? Exorbitant alpha, not only from the underlying blockchain digital assets but also from the emerging DeFi protocols is a big response to the ‘why now?’. With macro tailwinds against a daunting economic backdrop, the emerging digital asset ecosystem is compelling. However, the bigger picture comes into focus when considering the characteristics of the current established financial system, its operational inefficiencies and why this natively digital asset class running on digital rails is fast emerging as the capital markets disruptor.
Addressing the shortcomings of legacy financial infrastructure
Why Decentralized Finance offers a paradigm shift
By Max Luck-Hille, Alkemi Network
At the centre of the economic world, today is a financial system that enables the movement of global currencies in exchange for goods and services. The current legacy paradigm (‘TradFi’ or ‘CeFi’) revolves around centralized databases and slow, siloed banking infrastructure (resulting in a lack of transparency); incompatible software, countless middlemen and external checklists, and other friction-causing services. Financial markets take days to settle, SWIFT payments are slow and costly and can take up to a week to arrive. What’s more, 31% of the global population are ‘unbanked’ [1.7 billion people in 2017, according to the 2018 World Bank Report] as they don’t meet the qualifying criteria to set up a bank account. This is all in the name of ‘protecting consumers’ yet when users deposit funds into a traditional financial bank account, they have no idea to whom their funds are being lent. One of the conclusions of the 2008
market crash was that record-keeping is imperative in a world of tranched financial structured products. On top of this, the centralized financial system is composed of central banks that can choose to print money when they see fit. The key takeaway here: centralized financial infrastructure is antiquated, opaque, and difficult to update without a complete overhaul. Crucially, centralized financial institutions are aware that
the outdated systems are under threat and overdue a shakeup.
In stark contrast, blockchain-based financial technology known as Decentralized Finance, or ‘DeFi’ for short, is expanding at an exponential rate. Since the ‘Money-Over-IP’ seed was first planted by Satoshi Nakamoto in the 2008 Bitcoin white paper, numerous blockchain technologies have emerged. The principles and underlying tech continue to be refined at each iteration, with Vitalik Buterin adapting the Bitcoin code to incorporate programmability and utility via a ‘virtual computer’ in 2015. Whilst Ethereum was the first notable mover in terms of a
Turing-complete solution, other chains with competitive scaling attributes and cross-chain interoperability are now vying for the limelight. Avalanche, Solana and Polkadot are also contributing to the new era of autonomous operation, supporting self-executing smart contracts deployed to enable the frictionless, almost instant, transparent, efficient and cooperative flow of digital assets. However, with Ethereum still offering the largest market capitalization (more resilient to hacks whilst supporting institution-grade transaction sizes) and the longest track record of stability (secure) it is understandable why Raoul Pal (founder of GMI) and much of ‘The Street’ now see Ethereum as the inevitable institution-grade clearing and settlement layer for decentralized finance.
If the potential for DeFi is so vast, why aren’t more institutions participating?
There are three key friction points that have prevented corporations from allocating their digital assets to decentralized finance. Compliant participation has been the primary concern, with KYC/AML verification practices at odds with the trustless, open nature of DeFi. The connectivity issues have also hindered access, with Web3 infrastructure and wallets creating connectivity issues for traditional financial institutions. Finally, the levels of liquidity in the space haven’t met institutional requirements until very recently. Some of the DeFi incumbents within the Web3 stack have adapted their offerings to include institution-grade solutions, with Aave’s ‘Arc’ and Compound’s ‘Treasury’ recently coming to market. Alkemi Network, a launching challenger project, was purpose-built by the team for Institutional DeFi. Alkemi
Earn, their professional DeFi borrowing and lending protocol, was tailored specifically to the requirements of financial institutions, from the ground up. By using Alkemi Network, institutions can solve the key friction points and participate in decentralized finance, beginning their migration from legacy financial systems to the new, natively-digital infrastructure. With recent moves by the SEC, the demand for KYC/AML layers is growing. Market commentators perceive the next phase of decentralized financial growth to be led by centralized institutions integrating an ‘under-thehood’ compliant DeFi infrastructure, such as Alkemi Network.
Whether reading through Federal Reserve reports or tuning-in to the conversations on mainstream financial media outlets, the general conclusion is that DeFi is just getting started and is anticipated to grow and evolve rapidly. Centralized institutions will be obliged to update their fundamental processes or risk being superseded by challenger banks integrating DeFi protocol utility. “We are so early” is one of the most common phrases heard at crypto conferences. As long as the innovation can continue, as long as digital asset protocols are permitted to continue to forge an educative and cooperative path for institutions and the lawmakers of tomorrow, the future of digital finance will continue to be an exciting prospect.
Innovating with Blockchain could save your business tax – R&D Tax Credits Explained
By Shaun Bartle, Associate Director Finch & Associates
>>>> Photo: Shaun Bartle The last few years has seen huge adoption of Blockchain being integrated across almost every industry, from real estate to finance to logistics to retail. There has also been an increase in companies creating their own native cryptocurrency to enhance their business, such as a token that is tracked to the supply chain of jewellery, allowing the end user to know exactly where the material has been sourced from.
So, what does this have to do with saving your business on tax? The UK Governments Research & Development Tax Credit Scheme! This generous tax -saving scheme allows companies who are innovating to reduce their corporation tax burden and potentially receive a game-changing cash injection to the business.
The scheme does, on the face of it, sound too good to be true, but I can assure you that is not the case. The scheme is a Government incentive that rewards UK companies for pushing the boundaries of innovation and help to fuel growth in the UK, making a claim can potentially provide a valuable cash injection into the business and reduce your corporation tax bill.
To qualify, a business must be seeking an advance in science or technology, and when trying to achieve this, encounters scientific or technological uncertainties that are not readily deducible by an expert in that given field.
A loss-making company which qualifies for the SME scheme can potentially recoup up to 33p in every £1 spent on qualifying R&D activity (more on this later), whilst a profit-making company profit-making company can potentially reclaim up to 26p in every £1 spent.
How does this relate to Blockchain?
So what is the benefit of doing an R&D claim?
The core value that underpins Blockchain is that it acts as a consensus mechanism that enables a database to be directly shared without a central administrator, essentially cutting out the middle man. Not only this, Blockchain offers businesses advantages such as trust, transparency, efficiency, reduced transaction costs but with faster transaction settlements, and with the pace of technology moving faster than ever before, it was inevitable that technology such as Blockchain would begin to become “the next big thing”, no doubt being helped by the crypto-craze we’ve been encountering with its various highs since 2017.
The number of companies exploring the use of Blockchain and actually integrating it into their day-to-day operations has significantly increased.
This has led to higher volumes of R&D claims being made where companies are innovating with Blockchain.
Credit where it’s due!
SME’s can claim an additional 130% deduction of the qualifying expense incurred
Whether you are profit or loss making, you may still be eligible for the relief, with up to 33p in every £1 spent on qualifying R&D activity potentially being recovered.
A Tax Credit is an immediatsource of cash which you can reinvest in your R&D and continue to lead innovation. Potential Benefits
As an example, let’s assume a profit-making company qualifies for t he SME scheme and their Tax Advisor has identified £100,000 of qualifying R&D expenditure for the period. The potential benefit could be a tax refund or reduced tax liability of £24,700, broken down as follows:
£100,000 x 130% (enhancement rate) = £130,000 (known as your enhancement)
£130,000 x 19% (current Corporation Tax rate) = £24,700
Now let’s see what the potential benefit could be if that same company were a loss-maker instead:
£100,000 x 130% (enhancement rate) = £130,000
We then add this to the original expenditure:
£100,000 + £130,000 = £230,000 (known as your enhanced expenditure)
£230,000 x 14.5% = £33,350
The 14.5% is the known as the “surrender
rate”, as the business is essentially giving up their loss for an immediate cash injection instead.
The average claim made by an SME company in the 2016/17 tax year was £53,876. With benefits like this it’s easy to see why claiming R&D tax credits could help transform a business around!
What Costs Qualify as R&D?
The cost of staff directly involved in the R&D work.
Some Software & Consumable items.
65% of the cost of third parties who worked on the R&D projects.
Grants – You can still claim R&D tax relief if you have received a grant.
Blockchain Case Study
Real Estate
The increasing use of Distributed Ledger Technologies (‘DLT’) such as Blockchain to record real estate transactions has led to an increase in R&D claims for Property Investment companies.
The R&D is usually integrating an existing CRM system with the DLT. As the Intellectual Property vests with the business and is usually kept as a trade secret, the knowledge that is available in the public domain is scarcely limited.
This results in specialists creating and advancing a new integrated platform that is more efficient for the business.
To emphasise the impact that Blockchain is having in Real Estate, HM Land Registry themselves are currently exploring how Blockchain technology could be used to provide quicker and simpler services at Government level.
So what next?
If you are adopting Blockchain within your business and integrating it with your existing systems, or innovating via another method, you should contact your Accountant or Tax Advisor as soon as possible to discuss whether or not you qualify.
It’s important that you act sooner rather than later, as claims can only be made within the 24 months after your year-end.
Remember, this could help transform your business around, freeing up cash quickly to enable you to continue to innovate and further growth.
