Best Practices for Enterprise Crypto Account Management — Part III (Use Cases)
Andreas Vogel and Kai Schmitz-Hofbauer
This is Part III of a three-part article series: Part I, Part II
Now that we have taken a closer look at the different types of wallets and typical requirements in the enterprise environment, we will now put both topics into the context of specific use cases and discuss how to select the right wallet.
Use cases
In addition to the general requirements for the use of wallets as described in the previous part, the specific use case is of course also crucial in choosing the appropriate wallet. The functional requirements for the wallet are determined by the planned use cases.
Investing
Investing in cryptocurrencies can make sense for institutional investors for a number of reasons. The most important ones are:
- Potential for high returns: Cryptocurrencies have the potential to generate high returns, as they have shown in the past — although most cryptocurrencies are also characterized by high volatility.
- Diversification: Adding cryptocurrencies to a portfolio can help to diversify and potentially reduce overall investment portfolio risk.
- Early stage experience with new technologies and new financial approaches: Cryptocurrencies are increasingly being accepted as a legitimate asset class and are being adopted by more and more mainstream investors. Making your own investments on a manageable scale in order to gain experience can be a first controlled step into the web3 and crypto environment.
A comment on protection against inflation: Since cryptocurrencies are not directly tied to any particular country or central bank, they should in theory, not be affected by the monetary policy of a specific government. As a result, some people argue that investing in cryptocurrencies could potentially offer some protection against inflation, as the supply of many cryptocurrencies is limited by design. However, practice and experience have shown that due to the high volatility of many cryptocurrencies (notably the drops in the so-called “crypto winter”), this is more of a theoretical argument that has not been proven in practice yet. So-called stablecoins are directly pegged to fiat currencies such as the euro or the dollar and have a lower volatility, but are just as dependent on inflation as the respective currencies.
When selecting a suitable wallet, in addition to the general conditions discussed in part two of this article series, it is important to ensure that the wallet provider
- supports the desired tokens and has acceptable token coverage to be future- proof
- offers an acceptable pricing
- provides integration with fiat on- and off-ramp services to exchange fiat currencies to crypto and vice versa
- provides integration with DeFi (Decentralized Finance) protocols, which can be used as additional financial instruments
It is important to note that investing in cryptocurrencies involves risks and should be taken with caution. It is always a good idea to thoroughly research and perform due diligence before making an investment decision.
Staking
Staking is an intriguing type of investment, where a cryptocurrency holder can earn rewards for holding a specific cryptocurrency. In order to stake a cryptocurrency, the holder must first acquire a certain amount of the cryptocurrency and then hold it in a wallet that supports staking and/or is integrated with a staking provider.
The basic principle is that investors can make their assets available to a network validator and thus participate in the settlement of the blocks on the underlying blockchain. The reward that is earned is typically a percentage of the deposit. Staking can be an excellent way for (business) customers to earn passive income by supporting the security and stability of a cryptocurrency network.
There are also some risks involved with staking:
- Volatility: If the price falls sharply, the staking rewards may not be enough to absorb the loss and the investor may incur losses.
- Validators can be penalized through a process called slashing. If a validator node misses several blocks and does not participate in the consensus network, the staker may be charged for this — by deducting it from his cryptocurrency holdings.
Accepting crypto currencies for payments
Cryptocurrencies can be used alongside fiat currencies as a payment for goods and services. However, there are several factors that must be taken into account. These are discussed in greater detail below.
Legal aspects
Many countries do not yet have specific laws regulating the use of cryptocurrencies. It is important to be aware of the applicable laws and regulations in your country before accepting cryptocurrencies as payment.
Exchange to fiat currencies
Cryptocurrencies are very volatile and their value can change quickly. It is important to be aware that the value of cryptocurrencies you accept as payment may decrease before you can exchange them for fiat currency. It is also important that you have the right strategy for changing cryptocurrency to fiat. Some approaches might be:
- Manually change to fiat when the rate is favorable. This is a recommended option for starting.
- Periodically exchange — e. g. once a month
- Threshold based: exchange when a specific threshold has been met
- Exchange rate based
In this context, the company’s own accounting and reporting requirements must of course be taken into account (see also Part two of this series).
Readiness of the target group
It is important to ensure that the target group can be onboarded easily. A distinction must be made between crypto-native users and normal users.
- Crypto-native users: These users will want to continue using their existing wallets.
- Standard users: Normal users are often overwhelmed by current user-facing crypto wallets. Therefore,it is important to find the easiest possible entry point. One possible approach is to hide the wallet logic as far as possible for the end-user and to boot the user onto an omnibus wallet (see also Part two of this series) “under the hood”.
Creation of digital assets like NFTs
NFTs are very popular for many use cases, such as the use of digital assets like artworks, collectibles, and ownership documentation in the real world. Not all wallet providers or custodians offer the ability to create digital assets such as NFTs. While trading digital crypto goods may require the use of a regulated crypto custodian, there are other ways to generate digital assets like NFTs. As explained in the first part of this series, enterprise key management solutions are well suited for this purpose. For instance, it is possible to create a digital asset through these systems and then transfer it to a separate wallet for trading. This is a best practice in terms of risk minimization, because if one of the two wallets is compromised, the damage can be limited to just that one. A description of how enterprise key management solutions can be used as web3 wallet can be found here, using AWS as an example.
In addition, there are other aspects that need to be considered when generating digital assets:
- Licenses and ownership: In addition to the classic metadata, clearly defined usage rights should also be included in the metadata. If this is not the case with an NFT, for example, the owner has no particular rights. It is not recommended to regulate this outside of the NFT metadata, such as in the terms and conditions of a platform offer.
- Proof of origin and authenticity: For someone buying a digital asset, authenticity is very important. For example, the buyer of a digital artwork wants to be sure that it is the original work of the artist.
One way to implement this is to always mint NFTs via uniquely assigned private keys. In the example of digital art, it is good practice to mint via one private key per artist, so that the authenticity can be ensured via the artist’s address.
Another option is to use dedicated smart contracts for authenticity proofs. Following the art and NFTs example, the work of different artists can be minted via distinct smart contracts.
Ownership certification
The original idea of an NFT was to act as a digital ownership certificate, and by doing so, enable commercial activity. The certification part seemed to be somewhat forgotten in the NFT hype of 2021/22. Digital certificates are a very useful concept, but it is important getting the following issues right:
Genesis
The smart contract must be associated with the creator, e.g. the artist, the writer, the musician, the inventor, etc. The smart contract address is anonymous by nature. The link between creator and address can be done in a number of different ways.
Social Identity
The address is implicitly associated with the creator, i.e. a creator exclusively uses this address for minting their work, the address becomes their signature. You could think of an artist known as “0x71C7656EC7ab88b098defB751B7401B5f6d89”.
This is of course not very practicable. The Ethereum Naming Service (ENS), a distributed, open, and extensible naming system based on the Ethereum blockchain, provides human readable names like “prince.eth” which it resolves to an address.
The address or the ENS name becomes the creator’s social identity.
KYC / KYB validated identity
The creator’s identity gets validated by a certified identity provider and the resulting decentralized identifier is mapped to the address on-chain.
Creator and Ownership Rights
Copyright
There is the copyright of the work and then there are usage including commercial rights. The management of copyright depends on the jurisdiction. For example, it is possible and common practice to transfer copyright in the US or the UK while in Germany copyright is not transferable.
Usage rights
- A good practice is that the artist maintains the copyright and only explicitly defined usage or commercial rights are assigned to the NFT. Creative Commons provides a solid framework for non-commercial usage rights.
- Commercial usage rights should be defined by an experienced intellectual property attorney.
- The definition of the rights associated with an NFT needs to be immutable. It could be part of the metadata which is stored on-chain. Alternatively a link to a document which is stored immutably could be used.
Royalties
NFTs also enable the payment of royalties to the creator in case of subsequent sales of the NFT. Royalty payments can be programmed into the smart contract. In 2022, there was a big debate about the possibility of circumventing royalty payments. The details of the issues and a possible solution have been discussed here by Andreas Vogel.
From these scenarios additional requirements for wallets could be derived: Wallets should not only manage keys for the crypto account, but also for decentralized identities. Business relationships between artists and their managers and / or gallerists, specifically delegation should be enabled by wallets.
Utility Token
Another interesting aspect of NFTs is to combine them with real-world benefits. For example, NFTs could be used as exclusive event or travel tickets, have the owner treated like a VIP, provide discounts when purchasing goods or services and similar perks often associated with loyalty programs.
Another very interesting use case are travel tickets as NFTs. creating a controlled secondary market in which the original ticket issuer participates (via royalties) would be quite feasible.
Wallets should be able to interact with 3rd parties, e.g. for example for checking the validity of tokens used as tickets.
Fractionalization
The idea of fractionalization is the partition of an investment, whether digital or physical, into multiple fractions which would be represented by tokens. These could be owned and traded independently.
This is an interesting way to create liquidity to certain asset classes for example fine art, antiques and other real-world collectibles. It also opens up possibilities for asset owners to create liquidity which was previously hard to come by and it creates new types of investments with low barriers to entry, providing investors with additional approaches for finding growth opportunities and for diversifying their portfolios.
However it is important to handle terms and conditions similarly to licensing agreements discussed above.
Specifically for institutional investors all the enterprise requirements discussed above apply here.
Metaverse / web3 games
Enterprises may want to use wallets for the metaverse to store and manage virtual assets, such as in-game currency, digital items, and other types of digital assets used within the metaverse. These assets may hold value within the virtual world, making it crucial to have a secure way to store and manage them.
In addition, wallets can be used to facilitate transactions within the metaverse, such as buying and selling virtual goods or services. This can be particularly important for enterprises seeking to monetize their presence in the metaverse or use it as a platform for conducting business.
Summary and conclusion
Choosing the right wallet is critical for any web3 project. Since the use cases in the web3 environment are so diverse, the requirements for wallets are also very diverse. In addition to the fundamental requirements for enterprises as described in part 2, business requirements and wallet usage & integration patterns, such as those described in this document, are particularly important. When selecting and implementing a specific wallet offer, both criteria should always be taken into account. In particular, the first and future use cases must be understood.
The best practices presented in this series of articles provide support at the technical, organizational, and application levels to make web3 projects successful in the long term. The potential of decentralized approaches is and remains immense.
