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Know your tokens: Defining “digital assets”

Mon 10 Feb 2020 | Xinshu Dong

Not all tokens are created equally. CEO and co-founder of RockX, Xinshu Dong, breaks down tokenisation 

While the term “digital asset” is cropping up more and more in the media and financial markets, it remains shrouded in uncertainty. Despite growing awareness of “digital assets”, many remain uncertain as to what the term means, and whether there is real value in this nascent market. 

This is undoubtedly the result of the chequered history of the digital asset and cryptocurrency space. These terms have been viewed as somewhat interchangeable, leading to confusion and misconceptions surrounding the nature, purpose, and viability of digital asset classes across industries. 

In order to uncover the potential value of digital assets for financial actors and institutions, it is important first to demystify what we mean when discussing this new asset class, before outlining how the future of finance may well be based on the “blockchain boom” of recent years.

Bitcoins? Cryptocurrencies? Black Market Money? Defining “Digital Asset”

Perhaps the best known digital asset is the leading cryptocurrency, bitcoin. Bitcoin has been labelled everything from an online payments mechanism to digital gold to black-market money since it went live in 2008. 

Having witnessed a meteoric rise in value in 2017 and 2018, peaking at more than $20,000 USD, before plummeting to almost $3,000 just 12 months later—it is safe to say that bitcoin has helped generate much publicity and mainstream attention for the broader digital asset space. But what exactly are digital assets?

“Digital asset” is, ultimately, an extremely general term. If something has value, and is digital, it is a digital asset. This can include anything from online collectibles, digital multimedia or content, to esports or video game accounts. It also includes a gamut of “digital assets” which have been making headlines in recent months, which may be more accurately described as “crypto assets” or “tokens”.

A crypto asset is any digital asset which uses cryptographic technology to secure transactions, control the creation of additional units, and verify the transfer of assets. 

Crypto assets are underpinned by blockchain to maintain a decentralized, transparent, and immutable record of transactions. They are not controlled or backed by a single authority and are intended to be immune to manipulation and interference by any participants, unless the approval from the majority of all participants have been obtained. This means that while all crypto assets are digital assets, not all digital assets are crypto assets.

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Telling your utilities from your securities

While it may seem intuitive that crypto assets are equivalent to cryptocurrencies, particularly as the phrases are often used interchangeably—this oversimplifies the diversity of the crypto asset market. 

Much like all crypto assets being digital assets, all cryptocurrencies are crypto assets—but not all crypto assets are cryptocurrencies. The crypto asset ecosystem is far more diverse, and a growing number of applications of cryptographic and blockchain technology have given rise to many iterations of crypto assets and tokens. Not all tokens are created equally, or for the same purpose.

While terminology employed by different technology communities and jurisdictional regulators can vary, there is relative clarity relating to the key characteristics of the three most common token types—cryptocurrencies, utility tokens, and security tokens. 

Perhaps the definitive guide to crypto classification can be found in the working definitions employed by the Swiss Financial Market Supervisory Authority (FINMA), released in 2018 as one of the first regulatory attempts to offer clarity to the crypto sector. The summaries can be broken down into:

  1. Cryptocurrencies/Payment Tokens: all tokens which function as a means of payment—such as bitcoin, DASH, or Litecoin.
  2. Utility Tokens: tokens which exist with the sole purpose of conferring access rights to an application or service—such as Binance coin, Lisk, or the ZIL.
  3. Security/Asset Tokens: tokens which entitle holders to the underlying assets, dividends or interest payments – these tokens are “analogous to equities, bonds or derivatives” —such as Polymath tokens

Each of these token types is a crypto asset, but not all are cryptocurrencies. Understanding the differentiation between assets is imperative for navigating the crypto economy and understanding the value presented by different tokens.

Tomorrow’s economy, today — Why digital assets should matter to financial actors

Why does this matter? What relevance does the digital asset and crypto market have for financial actors? More, perhaps, than you might think.

Currently, crypto markets are worth an estimated 202 billion USD, and have previously soared to a total value of almost 781 billion USD. 

While initially sceptical of this new breed of digital assets, majorly competitive banks and financial institutions have begun to recognise the potential of the market. Not least of them, JP Morgan, which has launched its very own cryptocurrency. While a varied cast of banks including UBS, Santander, Credit Suisse, and HSBC have been rumoured to have invested in a system to settle crypto payments. 

Beyond the short term volatility of global crypto markets, there is no denying that the industry as a whole has consistently trended upwards—experiencing one of the fastest growth trajectories among different assets in the past few years. Furthermore, with the emergence of sophisticated services for crypto assets, there is greater opportunity for low-risk engagement with tokens of every ilk and kind. 

While there may still be some uncertainty as to the exact nature of digital assets in financial circles, it would seem there is no doubt that they have a great potential in transforming various businesses as we know them today. 

As renowned banks and financial service providers begin to embrace them more seriously, they are slowly being incorporated into the world of traditional finance—laying the groundworks for the future of the financial system, and a whole new conception of value. Understanding the industry today, will leave everyone better off tomorrow.

Experts featured:

Xinshu Dong

CEO & Co-founder
RockX

Tags:

finance tokenisation
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