Digital Asset Guide: Demystifying the Multifaceted World of Digital Assets

Many tend to use one umbrella term when referring to instruments based on DLT: digital assets.

When we speak of DLT-based instruments, we refer to the digital representation of a specific value, right, or combination thereof, that is recorded and maintained on a distributed ledger technology (DLT) system. In practice, this representation takes the form of a digital token - a data unit that embodies or evidences certain rights (such as ownership, claim, or access right) linked to an underlying asset, service, or protocol function.

It’s important to clarify that the token itself is simply the technological means by which a specific right or value is represented and transferred – like a piece of paper in the past.

However, what makes it distinct from other traditional record keeping and transfer mechanisms is the unique way in which DLT operates. Each token effectively corresponds to a DLT ledger entry that is cryptographically secured (based on complex mathematical algorithms) time stamped and synchronized accordingly. This peculiar technological infrastructure ensures that each ledger entry (token) is tamper-resistant, transparent and verifiable without any central authority involved (like the record keeper).

The above-described digital assets can be used for a variety of purposes: one might use this technology to record the ownership title, rights and obligations stemming from a contract or a financial instrument, or claims to various real-world assets (like precious metals, commodities, art pieces, jewellery etc.), in the form of a DLT based token i.e. digital asset in this context.

In this way, ownership of such assets can be transferred more efficiently, even in cases where the underlying asset may be difficult or impractical to change hands in physical form. Most importantly, this easier transferability does not come at the expense of security or integrity of ownership related data: the ownership record remains cryptographically protected, tamper-resistant, and verifiable thanks to the inherent features of DLT described above.

Chapters below, focus on different types of digital assets, that are primarily classified for this purpose in accordance with the regulatory taxonomy of digital assets in the EU.

Whereas the term digital assets is largely seen as an umbrella term used for all DLT based instruments, the term crypto-assets (or cryptoassets and virtual assets depending on the jurisdiction) has gained prominence in recent years primarily by managing to find its way into legislation of many countries around the world.

The EU was arguably the first jurisdiction that used the term in its proposal for the Markets in Crypto-Assets (MiCA) Regulation, which was unveiled in September 2020 as part of the EU Commission’s Digital Finance Package. The MiCA-Regulation which became fully applicable across the EU Single Market as of 30 December 2024, has created the first comprehensive regulatory framework on crypto-assets, regulating the issuing, trading of and provision of services in relation to crypto-assets. Under the MiCA framework, the term “crypto-asset” is being used as an umbrella term that is defined quite broadly as (i) a digital representation of a value or of a right; (ii) that is able to be transferred and stored electronically; (iii) using DLT or similar technology.

Practically speaking, this broadly defined term is aimed to cover various types of digital assets including digital assets that may be used for:

• Payments (payment tokens);
• Investment purposes (investment tokens) or
• access to a particular product or a service (commonly known as utility tokens).

Further, it captures digital assets that may be used as a means of payment or for investment purposes by virtue of the fact that their value is being backed by other more common asset classes (like commodities, securities or fiat currencies) – commonly known as “stablecoins” (explained in Chapter 3 below).

A crypto-asset may be tied to different rights and obligations which would make it function in practice like a financial instrument. For instance, where the person holding a token, benefits from the claim on periodic or one-time interest payments from the issuer, thereby operating in an equivalent way to debt instruments (like bonds or money market instruments). In other cases, crypto-asset may grant a holder rights and claims stemming from another underlying asset (like a share in a company or a bond), thereby making it equivalent to a derivative instrument.

Therefore, under the MiCA-Regulation, crypto-assets that constitute financial instruments and other regulated instruments under the EU law¹  are not deemed as crypto-assets to which the MiCA-Regulation applies. Hence, crypto-assets that one might purchase as an investment, will be treated as a standard financial instrument in all material respects under the EU law, where the crypto-asset in practice functions in an equivalent way like a standard financial instrument (bond, money market instrument, derivative etc.). The aforementioned crypto-assets are commonly known as “tokenised financial instruments” (see Chapter 4 below for more).

Many other jurisdictions around the world follow a similar approach to the EU, by:

• defining an umbrella term (like crypto-asset/cryptoasset/virtual asset) that captures various types of DLT based instruments;
• stipulating a number of caveats which ensure that regulated instruments under the securities trading, e-money and payments regulations stay under the scope of existing regulations;
• most usually, exempting crypto-assets used in a closed-loop system (like loyalty coins) from the scope of crypto-specific regulatory frameworks.

The same approach was taken also by the UK lawmakers when drafting the Financial Services and Markets Act (FSMA) 2023 back in 2023, which defined the term “cryptoasset” as an umbrella term in a similar (nonetheless not identical way) as the EU MiCA-Regulation. Most recently, the HM Treasury has unveiled a draft statutory instrument creating a further taxonomy of cryptoassets, by differentiating between qualifying cryptoassets (cryptoassets that are planned to fall under the future regulatory framework regulating activities of issuers and service providers) and specified investment cryptoassets – those DLT instruments that fall under the definition of cryptoassets but at the same time meet the criteria to be deemed as specified investments (regulated financial instruments under the UK law).

Therefore, in terms of the scope of application, the term crypto-asset in the EU (and cryptoasset in the UK) at least, refers to some most common types of DLT based instruments that one might come across with incl. amongst other cryptocurrencies like Bitcoin, Ether, Solana, various types of utility tokens as well as stablecoins.

¹ Art. 2 para. 4 MiCA-Regulation

At first, the use of crypto-assets in the payment sector did not manage to reach some noteworthy scale, primarily due to high price volatility of some crypto-assets like cryptocurrencies like Bitcoin and Ether. This has incentivized the crypto industry to find alternative ways for the use of digital assets for payment purposes. One of the most successful ones was the method that involves tying the value of the digital assets to the value of another asset, like a fiat currency, which resulted in the creation of a new type of digital assets that today form an essential part of the crypto-asset ecosystem: stablecoins.

Stablecoins are nothing other than digital assets (under the MiCA-Regulation for instance, crypto-assets) that purport to maintain a stable value, by being linked to the value of another asset – be it a fiat currency like EUR or USD, precious metal (e.g. price of gold) or another commodity (e.g. oil price).

Due to a variety of potential underlying assets, the EU lawmakers have designed the MiCA-Regulation in a way that provides for two distinct categories of stablecoins:

• Asset-referenced tokens: A crypto asset that is not an e-money token and that purports to maintain a stable value by referencing another value or right or a combination thereof (for example, commodities, other crypto assets), including one or more official currencies.
• E-money tokens: A crypto asset that purports to maintain a stable value by referring to the value of one official currency (for instance EUR, GBP, or USD).

Since stablecoins are primarily used as means of payment, regulators around the world are particularly concerned about the risks that their wide use may pose to the stability of the financial system as well as about their impacts on fiscal and monetary stability of individual jurisdictions. Hence, many lawmakers around the world (incl. the EU through the MiCA-Regulation) create designated regulatory requirements applicable to issuers of stablecoins and entities providing safekeeping services with respect to them.

In the EU for instance, the above-mentioned e-money tokens are deemed as e-money – a legal means of payment that anyone can use and accept as such in the same way as their e-money balance on their PayPal account. On the other hand, particularly conscious of the attempts of some big tech companies to create an asset-backed digital currency a couple of years ago, the EU framework also includes a designated set of rules applicable to issuers of the above-mentioned asset referenced tokens, which, unless already regulated as a credit institution in the EU, require a special authorisation.

As mentioned above, digital assets that function in a way similar to traditional financial instruments are generally not regulated under the designated regulatory frameworks that aim to regulate the issuers and service providers that engage in activities related to crypto-assets explained above.

Instead, where a digital asset grants its holders rights that are equivalent to those conferred by traditional financial instruments, a digital asset is treated in the same way as any other financial instrument – regardless of its underlying DLT infrastructure. The reason behind this idea lies in the fact that financial instruments are subject to stricter rules under the securities issuing and trading legislation of various countries around the world, that aim to ensure high level of transparency, investor protection and stability of the financial system.

Accordingly, issuing a digital asset that grants its holder any of the following rights would generally imply that the asset qualifies as a regulated financial instrument in the EU within the meaning of Article 4(1) (44) MiFID II:

• A claim to interest payments (periodic or one-off);
• A claim to proceeds derived from another underlying asset (such as dividends from an underlying share);
• A claim to an underlying asset (such as a debt instrument);
• A right to participate in the decision-making of a company (as a shareholder);
• A claim to a portion of assets pooled into a single account from which investments are made into other assets (such as real estate, transferable securities, or commodities).

Despite the fact that at least in the EU, the answer to this question appears to be pretty straightforward, bringing DLT based instruments under the scope of traditional financial services regulation is sometime harder than it might appear at first glance.

Namely, the existing rules regulating securities trading and especially securities settlement process, are designed with the legacy financial market infrastructure in mind. For instance, under the EU Central Securities Depository Regulation (CSDR) all trades need to be recorded in a book-entry-format. Further, under the Markets in Financial Instruments Regulation (MiFIR) investment firms facilitating trading in financial instruments, are required to report all transactions in prescribed format to their competent supervisory authorities. Both of the aforementioned, are hardly compatible with the use of DLT based instruments.

Conscious of this, the EU has developed a DLT Pilot Regime which is operational as of 23 March 2023, and which provides for targeted exemptions from some key regulatory requirements (incl. the above mentioned two) under the existing financial services rulebook in the EU, aiming to enable issuing and trading of DLT based financial instruments in the EU. See our dedicated article on this topic for more detail.

In recent years, primarily banks have been expressing ever growing interest in using DLT as a technological solution for the sake of efficiency, cost and operational improvement of their products and services. One of the most noteworthy examples of this tendency is the tokenisation of bank deposits.

Currently, deposits that one has with a local bank is nothing else than a numerical entry in the system of the bank in question, which is related to a correspondent entry in the bank’s balance sheet. This entire infrastructure is based on traditional information technology systems and processes common in the banking sector, and transfer of funds from one account to another is run based on the legacy payment infrastructure (in the case of international payments, SWIFT based). Therefore, processing a payment transaction particularly in international context, takes quite some time and usually involves intermediation by a number of different financial institutions.

The tokenisation of a deposit refers to recording of the deposit claim of a depositor (customer) against the credit institution on the DLT instead of a traditional ledger (“tokenised deposit”). Through tokenisation of bank deposits, and the related use of digital tokens that run on DLT, banks could achieve more efficient and transparent processing of payment transactions that the existing payment infrastructure cannot facilitate (not for the time being at least).

Looking at this concept, one might ask a legitimate question – how exactly these tokenised deposits differ from stablecoins that likewise can be used as a means of payment, that run on DLT and provide for the same level of time and operational efficiency in comparison to traditional means of payment?

Tokenised deposits differ in many ways from stablecoins, primarily because they represent a deposit the acceptance of which solely the banks in many jurisdictions around the world have a monopoly over. As such, deposits (either in their traditional or potentially tokenised form) fall under the statutory deposit guarantee scheme – for instance in the EU under the Deposit Guarantee Scheme (DGS) Directive, deposits of up to EUR 100.000 are protected under the DGS of the EU Member State in question. Lastly, as a regulated deposit taker, banks are permitted to grant interest on all deposits of their customers. None of the aforementioned features are associated with stablecoins under the EU MiCA-Regulation: (i) stablecoins can be issued by a number of different entities under the MiCA-Regulation, not only banks; (ii) the funds that customers pay in exchange for an asset-referenced or e-money token are not protected under the DGS, (iii) issuers of stablecoins in the EU are prohibited from granting interest on them to their customers.

And while banks and financial institutions around the world are actively looking for various use cases for the application of DLT in finance as explained above, central banks are not only closely watching the sector but also trying to get into the space in their own way.

Conscious of the potential benefits that the use of DLT instruments can offer primarily in terms of time, cost efficiency and transparency improvement, central banks of several jurisdictions around the world have been working for quite some time on the issuance of their official currencies in tokenised form – commonly known as central bank digital currencies (CBDCs).

Whereas tokenised deposits represent just another more efficient and transparent method of record keeping for commercial bank money (the amount of funds displayed in one’s account statement) CBDCs represent an entirely different concept. CBDCs refer to central bank money, an official currency issued by the central bank (e.g. Euro by the European Central Bank) in the form of a digital token. Unlike banknotes or coins, CBDCs exist as digital tokens recorded on DLT system that is operated by the central bank and provide their holders with a direct claim vis-à-vis the central bank. As such, CBDCs also differ from the digital money held in commercial bank accounts, which represents a claim on a commercial bank (the bank one holds deposits with) rather than on the central bank itself.

For quite some time, the ECB has been working on the Digital Euro project that shall introduce Digital Euro as a CBDC within the Eurozone. Given that the ECB’s current mandate solely covers issuance of Euro coins and banknotes, the EU Commission has prepared legislative proposals for that shall expand the ECB’s current competence and allow for the issuance of Digital Euro.

However, the Digital Euro project has experienced many challenges in the recent period: from the criticism in terms of its proposed scope (focused in the first phase, solely on the volume limited retail use of Digital Euro), opposition from some corners of the European Parliament and the Council as well as most recently the banking industry that in the light of recent development of stablecoin arrangements by several banks in the EU see the idea as rather obsolete. Arguably, the biggest added value that CBDC should offer would be easier payments and settlements in wholesale space (by using CBDC instead of a stablecoin or tokenised deposit issued by private institutions). Nonetheless, whilst ECB is experimenting within the Eurosystem with the potential use of Digital Euro for wholesale purposes, this is still relative to the ongoing retail Digital Euro Project (that is aimed to go live sometime in 2029) in relatively early stage.