Welcome to the Block & Mortar newsletter! Every week, I bring you the top stories and my analysis on where business meets web3: blockchain, cryptocurrencies, NFTs, and metaverse. Brought to you by Q McCallum.

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(Photo by Darya Tryfanava on Unsplash)

A shift in the art market

Last week I raised a point about the “layer cake” model of web3: disturbances in the defi layer of cryptocurrency trading shouldn’t propagate to other spaces, like NFTs. I still hold that to be true.

I also hold that the other layers can experience their own problems. Blockchain, for example, is still in search of other use cases. There must be situations that call for a distributed, tamper-resistant log of transactions … but we’re still looking.

The NFT layer is more nuanced. It’s seeing plenty of action thanks to event tickets, loyalty passes, and other NFTs With Benefits™. There are also strong use cases for ownership of digital goods like in-game items and metaverse outfits. But the notion of digital art collection? Hmm.

I thought of this as I read up on last week’s Miami Art Week, a key part of which was the Art Basel Miami Beach art fair. There was plenty of coverage of the party scene and creation of digital art, but relatively little on ownership of that digital art through NFTs.

What’s driving this loss of interest? Guilt by association no doubt plays a role. A lot of people, understandably, lump NFTs in with cryptocurrency price drama – especially since some NFT ownership is based on speculation rather than collecting art. But I think there’s something more.

My hunch is that crypto winter has convinced the NFT “tourists” to move on in search of greener pastures. People who are serious about art still see the potential for NFTs, but they also see blockchain solutions as underlying infrastructure. The actual art now returns to center stage.

To its credit,the web3 boom wasn’t all take and no give. All of that excitement has left the Miami art scene with an increased appreciation and awareness for digital works, even if the wider web3 space has fallen out of favor.

Some people even see room for a comeback. Both in the traditional art world and, y’know, with the Brooklyn cool kids crowd.

The ride continues

FTX was quite the ride.

• When things were going well, customers experienced the upside of putting their cash into an unregulated financial system.
• When things took a turn, those customers experienced the downside of their tokens being locked away inside the smoldering wreck of a crypto exchange. Possibly gone for good.
• Last month, they got some closure as FTX head Sam Bankman-Fried was convicted of fraud.
• And just now, a little more than a year after FTX fell apart, customers are getting a tour of US bankruptcy law.

Bankruptcies are messy affairs. It can take years to sort out who gets paid, when, and how. And while John J Ray III’s restructuring team has managed to recover some of the $10B that was (ahem) “lost” by the previous leaders of FTX and Alameda, there’s the question of whether to repay customers in crypto or in cash.

One could argue that FTX customers didn’t hold cash in the exchange, but they held cryptocurrency tokens. Those tokens fluctuate in value and, as it so happens, some of those values have risen since FTX entered into bankruptcy proceedings. These customers have what finance professionals call an unrealized gain – it’s not real until someone trades you fiat currency for those tokens.

One could argue that. And some certainly do. But the FTX restructuring team argues otherwise:

[FTX] says it is easier to repay customers in cash because of the difficulty in untangling the company’s poor record-keeping and figuring out who has title to the exchange’s tens of millions of leftover tokens. U.S. bankruptcy law also says unpaid creditors can only demand to be repaid in dollars, no matter if they are owed euros, yen, or bitcoin.

The linked WSJ article goes into detail about FTX’s views, and a lawsuit filed by creditors to get repaid in crypto instead of cash. It’s worth a read, if for no other reason than to remind yourself of a key lesson about putting cash in unregulated systems:

It’s not just that the system’s host may walk off with your money.

It’s that recovering your money may involve navigating new(-to-you) legal precedent.

Where to next?

You may recall that Terraform Labs CEO Do Kwon was arrested in Montenegro back in March.

He was ostensibly arrested for breaking local laws and sentenced to a few months in prison. But now that authorities in other countries are able to confirm his current location – he’d been on the run on holiday since the Terra/Luna collapse, you see – they’re asking for extradition. And by “they” I mean the United States and South Korea.

A Montenegro judge is due to officially announce his decision next week. But the unofficial, behind-closed-doors-yet-somehow-leaked take, is that he will grant extradition to the US.

It’ll be interesting to see where that case goes, especially in light of the legal woes of Coinbase, Binance, and FTX. America may soon wield influence over global crypto regulation. (This is not unlike traditional finance, where American authorities have a say in transactions that pass through the US banking system. A banking system which, despite its name, happens to sit at the center of quite a bit of global commerce.)

The judge’s ruling will land after next week’s newsletter. The week after that will be Block & Mortar’s December media roundup, and I may run something special for the start of the year. Point being: I might not revisit the Do Kwon extradition till early or mid January. At which point there may be a lot more to the story.

This is why we can’t have nice things

In the spirit of closing out the newsletter on a positive note, I can tell you that Fortnite has unveiled a Lego mode!

Fortnite is a popular metaverse property (even if you file it under “web 2.5” and not “web3”). This is where I’d love to focus on how it is a popular way to reach Gen Z. And how this collaboration led to record-breaking numbers, with more than six million concurrent players and eleven million viewers.

That’s what I’d like to do.

Instead, I have to tell a story about brand safety. That’s an industry term for I Don’t Want My Logo Anywhere Near Bad Things Online. It’s a very real concern for anyone in the online advertising space. The brand safety issue here is that, within the first day, Fortnite users had re-enacted the events of 9/11. In Lego form. And posted videos of it online.

Repeat after me: this is why we can’t have nice things.

This wasn’t a problem unique to Fortnite. It was about the degrees of freedom afforded to end-users. The new Lego mode was a departure from Fortnite’s norms in that it was an open-world, unscripted, do-what-you-want interaction. (More like Minecraft.) Most people treat that lack of boundaries as an opportunity to be creative. A select few will be creative in terrible ways.

What lessons can we learn from the Fortnite story? How do you establish a metaverse presence that won’t be misused to recreate a mass-scale terrorist attack?

It’s all about the experience design. You’ll want to consider What Could Go Wrong just as much as you plan How This Could Be Fun And/Or Profitable. Think “crafted, guided, with a clear goal in mind” (like the get-to-know-our-offerings game from the Bonvoy hotel loyalty program). Or you can run a specific event (such as an in-game concert or conference). The more script and structure you provide, the less room you leave for people to do terrible things.

I emphasize the word “less” there. Even when you establish boundaries, determined bad actors will find ways to weaponize the offering as-is. Like, say, tricking celebrities on Cameo into berating Ukraine president Volodymyr Zelenskiy.

The wrap-up

This was an issue of Block & Mortar.

Who’s behind Block & Mortar? I'm Q McCallum. I've spent the past two decades in the emerging-tech space. And I'm very interested in web3 use cases.

Credit where it's due. Big thanks to Shane Glynn for reviewing early drafts. Any mistakes that remain are mine.

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