Know your Terminologies: Cryptoassets
Understanding the cryptoasset class
Although crypto regulations are progressing, globally, coherent and comprehensive frameworks among jurisdictions tailored specifically to cryptoassets are generally lacking.
A perennial issue with cryptoassets lie in their distinctiveness from traditional asset classes, making it difficult to apply existing regulatory frameworks to them and develop new ones that ensure full coverage and financial protection for market participants. At the same time, it can lead to financial institutions walking on eggshells with regulators when seeking to transact with cryptoassets, with uncertainties over whether they may be inadvertently breaking regulatory guidelines.
For example, not only do cryptocurrencies have some key distinctions from traditional securities, such as the absence of formally recognised management structures and legal rights for holders, there are several different types of cryptocurrencies, which across different jurisdictions, can be defined as a security, commodity a derivative, or something new altogether. Consequently, global regulatory frameworks are largely fragmented and lack standardisation, often leading to ambiguity, confusion and mistrust, thereby discouraging greater institutional adoption.
Generally speaking, cryptoassets fall under the following definitions:
Bitcoin: By market capitalisation, Bitcoin is the largest cryptocurrency, with its price often used as a metric for the general direction and health of the cryptocurrency market. Due to its size and popularity, is often seen as a standalone cryptocurrency.
Altcoins: A portmanteau of ‘alternative’ and ‘coin’, any cryptocurrency other than Bitcoin is technically considered an altcoin, and despite the definition, are comprised of coins and tokens;
Coins and Tokens: Cryptocurrencies can broadly be defined into two categories; coins and tokens. Crypto coins are cryptocurrencies that operate on their own independent blockchains. Coins generally serve as a medium of exchange, unit of account and a means of storing value within a blockchain. Bitcoin and Ethereum are examples of crypto coins. Crypto tokens are cryptocurrencies that are built on existing blockchains, such as Ethereum, and do not have their own independent blockchain. Examples of tokens include ERC-20 tokens built on the Ethereum network, such as Chainlink. Tokens perform more specialised functions, such as project participation rates, blockchain governance or access to certain services. Crypto tokens can be broken down even further;
o Utility Tokens: Utility tokens provide users of a particular blockchain with specific services or functions within that blockchain or platform. These include voting or triggering smart contracts (network-based protocols) and serving as an internal currency for transactions within the ecosystem.
o Governance Tokens: Token ownership can determine the extent to which holders can participate in the decision-making process of a blockchain, such as project development and modifications.
o Security Tokens: Although not technically a cryptocurrency, security tokens are digital representations of ownerships rights to an asset that has been tokenised and stored on a blockchain, such as bonds, real estate and other real-world assets.
Stablecoins: As the name suggests, stablecoins go against the inherently volatile nature of cryptocurrencies, and are designed to maintain a stable value, typically through being algorithmically pegged to another asset, such as fiat currency or gold. Stablecoins are typically traded against other cryptocurrencies and thus act as a bridge between fiat currencies and cryptocurrencies.
Memecoins: Currently one of the most popular cryptocurrencies at the retail level, memecoins are highly speculative plays that are developed off the back of internet trends or characters. These digital currencies are highly speculative and are typically developed on core blockchain networks such as Ethereum and Solana. An example is Dogecoin, inspired by a famous Shibu Inu dog called Kabosu. Dogecoin currently has a market capitalisation of $15.1 billion.
Non-fungible tokens (NFTs): Are non-interchangeable digital assets that produce a blockchain record intrinsically connected to a real-world object such as art, digital content or media. The most expensive NFT art ever sold is called “The Merge”, which fetched $91.8 million on Nifty Gateway, one of the main NFT marketplaces.
Such is the diversity and uniqueness of cryptocurrencies as an asset class, regulators, globally have found themselves in unchartered territory when it comes to regulation. In fact, to say that regulators have been confounded by cryptocurrencies is an understatement.
Being aware of the different definitions of cryptoassets will, going forward, help to ensure that opacity towards the weird and wonderful world of cryptoassets is reduced and help financial institutions to understand the varying degrees of risks of that they pose, and how they may be applicable to different regulatory frameworks.