'It is inevitable that crypto will be regulated'

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'It is inevitable that crypto will be regulated'

The metaverse encompasses our online identity, images, songs, online purchases, even the clothes we might want to purchase for our avatar.

It has the potential to serve as a verification tool for art work or designer clothes as it tracks every single step of the product for the duration of its lifetime.

But is it an investment? Daniel Gee, managing director of Pello Capital, and owner of gamings company Ludus, speaks to FTAdviser In Focus about the metaverse's investment potential and why it is more than likely that it will become part of our daily lives.

FTA: What exactly do we mean when we talk about the metaverse as an investor?

DG: Metaverse is really the the evolution from Web 2 to Web 3. It's become a bit of a broad umbrella to really signify any types of Web 3 technology. So the core concepts are really proof of ownership, proof of copyright, and actually owning your data.

So instead of just producing – Web 1 was in effect static, one-way communication; Web 2 was the next iteration with the things like social media, two-way integration across platforms – Web 3 is actually the ownership of that data and communication.

FTA: So it's a way of tracking and verifying people's data?

DG: Non-fungible tokens are in effect proof of ownership of content, and that content could be anything, it could be me taking a photo of myself now and minting that as an NFT. I get royalties to that.

We've just seen the first ever NFT gallery open in London, which was a couple of weeks ago in Spitalfields. And it's seen a huge amount of traction.Daniel Gee

And when you think about royalties in music, art, sports, it's really tough. It's been an issue for music labels for years and years. How can we really track, for example, streams of a song, views of a piece of art, sales of a piece of art, if it's not being done through a Christie's or Sotheby's, how do we log that?

NFTs have kind of solved that problem by giving a centralised solution, saying every time something happens it's logged, it sits within this piece of content.

So really, if you buy an NFT you aren't just buying a picture, you're buying the history that comes along with that picture.

FTA: How does an investor invest in the metaverse?

DG: There's lots of interesting ways we can invest. What we're seeing at the moment with cryptocurrency is a really condensed cycle of adoption. There are ETFs, there are huge banks buying plots of land in Decentraland. So it's kind of moving really, really quickly.

The piece that is missing is the education piece; talking to people about how you can get exposure, how you can maintain a level of safety that you will get with traditional assets. 

Hiro Capital just launched a metaverse fund in the UK. I think they raised £250mn. And that has a really broad mandate. So investors become invested in that.

FTA: These assets are risky. Is it even possible to assess the risk? 

DG: It's really individual to the person, and that's where regulation needs to go, actually empowering the user to make their own assessment of risk.

Whether we're investing in going and buying a shop on the High Street and setting up a business selling coffee, or buying Vodafone shares or buying Aetherium. We need to do our risk assessment on every single one of those.

The difference is, with buying a coffee shop we know about Swot (strengths, weaknesses, opportunities, and threats) analysis, we know about business metrics with Vodafone, we know about all these listed company metrics.

With crypto, it's still a little bit early stage, and we don't know how to really measure those metrics.

The metrics are there, it's possible to assess risk. Education is really the building block, we need to know what to do with those numbers.

FTA: Speaking about education, how does the process of exchanging digital money work?

DG: Let's look at Visa as an example. Visa is a network chain, so when you go into a shop and you give your debit card, they give you a Mars bar.

Visa is in effect doing a proof of stake to say 'okay in your bank account there is 99p', the merchant ends up transferring that money across. That's just one network processing.

I really would like to see a lot of brands turn around and go, 'You know, it's exciting. We don't know how we're going to work in it. But we're embracing it. We're open to it'.

Cryptocurrency is lots and lots of people becoming Visa or Mastercard. So they're using the community to prove these network transactions. And that might be an NFT, for example, changing hands, or someone buying bitcoin from another person, or someone registering their details on a Web-3-enabled website.

Nodes in effect will prove every single transaction. And there might be a kind of an infinite number of people that approves the transaction, it really depends on all the chains.

FTA: How is this process paid for? 

DG: The gas fee when you're transacting on cryptocurrency is that cost of processing. And that goes back into the chain of the people doing this proof of concept, it is super fractional.

The metrics are there, it's possible to assess risk. Education is really the building block, we need to know what to do with those numbers.

Some gas charges are really low. But you do get what you pay for. Some of them are quite unstable. Some aren't as quick as others, some don't work all the time.

With bitcoins, the gas is expensive, but they don't fall over very often. They're pretty reliable, pretty quick. And they've kind of worked their way to becoming the gold standard in that sector of the industry.

FTA: Is the idea of NFTs already being applied to the real world?

DG: Yes and no. We're seeing lots of mass adoption now for big brands; you see JPMorgan buying a virtual property in Decentraland, we're seeing Nike and Adidas starting to produce digital underclothing.

But what we're not seeing, which I would love to see, is actually a hybrid solution between digital and physical. 

So to the art world, it's a really easy translation. We've just seen the first ever NFT gallery open in London, which was a couple of weeks ago in Spitalfields. And it's seen a huge amount of traction.

So yes, it's really early stage. Big brands identify that it is a huge area of growth. But no one's quite sure.

FTA: What would you like them to do?

DG: I really would like to see a lot of brands turn around and go, 'You know, it's exciting. We don't know how we're going to work in it. But we're embracing it. We're open to it'.

FTA: Where do you see this space go in the next 10 years – into the mainstream, regulated?

DG: So I think with regulation, although a lot of people in crypto are scared of it, it will serve to actually cultivate innovation in the industry. I think it's ultimately inevitable.

And as you get more adoption, and if we want to see global adoption, regulation needs to sit there because consumers need to be protected. 

Security needs to be enhanced. And education needs to be really a kind of focus on that – educating people about the dangers of investing is just as important as regulating those investments.

We're starting to see some of the bigger banks and wealth managers offering it as a product to their customers, which is good.

What would be really nice is if we saw some transparent asset class agnostic platforms where everything co-existed side by side, in one nice wrapper, and you had your traditional investments, with your cryptos, with your Isas, and everything was in one really nice kind of interface.

But the question really is time, is it in six months, six years, is it in my lifetime? That really is dependent on people, politics, and culture. 

carmen.reichman@ft.com