Types of Cryptoassets
Cryptocurrency
The most well-known form of cryptoasset is the cryptocurrency, of which Bitcoin is the best-known example. Cryptocurrencies are a form of digital money. However, while most digital money is an online version of traditional paper currencies, such as the digital U.S. dollars discussed earlier, cryptocurrency is an entirely different proposition (see Box 2).
Utility Tokens
Utility tokens are built and used within discrete platforms. The classic example is Ether, which is a utility token created on the Ethereum blockchain and used to settle smart contracts executed on that blockchain and to access dapps (decentralized apps, which are applications run across the distributed Ethereum network). Importantly, Ether is both a utility token and a cryptocurrency as it is used in multiple different ways—this underscores the complexity of the crypto landscape.5
Stablecoins
Stablecoins are an area of growing interest on the part of both investors and regulators.6 Stablecoins are a type of cryptocurrency that is pegged to a fiat currency—or, more rarely, to an exchange-traded commodity such as gold or platinum. Stablecoins are generally redeemable for fiat currency, and issuers hold fiat currency equal to the value of stablecoins issued. Regulators have expressed concerns that some stablecoin issuers do not have the sufficient reserves to back their issued coins—for example, Tether, the world’s largest stablecoin by market capitalization, which is pegged one-to-one to the U.S. dollar, has been fined millions of dollars by the Commodity Futures Trading Commission (CFTC) for misleading investors by claiming its stablecoins were fully backed by dollars when they were not.7 In other cases, the design of certain stablecoins that rely on algorithms to maintain their pegs have raised concern—the collapse of TerraUSD illustrates the potential risks of these poorly-understood mechanisms.8
Security tokens
Security tokens function much like traditional financial securities—they represent a stake in a real-world asset, such as a business or real estate. They are a digital version of traditional securities that use cryptography and blockchain technology to manage issuance, ownership, and exchange functions. An example is ArCoin, a token representing shares in Arca’s U.S. Treasury Fund. There has been some controversy over security tokens. On several occasions, for example, the Securities and Exchange Commission (SEC) has brought actions against crypto companies for conducting unregistered securities offerings when they issued tokens.9
Central Bank Digital Currency (CBDC)
CBDCs are the result of regulators exploring the potential benefits of fungible digital tokens.10 Essentially, CBDCs are virtual forms of fiat currency. Like cryptocurrencies, CBDCs would exist on a network, but the network in this case would be centralized and controlled by the government. Theoretically, CBDCs would make the implementation of monetary and fiscal policy faster and easier, but they would also raise privacy concerns. Many governments are investigating the possibility of issuing CBDCs; China is conducting pilot trials of a digital yuan, for example.11
Non-fungible tokens (NFTs)
NFTs are digital representations of one-of-a-kind objects—they are non-fungible in that they cannot be exchanged for one another as each token represents a unique asset.12 Most commonly, NFTs are associated with digital works of art. Artists create a blockchain-based token representing an individual digital artwork—an album, an image, or an icon, for example. While the artwork itself can be reproduced, viewed, or copied as usual, the NFT is a unique object owned by the collector who purchases it. In a sense, then, an NFT is like a digital version of a rare baseball card. NFTs may sell for millions of dollars—an NFT representing CryptoPunk #7523, a digital icon, sold for $11.75 million, for example.
BOX 2
What is Cryptocurrency?
Traditional—or fiat—currencies are issued by governments and new money is generally created through the fractional reserve banking system. Most digital fiat money flows through the mainstream financial system, with financial firms acting as middlemen in transactions. When you use your credit card, for example, both your bank and the store’s bank act as intermediaries.
Historically, traditional currencies were backed by hard assets—most popularly gold—but today, few are. Instead, they are backed by the full faith and credit of their issuing government. Their value derives from the fact that governments have declared them legal tender—in other words, from government fiat.
By contrast, cryptocurrencies are neither backed nor issued by the state. New tokens, often called coins, are created and exchanged using blockchain technology. The number of new coins created is determined by the software underlying the blockchain (or, in some cases, by decisions made by blockchain participants). While cryptocurrencies, like fiat currencies, are not backed by assets, they are also not subject to devaluation due to government printing of new money as their supply is controlled by the network.
Cryptocurrencies’ value derives primarily from users’ faith in them and willingness to use them as a form of exchange or store of value. Cryptocurrencies generally offer a high degree of privacy. Cryptocurrency blockchains use sophisticated encryption methods to provide security and, when transactions are completed over the blockchain, the identities of participants are shielded as they are generally identified only by their public key.
A Growing Universe
The above list of cryptoasset types is incomplete and subject to change. The crypto market is constantly evolving, with new technologies and tokens emerging every day. However, the list above covers the most prominent and important cryptoassets—and those most frequently used as long-term investments.
5 Metaco. Cryptographic Tokens. May 4, 2021.
6 CFTC. Summary overview of stablecoins and the law regarding stablecoins. October 3, 2019.
7 CFTC. CFTC Orders Tether and Bitfinex to Pay Fines Totaling $42.5 Million. October 15, 2021.
8 Financial Times. Stablecoins Need to Be Tethered By Real-World Rules. May 15, 2022.
9 Paul Weiss. Chair Gensler Reaffirms Focus on Crypto Enforcement; SEC Brings Actions Against a DeFi Lender and a Crypto Exchange for Offering Unregistered Securities. August 11, 2021.
10 Deloitte. Are Central Bank Digital Currencies (CBDCs) the money of tomorrow? 2020.
11 CNBC. China is pushing for broader use of its digital currency. January 11, 2022.
12 CNN Business. What is an NFT? Non-fungible tokens explained. November 10, 2021.
© The American College of Financial Services • TheAmericanCollege.edu • 888-640-3748