Issue link: https://digital.shearman.com/i/1479657
What are Cryptoassets? Cryptoassets & Insolvency 6 The most commonly known form of cryptoassets are cryptocurrencies, but others, such as non- fungible tokens (NFTs) (a means of recording the ownership of digital assets such as digital artwork), will also fall within the asset class. Although there is no single recognized definition, cryptoassets can be seen as a digital representation of value or contractual rights that can be stored, transferred, or traded electronically. Cryptoassets may utilize cryptography (secure communications techniques which use computer science and mathematical theory), DLT or similar. While Central Bank Digital Currencies (CBDCs) are issued by a central bank, work alongside sovereign cash and bank deposits and have the same security as cash, cryptoassets are often privately issued and can fluctuate drastically in value. One type of cryptocurrency—the stablecoin—attempts to manage that problem by backing the "currency" with assets. Cryptoassets can be used to make transactions for speculative investments or to diversify an investment portfolio and afford a degree of anonymity to those owning or using them. The individual tradable units which comprise a cryptoasset (e.g., a Bitcoin or an NFT) are typically referred to as "tokens." In turn, these are sometimes subdivided into: (i) "native" tokens—which do not derive their value from another underlying asset (e.g., Bitcoin); and (ii) "non-native" tokens—which derive their value from some other underlying asset (e.g., stablecoins, which are typically pegged to a fiat currency or a commodity, such as gold). Depending on their structure, native or non-native tokens may fall within the definition of "securities." Native tokens give rise to significant investment risk, as the value of the investment is simply the value in holding that native token (and is completely dependent on the infrastructure maintaining that token). Non-native tokens are more likely to carry the value of the underlying asset. That said, they do not necessarily carry the right to the underlying asset itself but may help to constitute evidence of such right to ownership, and if the asset itself is another token, may be the only manner in which that asset can be handled. Non-native tokens are likely to be of interest to financial institutions, including clearing banks, in that they can provide a form by which other assets can be traded (including for central banks, fiat currencies, where the non-native token wraps a central bank obligation to pay a currency). Exchange Tokens Often referred to as cryptocurrencies, they use DLT platforms and are not issued or backed by a central bank. They are used as a means of exchange or for investment—examples include Bitcoin and Litecoin. 01 Security Tokens In the U.K., Security Tokens qualify as "specified investments" for the purposes of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. They may provide rights such as ownership, repayment of a specific sum of money, or entitlement to a share in future profits. 02 Utility Tokens Utility Tokens can be redeemed for access to a specific product or service that is typically provided using a DLT platform. 03 THE THREE KEY CATEGORIES OF CRYPTOASSET ARE: