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The role of digital assets in today’s financial climate can no longer be ignored. Although the International Monetary Fund (IMF) warns of their potential risks, it stated in a research note that digital assets are now mainstream and should no longer be considered a fringe asset class in the financial sector. It’s not just the IMF either, as countries like Singapore, Russia, and more are deterred by the lack of definition. However, as the asset class continues to become more pervasive, all players in the financial market, including proponents and cynics, can see the influence digital assets have in the industry.
What are Digital Assets?
A digital asset is a virtual representation of value with unique identifiers and use cases. Digital assets exist on several different platforms and are usable as mediums of exchange, stores of value, or more. In today’s financial market, digital assets are available in different categories, each one with unique features and varying legal and financial implications.
- Cryptocurrencies: Easily the most widely-known digital asset category, cryptocurrencies describe electronic and encrypted currencies available and usable via blockchain technology. Crypto assets may be native or fiat-based. While a fiat-based cryptocurrency is an asset pegged to the value of a fiat, a native asset has no fiat base, and succumbs to market forces, such as supply and demand. Depending on market factors, the value of a native tokens may spike or plunge arbitrarily.
The major difference between native and fiat-based options is the presence of fiat-based collateral. Native currencies generally do not have an asset backing their value, while fiat-based tokens have their value clearly pegged to another asset. For instance, USDT and BUSD are examples of cryptocurrencies with values pegged to the US dollar. Also called stablecoins, fiat-based cryptocurrencies are not volatile and only fluctuate based on the value of the underlying fiat collateral.
On the other hand, native cryptocurrencies have no fiat backing and are available to the general public via decentralized blockchains. Native cryptocurrencies can be very volatile and usually experience severe price swings as the market tries to determine their fair value. Examples include Bitcoin (BTC) and Ethereum (ETH).
- Security Tokens: Sometimes called digital securities, security tokens are digital representations of real-world assets, now traded on a blockchain. Security tokens are also available in categories, including traditional investment securities and alternative investment securities. Traditional options may include debt and equity instruments, while alternative investment securities may be derivative contracts, trusts, and funds.
- Other Digital Assets: There are other types of digital assets tradable on a blockchain, which are not cryptocurrencies or security tokens. For instance, non-fungible tokens (NFTs) are uniquely verifiably assets on a blockchain, each with distinctive metadata that differentiates one from another. There are also utility tokens, which are assets that serve a particular purpose on a platform. These can be property, such as tokens representing digitized real estate, social tokens giving users access to certain events, clubs, and celebrities, and even governance tokens, giving users a direct say in the future direction of the specified platform.
Investing in Digital Assets
There are several factors each prospective buyer must consider before purchasing a digital asset. Each asset class and example has characteristics that inform legal and financial implications. For instance, some cryptocurrencies allow direct exposure to the asset and may also provide financial returns; however, this cannot be guaranteed. Regardless, legal implications may be applicable in each case, as there is a difference in structure when it comes to direct ownership of a company, equity in the form of tokens, and tokens tied to investment contracts. For most, there are no statutory rights that users can invoke or expected obligations of the issuer. In addition, tax obligations may exist in some jurisdictions and may be unclear in others. Finally, digital assets that are not central bank digital currencies (CBDCs) are usually not usable as legal tender. Investors must carefully examine each type of cryptocurrency, consider all of the potential financial and legal implications, and study each asset’s track record before formalizing any investments. Some cryptocurrencies are considered property, while others are considered securities.
With much more regulation set around securities (as well as potential tax implications), it’s important to understand the internal aspects of the assets you are getting involved in. As a security token, there are much more stringent legal and financial implications, as there is a much more defined financial process. This includes reporting, who can invest in the securities, and taxation to name a few. Utility tokens are property, allowing for much more flexibility, while on the other hand, security tokens are viewed in the same way as a traditional security. With utility tokens being treated as property, there are less strict financial and legal implications, and there is a much lower barrier to entry. For example, many securities require someone to be an accredited investor to take part, limiting who can participate to mitigate downside risk, there is also more regulation in terms of who is allowed to manage securities on your behalf. For utility tokens, anyone can partake.
Outlook of Digital Assets
There are three different outlooks speculators use to describe digital assets. Each one gives a particular user’s insight into the asset’s long-term or short-term future; they may be bullish, bearish, or neutral.
A bearish outlook suggests that the cryptocurrency is likely to experience a downward trajectory for one or more reasons. For instance, there is a generally bearish outlook on USDT long-term, as it may not actually be backed by the number of dollars it is supposed to represent. Since the premise for each stablecoin is that it is backed 1:1 to a unit of the actual fiat, the validity of USDT’s backing is still under question, making many skeptical of the asset.
Assets with a neutral outlook are likely to see sideways support, with some users being bearish, some bullish, and some thinking the asset’s valuation will remain at the current level. Where there is a neutral outlook, the chance of a stable trajectory replaces the likelihood of a downward or upward one. Real estate tokens, for example, are likely to enjoy continued support since they serve a particular niche and have a pretty traditional and popular background.
A bullish outlook is the direct opposite of a bearish one, as it suggests that an asset will receive market support and increasing levels of adoption and value. The outlook on BTC and ETH is quite bullish for two main reasons. Firstly, both assets are very popular, and are the largest digital assets by total market capitalization. Secondly, there are viable use cases for both of them, with many current and upcoming products and services built powered by Bitcoin or Ethereum. This should ensure extensive utility over time, causing many to think the assets will increase in value over time. With many cryptocurrency users now getting exposed to the world of investing and securities, as well as the fluidity security tokens present compared to traditional securities, security tokens are quickly becoming the next big wave in the blockchain investment space.
Security tokens also have a bullish outlook for a few main reasons. Firstly, traditional issuers are gradually recognizing the benefits of tokenizing real-world assets. As the blockchain technology industry expands, more owners and issuers of financial assets, art, real estate, and other valuables across a variety of sectors will create digital representations on the blockchain as security tokens. Another reason is the potential regulatory ease expected of the shift to security tokens. If these assets already have regulatory permission to trade and are already available on regulated platforms and marketplaces, widespread adoption of security tokens would take shorter than expected.
Security Token Exchanges
Security token exchanges allow buyers and sellers to trade securities tokens in the same ways as they would on traditional stock exchanges or cryptocurrency exchange platforms. As a result, these exchanges play a vital role in the growing adoption of security tokens, and are at least partially (if not entirely) responsible for creating a healthy playing ground for buyers and sellers to interact.
A security token exchange also lets traditional traders take advantage of blockchain offerings while trading familiar assets. Directly or otherwise, exchanges provide these traders with the blockchain experience, bridging the gap between both worlds and increasing the likelihood of greater security token adoption.
Already shaping the security token landscape is Fusang, a fully-licensed digital security trading exchange. Fusang provides a working environment where issuers and investors can meet on the blockchain to safely issue, trade, and invest in security tokens. Fusang provides its issuing and investing public with three main features, including the Fusang Digital Identity (FDI), the Fusang Exchange, and the Fusang Vault, offering features across the spectrum.
Fusang has a variety of unique aspects that make it a reliable option for issuers looking to tokenize traditional assets. Firstly, the exchange has origins in the traditional capital markets with considerable experience. Before now, Fusang served as an investment management platform with a team of experts that deeply understood the requirements of the investment space. This already places Fusang above most other digital-asset businesses that may have experience with cryptocurrency and blockchain technology, but lack the understanding required to effectively operate in the capital market.
The exchange also ticks all the regulatory and compliance checkboxes needed to deal with more regulated security tokens. Before launching, Fusang liaised with regulators for specifics on licenses and permissions required to maintain a compliant but friendly custodial business. Currently, Fusang’s licenses include the Labuan Securities Exchange License, Money-Broking License, Fund Manager License, and the Hong Kong Trust or Company Services Provider (TCSP) License. This compliance allows retail investors to trade in a fully-regulated environment, knowing they are protected every step of the way.
Unlike many digital asset exchanges, issuers can enjoy products and services that offer complete end-to-end solutions on Fusang. Instead of limited services available on cryptocurrency platforms and traditional exchanges, Fusang offers services for investors, businesses, economies, and issuers. While businesses can benefit by enjoying more straightforward access to capital, investors can take advantage of dividend income.
As an established player, Fusang has proof of concept for its services. The exchange worked with a major Chinese financial institution to issue a digital bond, successfully creating a successful template for the process. In addition, Fusang has created equity tokens out of its own shares and will list them on the Fusang Exchange. This proves to all clients that Fusang trusts in its own methods and is willing to use the same processes it offers customers, putting its money where its mouth is.
People looking to use the security and immutability of the blockchain may take advantage of Fusang’s services whether or not the tradable assets they are dealing with are cryptocurrencies or security tokens, offering a full range of services for any user’s investment needs. Furthermore, Fusang ensures that the onboarding process for all parties is easy, seamless, and tailored to the needs of its customers. Issuers and investors can now enjoy traditional assets with advantages only available through blockchain technology, providing a necessary solution for the continued evolution of the securities market.