The world of crypto assets can seem complex and intimidating, but it doesn't have to be. By knowing what crypto assets are, the regulatory landscape, who is investing in them, and what the future holds, you can make informed decisions and stay ahead of the curve.
What Are Crypto Assets?#
If you're reading this, chances are you probably have some knowledge about crypto assets. But just in case, let's refresh our memory. Crypto assets are digital assets that are defined by five key features according to a legal statement published by the UK Jurisdictional Taskforce (UKJT). These features are intangibility, cryptographic authentication, the use of a distributed transaction ledger, decentralization, and rule by consensus. Essentially, crypto assets are intangible assets that rely on advanced cryptographic techniques to authenticate transactions and are maintained on a distributed ledger that is decentralized and governed by a consensus mechanism.
Cryptocurrency is a digital asset that derives its value from scarcity and the perception that it is a store of value, a way to pay anonymously, or a hedge against inflation. Investors can buy or sell cryptocurrencies directly on a spot market, or they can invest indirectly through a futures market or investment products that offer exposure to cryptocurrencies. Essentially, cryptocurrency is a type of currency that exists only in a digital form, and its value is determined by the market demand for it.
There are different types of crypto assets, including cryptocurrency, asset-backed tokens, utility tokens, and security tokens. Each has its own advantages and disadvantages, and it is important to understand the differences between them before investing.
Types of Crypto Assets#
The world of crypto assets extends beyond just cryptocurrencies, which are often the first thing that comes to mind. In fact, there are a variety of other types of crypto assets that are transforming the way we think about value, and that are revolutionizing numerous industries, such as finance, real estate, and the arts. These include utility tokens, security tokens, and NFTs, each with its unique benefits and potential for disruption. As we continue to explore and innovate in this space, the possibilities for the future are endless.
Stablecoins: Stablecoins are a type of cryptocurrency that is designed to maintain price stability by being linked to fiat currencies, commodities, or other crypto assets. They are widely used for payments, foreign exchange, and cross-border transfers, especially in developing countries where they are used to hold value and hedge against inflation. The most popular stablecoins include Tether USDT, USDC, and BUSD, which together represent over 90% of the stablecoin market. However, not all stablecoins are created equal and investors should be aware of the risks involved, as reserves related to some stablecoins have been called into question in the past. Additionally, beyond the top three stablecoin players, there are many up-and-coming stablecoin contenders that are algorithmic and backed by crypto assets, not US dollars. Despite the industry being full of failed experiments, stablecoins continue to gain popularity, with over 70% of the “crypto dollars” running on the Ethereum network.
Security tokens: Security tokens define ownership of digital or real world assets (RWA) like property. They allow organizations to sell a share of their equity in digital form and this could significantly increase the ease with which shares are traded, particularly for not publicly traded companies; in so-doing, it would create a far more liquid and efficient market for companies to raise capital and it would allow easier exits for early equity investors. Security tokens are regulated by financial institutions.
Utility tokens: Utility tokens provide the owner with some form of access or functionality to interact with the ecosystem of the project that issued it. Utility tokens are often used for the governance of Decentralized Autonomous Organisations (DAOs). They do not represent an ownership or stake in the project and therefore are not regulated by financial authorities.
For further reading about the difference between utility tokens and security tokens you can follow this link.
Non-fungible tokens: Non-fungible tokens, or NFTs, represent ownership of a unique digital item, such as a work of art, ID, or a specific unit of production. The ownership of the underlying digital asset is verifiable as a result of the smart contract of the NFT, enabling the holder to sell, trade or redeem it. NFTs have a wide range of uses, from proving identity and granting access to virtual or physical spaces, to tokenizing supply chains and tracking inventory ownership, and ownership of virtual items such as games, in-game characters, and virtual land. There are also potential use-cases to tie NFTs to real world assets (RWAs), as has been highlighted recently in articles about Amazon’s plans to tie digital ownership to physical goods.
According to Statista, over 44 million people worldwide purchased some type of NFT in 2022, but this figure includes NFTs used in games and virtual worlds like Axie Infinity and Sandbox. The average NFT user only spent around $56.89 on NFTs in 2022, so it's evident that the purchase of multi-million dollar NFTs is not a norm.
Central Bank Digital Currencies (CBDCs)#
While Central Bank Digital Currencies (CBDCs) are digital assets, they differ from traditional cryptocurrencies in that they are not decentralized. CBDCs are essentially digital versions of government-issued currencies, whereas crypto assets are decentralized assets that exist independently of government control. These currencies are issued by central banks, whose role is to support financial services for a nation's government and commercial banking system, set monetary policy, and issue currency.
It's important to note that governments are currently experimenting with CBDCs and exploring ways to issue their own currencies, often pegged to their local fiat. To keep track of these projects, the Atlantic Council's CBDC tracker can be useful. China's e-CNY is currently the most notable pilot version of a CBDC. Central banks typically won't get it right the first time, as evidenced by issues with the registration process for Nigeria's e-Naira and structural barriers discovered by the Central Bank in the Bahamas.
Crypto Assets and Regulations#
For policymakers and regulators, the growth of cryptocurrencies has presented a challenging landscape to navigate. The lack of clarity and uniformity in regulations across different countries has created a complex environment for businesses and investors alike. While some countries have adopted a more hands-off approach, others have taken a more stringent stance in order to curb potential risks associated with cryptocurrencies such as money laundering and tax evasion.
One of the key challenges for regulators is to strike a balance between protecting consumers and fostering innovation. Some argue that overly restrictive regulations may stifle the growth and potential benefits of cryptocurrencies, while others argue that a lack of regulation may create an environment for fraudulent activities to thrive. As cryptocurrencies continue to gain mainstream attention, it is likely that regulators will continue to grapple with how to effectively regulate this emerging asset class.
Another challenge for regulators is the issue of cross-border transactions. Cryptocurrencies have made it possible to conduct transactions across borders without the need for traditional financial intermediaries. While this has the potential to create greater efficiency and lower costs, it also poses challenges for regulators in terms of monitoring and enforcing regulations. As such, there have been calls for greater international cooperation and coordination among regulators to ensure a consistent and effective regulatory approach to cryptocurrencies.
Institutional Crypto#
Institutional investors, who manage large sums of money on behalf of organizations and individuals, are increasingly investing in cryptocurrencies. According to a recent survey by Cointelegraph Research, institutional investors manage $316 billion in assets, with 3.3% invested in digital assets such as Bitcoin and Ether. While some investors have more than 50% of their portfolio in cryptocurrencies, the median percentage invested is only about 3%.
Despite preferring direct investments in crypto, most institutional investors gain exposure through passive funds, such as Grayscale's Bitcoin Trust, and crypto derivatives, which offer high liquidity.
However, liquidity risks are the strongest obstacle to crypto adoption, according to the survey. Cybercrime and fraud risks, as well as operational risks, are also concerns for investors. Despite these challenges, institutional investors are increasingly interested in digital assets, and some are even considering adding tokenized securities, NFTs, and metaverse platforms to their portfolios.
The Future of Crypto Assets#
The future of crypto assets presents both challenges and opportunities. While the adoption of crypto assets has been increasing rapidly in recent years, the regulatory landscape remains uncertain. Governments around the world are grappling with how to regulate crypto assets, and stronger regulation may affect the demand for them. However, this could also lead to a more stable and mature crypto market, which could attract institutional investors and drive even more growth.
Another key issue facing the future of crypto assets is cybersecurity. As crypto assets become more mainstream, they will become an even more attractive target for hackers and cybercriminals. However, the development of more secure blockchain technology and greater emphasis on cybersecurity measures could help mitigate these risks.
The accounting and tax implications of crypto assets also remain a challenge, as traditional accounting practices may not fully capture the unique features of crypto assets. As the market continues to evolve, it will be important for accountants and tax professionals to adapt and develop new standards and guidelines.
Despite these challenges, analysts estimate that the global cryptocurrency market will more than triple by 2030. This growth will be driven by factors such as increased adoption, technological advancements, and the entrance of institutional investors. As crypto assets become more mainstream, we may see even greater innovation in the space, with new use cases and applications for blockchain technology. While the future of crypto assets remains uncertain, one thing is clear: this is a rapidly evolving space that will continue to shape the financial industry for years to come.
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