Decrypting Crypto Assets
Don't let the name fool you: crypto assets are no secret. Bitcoin, Ethereum and their rivals have experienced dramatic surges in value this year, as speculators bet big that this burgeoning asset class will transform business around the world. Of course, not everyone is so optimistic, with critics questioning the longevity of these assets, among other concerns. Is the crypto asset bubble destined to burst? Will some fade while others thrive? Will they all be replaced by entirely new crypto assets?
No one can answer those questions definitively today. In the meantime, some prospective investors may be better served seeking answers to a more basic question about crypto assets: What exactly are they?
Crypto assets are often known as crypto currency — innovative digital systems that allow peer-to-peer transfers of value, without mediation from banks or governments, through blockchain technology. The best known is Bitcoin, which debuted in 2008. Almost a decade later, Bitcoin has spawned rivals such as Ethereum. To understand how they differ, consider the contrasts between a basic flip-phone and a smartphone. Bitcoin is like the flip phone. The flip phone works well within the limits of making calls and sending texts, just like Bitcoin is great for making efficient peer-to-peer transfers. Ethereum is more like a smartphone that allows developers to create completely new apps and businesses using the underlying technology. While people can use Bitcoin, they could build on top of Ethereum.
Crypto currencies can be purchased and traded on dedicated exchanges, but they aren't as popular as traditional currency — consumers still haven’t warmed to the idea of using them in place of cash or plastic to pay for common products and services. But in some emerging economies, crypto currencies have done well, in part because they require very little legacy infrastructure and represent an opportunity to skip the middleman. They provide access to financial services for some of the world's two billion "unbanked" citizens and, thanks to the secure nature of blockchain technology, they also show promise in restricting corruption in underdeveloped regions. Crypto currency is an attractive option for employees on ex-patriot assignments who need to remit funds to family at home — sending crypto currency abroad is far less expensive than wiring cash. The appeal of crypto currency has not been lost on government officials, with some in Russia and Sweden floating the idea of introducing their own crypto currencies as an alternative to paper cash and coins.
Crypto currencies can be purchased and traded on dedicated exchanges.
Despite their currency roots, Bitcoin, Ethereum and others are also called crypto assets because they're used for more than just digital payments. Crypto assets can be used as as "stores of value" — uncorrelated assets that may well rival gold. In fact, some crypto assets have actually outperformed gold: Bitcoin has appreciated more than 400 percent since the start of 2017. But critics decry such surges as a fad, noting that gold, unlike crypto assets, has decorative and industrial applications. However, just as gold and other precious metals rise in value at times of instability, crypto assets also can be saved, retrieved and exchanged in the future, as long as they sustain demand and remain immune to counterfeit. Both kinds of stored-value assets are valuable only insofar as people believe them to be of value to other people.
Another use case for crypto assets — and possibly the most compelling and transformative — is crowd funding. Through initial coin offerings (ICOs), investors use crypto assets to buy "coins" or "tokens" in businesses, often startups. What does a coin get you? It varies, depending on the business. In some cases, it's analogous to buying a share in a company, but in other instances the result is more utilitarian, with coin holders receiving access to specific tools or features. Coin holders in a decentralized data storage company, for instance, may get a certain amount of digital storage space in exchange for their investment. "The 'coin' in an ICO can be a portion of intellectual property," explains Josh Deems, a blockchain specialist with State Street's Emerging Technologies Center. "It can allow you to actually access a project, to operate on that platform."
The diversity of ICOs may make them compelling to investors, but it also creates uncertainty with respect to regulation: Regulators are still grappling with how to govern the fledgling ICO market, which outpaced early-stage venture capital for the first time this past summer. Just this July, the Securities and Exchange Commission issued guidance saying that tokens issued by a fund called Decentralized Autonomous Organization, or the DAO, were subject to federal securities law. But what applies to DAO won't necessarily apply to other ICOs — there's no one-size-fits-all approach.
It's important to remember that similar frenzies, like the '90s dotcom bubble, ultimately yielded many losers among a handful of winners. What winners will emerge from the crypto asset boom? That's a secret only time will tell.
1. Orcutt, Mike. "Governments Are Testing Their Own Cryptocurrencies." MIT Technology Review, Sept. 25, 2017: https://www.technologyreview.com/s/608910/governments-are-testing-their-own-cryptocurrencies/
2. Thalassinos, Andreas, FX Empire. "The Crypto Future of Currencies." Nasdaq.com, Sept. 13, 2017 http://www.nasdaq.com/article/the-crypto-future-of-currencies-cm844748
Antoine Shagoury is our global chief information officer. He manages our information technology and enterprise data activities, directly supporting operations in 27 countries. Antoine is listening for the harmony between client experience and user experience.