It’s reasonable to say that cryptocurrencies have gone global and become a topic of conversation. Cryptos are investing or trading something that, at the very least, most people have heard about. First, let’s define cryptocurrencies so they are all on the same page.
Coins based on the blockchain protocol are called cryptocurrencies, functioning as a decentralized digital currency. Cryptocurrencies from the first generation, with Bitcoin and Ethereum at the forefront, have a checkered past regarding their volatility, predictability, and, most importantly, intrinsic value; that is, it is nearly impossible to determine the value of the underlying or embedded instrument or asset.
However, asset-backed cryptocurrencies appear to be the polar opposite of early cryptos. The Yuan Pay Group was developed by experts in the financial sector and government agencies with interest in keeping tabs on the circulation of the Chinese Digital Yuan. The article is based on their investigation and is not meant to serve as a comprehensive exposé of blockchain technology.
Overview of Crypto Assets
Due to the uncertainty of early cryptocurrencies, asset-backed cryptocurrencies arose. The coin or pass’s value comes from the underlying asset, which could be real estate, gold, or fiat currency. Intangible assets include IP, equities, bonds, VC stakes, commodities, and finished items. The asset is digitally recorded as a cryptographic record on a blockchain or equivalent zdecentralized ledger.
Crypto assets aren’t cryptocurrencies because they’re more than a currency. IMF (2019) zrecognizes that coins and tokens can be used interchangeably. “Crypto-assets” includes both digital assets. IMF zrecognizes no uniform definition of a cryptocurrency asset.
Tokens and coins of distributed ledgers and blockchains, such as asset-backed tokens, are examples of crypto assets.
Exchanging Cryptocurrency-Based Assets
Crypto-trading platforms are where the buying and selling of cryptocurrency take place. The IMF (2019) claims that cryptocurrency trading platforms offer brokerage services to regular investors similar to traditional stock brokerage businesses. Unlike stock brokerages, which can simply forward customer orders to an exchange, crypto trading brokerage firms/platforms typically need to provide liquidity to facilitate transactions among their investors.
As they saw, cryptocurrency exchanges can serve as custody providers, margin lenders, and liquidity markets. That is to say, they bypassed a third party. This step of the procedure might be improved upon.
Since new platforms differ from traditional ones in that they provide functions previously performed by financial service providers like brokers and custodians, they will need to be regulated.
Cryptocurrency Asset Regulation
When developing a regulatory framework for crypto-asset platforms, the IMF (2019) recommends that the following factors be considered.
- Prudential standards for platform operators, such as having sufficient resources to manage the platform using a risk-based strategy, as part of the governance requirements for platform operators.
- If the platform allows direct retail access, it cannot depend on the due diligence of intermediaries such as brokers or listing advisers. Thus, it must ensure that it has proper procedures and controls in place.
- Requirements for operating system toughness, resilience, and integrity, including good cyber security processes and controls.
- Requirements for market integrity, such as regulations against market misuse and surveillance methods to keep investors safe.
- People must comply with transparency regulations that guarantee that the public has access to accurate and timely market data in a non-discriminatory manner. Additionally, the accessibility and openness of the platform’s rules and procedures, such as order processing and how errors and cancellations are dealt with.
- Requirements for preventing money laundering and the funding of terrorism. In order to operate, the platforms must conform to FATF standards (FATF).
- Custody: Regarding custody, regulators should consider the steps needed to protect the investments (ownership); correct encrypted decentralized rights.
- To ensure that clients’ cash and assets are allocated accurately and promptly, the platform’s clearing and settlement processes must be transparent and understood by regulators.
Regarding crypto assets, regulators must keep a close eye on the market while remaining open to new ideas and innovations. The central role that crypto assets play in the fintech revolution means that regulators and supervisors will shift their attention to different places as the industry evolves.
As the cryptocurrency market develops, crypto assets will play a pivotal role since their advocates believe that the capital currently held in traditional assets will eventually enter the crypto realm. The financial sector’s established firms must decide whether to “keep doing what they’ve always done” or adapt to the digital age.