On 23 December 2021, PwC Hong Kong announced that it had decided to acquire new land to do business. Though it may sound unsurprising for the Big Four firm – which already has 742 offices in 157 countries globally – the new piece of land they purchased didn’t exist in the real world: it was virtual land located in a three-dimensional virtual world, known as the metaverse.

The acquisition made PwC Hong Kong the first member of an internationally recognized professional services network to publicly enter The Sandbox, one of the largest metaverse platforms today. One definition of the metaverse is a virtual environment in which users can  – after creating or choosing an avatar – freely roam around, attend events, purchase items and property, and interact with other users’ avatars. Users access the world through a virtual reality (VR) headset or through computers or smartphones. It is, however, somewhat different from typical VR games that have existed before. People can buy and then “own” virtual assets within the metaverse. This is made possible today largely through owning what is known as a non-fungible token (NFT) of that digital asset (such as images, music, videos and virtual creations like virtual land). An NFT is a non-interchangeable unit of data stored on a digital ledger, known as a blockchain, that can be sold or traded. In essence, it gives a person the right to digital ownership.

PwC isn’t alone – companies and big banks also recognize the growing need to connect with customers and business partners through the metaverse, and prepare for a shift in interactions towards the digital world from physical branches. HSBC announced in March that it had also purchased virtual territory in The Sandbox, while JPMorgan Chase set up shop in Decentraland, another metaverse platform, in February. The hype has also led brands such as Adidas, Gucci and Samsung, and celebrities such as Paris Hilton and Snoop Dogg, to secure property in the metaverse. Space in these worlds come at a hefty price. Republic Realm, a company that develops real estate in the metaverse, purchased area in The Sandbox in November 2021 for US$4.3 million, the most expensive metaverse purchase to date, while an anonymous buyer forked out US$450,000 to own a spot next to hip-hop artist Snoop Dogg.

Despite being a new concept that is still developing in terms of its form and practical application, there is a rush to have a presence within the metaverse. This can be attributed to the sheer size and potential of the metaverse economy in the next 10 years. According to Metaverse and Money: Decrypting the Future, a report released last month by Citigroup Inc., the metaverse economy could be worth up to US$13 trillion by 2030, and boast as many as five billion users by then.

A new dimension of possibility

Interest in the metaverse has skyrocketed within the last two years. This is partly due to more reliance on virtual meetings as a result of the COVID-19 pandemic, says Bosco Lin CPA, Co-founder and Chief Executive Officer of DTTD, a crypto wallet and financial services platform for NFTs. “With people having to work from home, people have found new ways, such as Zoom calls, to do business and interact with others. But this obviously can’t replace in person interaction – so the metaverse fits in between,” he says. “The concept of owning of a virtual asset is also causing interest.”

The metaverse will add another perceptible dimension to current video calls and conferences, says Timothy Shen FCPA, Chairman of Safari Asia Limited, and a member of the Hong Kong Institute of CPAs’ Corporate Finance Committee. “The rise of video conferences, such as through Zoom, Google Meet or Microsoft Teams, are solutions for people to meet virtually. But these are still two-dimensional meetings,” he says. “In the metaverse, instead of having a phone or video call, people could use an avatar to meet. People could choose to be themselves or have different identities in a 3D world.”

Beyond offering a new way of communicating with family, friends or coworkers, the metaverse will resemble a “3D version” of the Internet, believes Tony Tong, Co-Chairman and Co-founder of the Hong Kong Blockchain Association. He says it will offer businesses a brand new way to market and sell their products or services. “In the next few years, we’re going to see more companies with a presence on the metaverse,” Tong says. “Think back to 20 years ago, when companies had to register their own domain name, and build their website on the Internet to then sell their products and services online. The next step of evolution is the metaverse, where I expect many companies to move their products to a 3D virtual shop, gallery or shopping mall.”

Companies that want to venture into the metaverse and maximize its potential for growth will need to first determine how they can use a virtual presence to boost their business, and then learn how to “mint” their products into NFTs, or publish their token on the blockchain to make it purchasable within the metaverse.

As Lin notes, it is up to businesses to decide what products will be useful in the form of an NFT. “The utility and real use case for NFTs is still expanding,” he points out. “Companies or professional bodies that are new to NFTs can start by issuing NFT memberships to their customers, for example. This is one easy way a company can engage with its users. Schools or educational institutions could also issue diplomas in the form of an NFT.”

NFTs transactions take place on a blockchain, which makes it easy for users to track transactions. “Only through blockchain, can one be a unique identifier or true owner of a digital asset,” Tong explains. “NFTs allow you to create an identification for anything digital. Without blockchain, everything else is just an image or file. It can simply be copied and passed around, and there’s no way to differentiate the real version with a copy.”

This enables NFTs to provide “proof of ownership.” Akin to a digital signature, NFTs are tokens marked with unique information that cannot be found on any other token in the blockchain, and are non-fungible, meaning they cannot be interchangeable with other tokens.

Similar to blockchain, the metaverse is decentralized by nature and, like the Internet itself, does not rely on a single company or organization for control. Instead, it relies on its network of users and blockchain technology to operate, which facilitates the safe buying and selling of assets in the metaverse. For example, a user’s NFT would remain completely unaffected even if the user quit the metaverse, if there was an adverse event within the platform, or if the metaverse was deleted. Blockchain will act as an immutable record of how assets are created, altered, traded, and destroyed in the metaverse.

The use of blockchain, Tong adds, is also what differentiates the metaverse from online virtual platforms or games that emerged in the early 2000s, where users interacted with others with a custom-made avatar. “Without blockchain, the metaverse is simply a VR or augmented reality game or experience. There’s no economics, or any way of authenticating the value of assets in the game or ownership,” he explains.

Finding fair value

The rise in prominence of NFTs and the metaverse presents challenges for the finance function, as there are currently no specific accounting rules or disclosure requirements for NFTs, notes Eileen Li CPA, Operations Manager at HashKey Capital. This will pose challenges for accountants who need to determine the valuation of an NFT. “When it comes to reporting, the lack of accounting standard guidance may lead accountants to either underestimate or overestimate the valuation of an NFT,” she says.

NFTs are also more difficult to value because they are not frequently traded and their worth is often based on the level of supply or demand for the related market. Other factors that affect an NFT’s value include their utility (how they represent virtual assets such as land or items in the metaverse), tangibility (how they are used to verify real-world objects such as concert tickets), interoperability (whether the NFT can be used across different platforms), and its ownership history (the identity of an NFT’s previous owner or owners may impact its value), according to cryptocurrency news website Cointelegraph.

“When it comes to reporting, the lack of accounting standard guidance may lead accountants to either underestimate or overestimate the valuation of an NFT.”

This leads to large price fluctuations for NFTs, says Li. “Even if accountants try to value an NFT using the floor price or average transaction price of other NFTs on an NFT marketplace like OpenSea, for example, it’s still very challenging. This is because each NFT is unique,” she says.

This will add another degree of uncertainty for stakeholders who view the financial statements of companies that have invested in or purchased a large amount of NFTs. “A listed company’s financial statements must be able to reflect the financial position of that company. But say a company purchases a significant amount of NFTs – this might affect stakeholders’ decision-making when they look at the financial statements and see that there is a large fluctuation in value between the reporting date and date the report is released,” Li points out.

Currently, crypto-assets, which include NFTs, are classified as intangible assets in accordance with International Accounting Standard (IAS) 38 Intangible Assets. There is a need for more robust accounting requirements that represent the underlying transactions of cryptocurrency transactions, according to the Institute’s response to the International Accounting Standards Board’s (IASB) Third Agenda Consultation, which notes that accounting for cryptocurrencies under IAS 38 Intangible Assets and IAS 2 Inventories may not provide relevant information when these items are held for speculative or investment purposes. The response also states that the IASB may consider amending the scope of International Financial Reporting Standard 9 Financial Instruments to include cryptocurrencies.

Chief financial officers, Li adds, will need to weigh the pros and cons of delving into the metaverse and look into how it will benefit the company. “Companies also need to consider whether the cost of owning land and operating a business virtually will be profitable in the long term. Companies should pay attention to relevant regulations and check if there are any restrictions before making any investment decisions in this industry,” Li says, exemplifying how her company makes use of their land in Decentraland. “We have our portfolio companies, our blockchain research reports and NFT gifts for visitors on display in our virtual office building. It has acted as a good marketing channel. Because we have a presence in the metaverse, our investors have more confidence in us.”

Companies that own NFTs, Shen adds, should also be prepared to justify their purchases of virtual assets to auditors. “At the end of every fiscal year, an audit firm may show up and ask ‘I noticed that your company spent HK$30 million in purchasing virtual land. Could you tell me how you came up with that value?’ If companies aren’t able to justify the cost, the auditors won’t take their word on the value of the transaction of the virtual land,” he says. “If the supposed value is higher than the cost of the transaction, auditors will only refer to the cost. So the valuation approach is still a bit too open for auditors, as they still aren’t experts in this area themselves.” Until an accounting guidance for cryptocurrency-related assets is written and released, Shen says that company heads may have to justify the value of their virtual purchases using the price trends of cryptocurrencies, bearing in mind that market fluctuations may affect value later on.

Shen says that accountants should equip themselves with relevant knowledge in order to identify business opportunities for companies. “They should be able to identify how these technologies benefit the company. Accountants without knowledge in this area will quickly fall behind in the future,” he says. “Once they do, it will be very difficult for them to catch up. This is because of how blockchain, NFTs, and the metaverse are all interrelated.”

Ensuring safety

Though blockchain will ensure the transparency of transactions, there is a need to take the necessary measures to ensure one’s virtual assets in the metaverse are safe from cyberattacks. “Whenever someone has a large amount of wealth concentrated into a platform, people will find ways to hack into them,” Tong points out.

For example, on 1 April, Taiwanese singer Jay Chou had his NFT stolen by a phishing website, which hackers were then able to sell for more than US$500,000 only a few hours later. “The incident placed the spotlight on the cybersecurity surrounding NFTs and the digital assets in one’s wallet,” notes Li. Companies and individuals should first know how to identify dubious phishing links when transacting NFTs or cryptocurrency, she adds, and opt to use a “cold” wallet as often as possible, or a wallet that isn’t connected to the Internet. “Individuals and small companies usually opt to use a ‘hot’ wallet because of convenience. But if a hacker can figure out your recovery phrase for the hot wallet, they’ll be able to access your wallet and your money.” To prevent this from happening, Li suggests disconnecting the Internet when generating a recovery phrase and writing it down in a notebook instead of storing it on one’s device.

For extra assurance, businesses can safeguard their virtual assets by engaging with third-party custodians, notes Lin. “Digital asset specialists already exist to help with cybersecurity-related issues, and companies should consult them before stepping into this field. Corporations should be able to rely on these companies, which are licensed and governed by regulators.” Li agrees: “Companies should look for third- party custodians for security and insurance to prepare for hacks and ensure that their insurance covers NFTs.”

The big shift

As more companies and individuals establish a presence within the metaverse over the next few years, this will give rise to a new and more advanced “digital economy,” which refers to economic activity that results from billions of everyday online connections among people, businesses, devices, data, and processes, according to Deloitte. It will be up to individuals and corporations to be creative in how they utilize NFTs, says Lin. “There will be a sea change in the business for the ones who can come up with the best ideas first and execute them. With that, we will see more use cases develop in the NFT space.”

NFTs will be used by organizations or individuals to “immortalize” their products or work, says Tong. “In the future, creativity will be minted as NFTs,” he says. “People will be minting their art, music, videos, inventions, articles, poems, novels as NFTs. Imagine you’re the first person to write a news story about something – you’d be able to mint it as an NFT and people will be able to purchase it.” The South China Morning Post, for example, released a collection of NFTs last month featuring newspaper archives from 1997, which sold out in two hours. Companies can also issue NFTs to authenticate physical products. This month, sports apparel giant Nike started to use NFTs as a way to certify the authenticity of a pair of sneakers, which could one day make it impossible for people to trade counterfeit sneakers.

As companies continue remote or hybrid working arrangements, managers may seek new ways to meet or interact with team members beyond the humdrum of 2D video calls, notes Shen. “Companies might start giving out VR headsets to make meetings within the metaverse a reality – this will entice more people to start using VR headsets,” he says. “Then, say your senior or boss pushes for a conference within the metaverse the following week – this may also encourage adoption.”

“There will be a sea change in the business for the ones who can come up with the best ideas first and execute them. With that, we will see more use cases develop in the NFT space.”

A virtual future

While the metaverse hopes to change the way people meet online, it won’t replace in-person interaction anytime soon, Lin believes. “It will simply remain another channel for people to gather,” he says. “People used to send letters to each other. That evolved into phone calls, emails, and now video calls. All of these helped to bridge the gap between people living in different places. The metaverse is the next generation of communication.”

The pandemic has proven that people can continue working and interacting virtually, which will facilitate the growth of the metaverse, Tong says. “More and more people have got used to staying at home and communicating virtually. This will further help NFTs, the metaverse and the virtual world to grow,” he says. “Even when things go back to normal, people will still flock to the metaverse. Compared with the Internet – where people have a Facebook, Instagram or Twitter account – the metaverse, because it’s in 3D, will be more immersive and interactive.”

Shen believes it won’t be long before people would rather meet virtually in the metaverse, especially if it’s too inconvenient to meet in person. “People already have different identities online – and the metaverse will just be an extension of this.”

According to Metaverse and Money: Decrypting the Future, a report released last month by Citigroup Inc., the metaverse economy will be worth up to US$13 trillion by 2030, and boast as many as five billion users by then.

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