Definition of Digital Assets
A digital asset is content that is stored digitally. Technology is continually changing our day-to-day routines; from sharing spreadsheets from one company to another, PDFs, HTML documents, storing images, files, videos, or slide decks. A digital asset can have any content, in any format, that is digital, making it uniquely identifiable and providing value to the owner/user.
Another approach to understanding digital assets is through finance where a digital asset is an electronic file containing data that can be owned or transferred by individuals and used as a currency to make transactions or as a way of storing intangible content such as contracts or computerised artworks. Digital assets in the Financial industry include cryptocurrencies, security tokens, crypto- securities.
In traditional finance, digital assets would be an asset class like commodities, securities, currencies, etc. Capital markets are set to be disrupted due to the tight legal restrictions on asset class availability, cross-border transfer difficulty, minimum capital requirements, etc.
How are Digital Assets bought, sold and held?
There are several ways to buy, sell and hold digital assets depending on the specific assets. Some jurisdictions have laws for some digital assets; however, the area is growing and much of the digital assets legal landscape is unregulated.
Individuals obtain digital assets depending on the asset through two ways; one, purchasing assets from an original distributor or secondary market, and two, mining which is a process of solving a repetitive mathematical function to record new transactions and record blocks on the blockchain.
Ownership of digital assets such as cryptocurrencies are held as records of ownership on an electronic ledger called a blockchain. Blockchain’s transactions are quicker and easier as there are no intermediaries in transfer processes.
Although one can not hold digital assets physically, they are a real asset class that one can buy, sell, and store online.
Buying digital assets
Digital assets may be acquired through:
- Online marketplaces and applications: Brokerages and exchanges that allow you to buy, sell, and exchange cryptocurrencies without your own crypto wallet through online marketplaces or apps.
- Identification: Individuals use a software or hardware wallet made for digital assets. The creation of these assets may be varied but held by a compatible digital wallet called a cryptocurrency wallet or crypto wallet. Additionally, the crypto wallet can be a piece of paper.
With a trillion dollar + crypto market, this area is growing rapidly. However, the volatility of the market and cyber security may be a concern to buying digital assets for beginners.
Holding digital assets
A cryptocurrency wallet stores digital currency and other digital assets and can be used to invest in a cryptocurrency or non-fungible tokens (NFTs), or use any other blockchain-based service. A cryptocurrency wallet holds a combination of a public wallet address and a private security key.
Every digital wallet has a unique public address and private keys. The public address allows you to receive digital assets, while the private keys give you access to your assets if you want to send to another address or sell them.
Similar to physical purses holding credit cards and cash, a crypto wallet stores the information required to access digital assets like Bitcoin or any type of cryptocurrency. Cryptocurrency wallets enable users to send and receive assets to anyone in the world who has a compatible wallet providing semi-anonymity depending on the crypto wallet in use either by using a public blockchain explorer tool to view the contents and transactions of any crypto wallet or through an exchange or brokerage that hosts the wallet.
Selling digital assets
The distribution and transfer of digital assets is increasing as the market grows. These online marketplaces including; OpenSea, Rarible etc. have a variety of products, digital assets can be transferred from buyer to seller, similar to Amazon.There are several marketplaces that have popped up around NFTs, which allow people to buy and sell. Marketplaces differ in price of selling of digital assets, account registration information, services offered and its community.
There are cases of stolen assets being sold, theft is a common occurrence in physical assets, thus the need for buyers and sellers to protect their assets, manage the risk of the digital assets deteriorating in quality.
Examples of Digital Assets
Digital assets are also currencies that, although not managed by central banks, play a role in e-commerce transactions. Digital assets can be from:
- Cryptocurrencies: Cryptocurrencies such as bitcoin, Ethereum, Cardano, Solana, Polkadot, and Dogecoin. Cryptocurrencies may be bought and sold using accounts with cryptocurrency exchanges or participating brokerages, and through a standalone digital wallet
- Asset-backed stablecoins: These are cryptocurrencies where the price is designed to be pegged to a cryptocurrency using smart contracts, fiat money such as US Tether backed by the dollar, or to exchange-traded commodities such as industrial materials or Digix Gold Tokens
- Non-fungible tokens (NFTs): NFTs can represent various properties, including artworks, collectibles, virtual reality and gaming items, domain names, and ownership records using digital wallets that are compatible.
- Tokenised securities: These are securities that exist outside of a blockchain. In addition to having a physical copy, information such as proof of ownership is recorded on blockchain shares and bonds.
Blockchain in Digital Assets
Blockchain is a distributed ledger of decentralized data that is securely shared in blocks chained together by hash codes which are cryptographic unique identifiers. Blockchain technology has evolved the use of digital assets to include three main categories:
- Digital store of value assets
- Decentralised Internet or Web3
- Digitized payment assets
Financial institutions stand to benefit from utilizing digital assets and blockchain technologies market due to the reduced administrative costs, physical storage costs and streamlining the transaction process.
Consumers could benefit from solutions provided by financial institutions to serve the digital assets space such as :
- Offering new financial offerings by combining financial contracts and transfer of digital assets
- Providing fast and quick payment systems to banks and merchants
- Setting up a prime brokerage desk service that provides access to crypto markets for traders.
- Offering digital assets exposure through wealth and fund management products for clients.
- Offering licensed and custodial rights of digital assets to clients
Changing customer demand is influencing traditional finance as banks and other large institutions take a reactionary approach to offering solutions in the digital assets and blockchain space by having the mindset of producing solutions to keep customers and another waiting to see whether blockchain is a passing storm.
Other financial institutions like Citigroup, J.P.Morgan are adopting blockchains to enable their infrastructure to support a variety of digital assets.
Governance of Digital Assets in Blockchain
Some digital assets in blockchain pose security and investment risks as they are not backed by physical assets or fiat currency thus can oscillate widely in value depending on popularity. Additionally, their decentralised nature results in blockchain technologies being unregulated nonetheless, providing security and establishing audit trails. Different regulatory authorities and jurisdictions have responded differently to crypto assets regulation, for example:
The UK’s approach balances between consumer protection and encouraging innovation. The UK Financial Conduct Authority (FCA) in 2019 published guidelines on three main digital assets: security tokens, E-money tokens, Unregulated tokens, including utility tokens such as Bitcoin and Ether., NFTs. Additionally, Anti-money laundering laws apply to those involved in sales of NFTs for €10,000 or more.
Overall, the function of governing blockchain will be organised around a group of people and/or entities retaining control and influencing the communities they interact with.
Digital assets are profitable, however, caution is necessary when dealing with dynamic assets. Digital assets are anything that can be stored and transmitted electronically through a computer or other digital device and are associated with ownership or use rights such as cryptocurrencies and NFTs.
Institutions, digital assets market and regulators should look into understanding concerns around AML/CFT perspective, managing custody and the risks associated with digital assets, and managing the volatility that is inherent in most digital assets.