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Let's look into the world of crypto-assets

Let's look into the world of crypto-assets

In recent years, crypto-assets have become a major topic in the financial world that resonates in the media. Cryptocurrencies, especially in connection with the investment in well-known cryptocurrencies such as Bitcoin or Etherum, are spoken about quite often and have become a new phenomenon. But what is a cryptocurrency (crypto-asset) from a legal point of view?

A crypto-asset is a decentralized virtual digital asset, which is based on asymmetric cryptography and on the chaining of digital signatures of individual transfers. Furthermore, it is not issued or guaranteed by a central bank using blockchain technology.

The legal definition of a crypto-asset is introduced by the forthcoming Regulation of the European parliament and of the Council on Markets in crypto-assets, which should be adopted soon. According to this regulation "crypto-asset" means a digital representation of the value or rights that can be transferred and electronically stored using distributed ledger technology or similar technology ".

A crypto-asset is a broader expression that also includes cryptocurrencies. This is because the term cryptocurrency may indicate that it would only be a currency as such, which in some cases may not apply. 

Crypto-assets represent a heterogeneous system of property assets and rights. Certain characteristics of individual crypto-assets may not represent identical characteristics to other crypto-assets. 

Crypto-assets may have different characteristics or may serve different functions. Some crypto-assets, also known as "investment" crypto-assets, may contain certain rights to profit (for example shares, equity-type instruments, or non-equity instruments). Other so-called "utility" crypto-assets provide "utility" rights, e.g. the ability to use them to access or purchase certain services or products. Other so-called "payment type" cryptocurrencies have no tangible value. Except in the expectation that they can serve as a means of exchanging or paying for goods or services that are outside the ecosystem in which they are built. Many also have hybrid functions or may evolve over time.

Another distinguishing criterion of crypto–assets is whether they operate on their own blockchain network or not. These differences divide them into the so-called coins and tokens. Coins include those crypto-assets that operate on their own blockchain network, such as Bitcoin. The coin is a crypto-asset that seeks to define itself as the digital equivalent of money. The main purpose of the coin is to act as a means of payment against classic fiat currencies such as a dollar or a euro. Coins are characterized by their decentralization and unlimited territorial scope. In this sense, they are the opposite of classic fiat currencies (EUR, USD), because fiat currencies are issued by a central authority (central bank) and can be used as a means of payment only within the territory of a given jurisdiction. 

In contrast, the token does not operate on its own blockchain network. The token operates on another already existing blockchain network. It is a functional unit already created according to existing rules e.g. Etherum. Tokens are basically intended for a purpose other than coins. A token is a type of right to dispose of an asset registered in digital form. The token owner is authorized to introduce the digital asset into the business transaction. Tokens are used in various start-up projects, where the classic financing through the issuance of securities (e.g. shares, bonds) is not used.  Whereas these investors buy a token for a certain type of cryptocurrency (e.g. Bitcoin, Litecoin), which represents a certain share or right on the start-up project. According to the purpose of using the token, we can divide the tokens into so-called payment tokens (for the purpose of making a payment), utility tokens (for the purpose of obtaining a benefit) or investment tokens (for the purpose of investing) and also other forms that are associated with another specific purpose. Closely related to the term token is the process of asset virtualization called tokenization. Tokenization is the transformation of a thing or a right to a token (see below).

The main advantage of crypto-assets can be their operation on blockchain technology. Blockchain technology ensures transparency, security and in some cases anonymity of trades.

Distributed Ledger Technology 

Distributed Ledger Technology (DLT) is a tool for storing information through a distributed book - repeated digital copies of data available in several places. DLT is built on public key cryptography, a cryptographic system that uses key pairs: public-keys that are publicly known and necessary for identification, and private keys that are kept secret and used for authentication and encryption.

Blockchain

Blockchain is a certain type of DLT technology. Blockchain is a digital distributed decentralized database where the parties share and know that the data, they see that data are the same as the data seen by other participants in the Blockchain database. It is basically a shared indestructible ledger containing various economic transactions that can be programmed to record all financial transactions and virtually everything of value.

Initial Coin Offering

ICO (Initial coin offering) is an alternative in the world of crypto-assets to classic IPO (Initial Public Offering).

ICO effectively enables companies to raise capital for their projects by issuing digital assets in exchange for fiat currencies or other crypto-assets such as Bitcoin or Etherum. It is the creation of electronic "coins", or "tokens" and their further offering and sale to the public in exchange for fiat currencies (such as the euro), or more often for virtual assets (such as Bitcoin or Etherum).

ICOs could provide a useful alternative source of financing for blockchain start-ups and other innovative companies that would find it difficult or expensive to raise capital using traditional financing methods. At the same time, ICOs could also provide a quick and efficient tool for obtaining money from a diverse investor base. ICOs represent an attractive but risky investment opportunity, even for smaller investors who usually do not have access to initial financial investments.

Tokenization

In the long run, asset tokenization can be considered a trend that has the potential to generate beneficial results for both market participants and investors. In fact, it is a tool for representing the ownership of assets on the DLT. Practically everything can be tokenized from physical goods to traditional financial instruments.

Tokenization has the potential to increase the liquidity of certain financial assets, such as unquoted shares or syndicated loans by making the transfer of ownership easier and faster. It can also reduce the need for mediators. In addition, DLT also makes easier the use of smart contracts that automate the performance of contractual obligations, potentially reducing risks and expenses. This can bring positive results for market participants as well as for final consumers.

Smart contracts

Smart contracts are separately executed pieces of code that replicate the terms of a given contract. They effectively translate complex contractual terms, e.g., payment terms into the calculation material to automate the performance of contractual obligations. Smart contracts can be used to provide specific guarantees, e.g., a guarantee in the case of Initial Coin Offerings (ICO) that the funds will be returned to the investor when the ICO does not reach the minimum subscription target.                                                                                                                      

Legal regulation of crypto-assets in the Slovak legal system

Does our legal system respond promptly to this area? Is there a regulation that would protect consumers or investors trying to enter start-up projects? Currently, there is no comprehensive legal regulation of cryptocurrencies in the Slovak Republic. However, this is not only a lack of Slovak legislation. A similar shortage can also be seen in the neighbouring countries of the European Union. The main reason is that crypto-assets and blockchain technology are relatively new technology and their development is constant. Unfortunately, the law is not able to respond effectively enough to the rapid development of new technologies. 

Crypto-assets are still a relatively new type of virtual asset that is constantly evolving. Their usability depends on individual types of crypto-assets. Several experts are sceptical about the usability of crypto-assets as an exchange tool and the follow-up replacement of fiat currencies. Others see the decent potential of crypto-assets as a tool of maintaining value and also as a tool in the fight against inflation or in the area of tokenization of financial assets. It is tokenization that can be an interesting tool for financing new investments or start-up projects. It is becoming more and more used in the world.