There is a lot of hype about digital assets and it can be quite a confusing topic.
If you plug those two words into a search engine you can be taken on a magical mystery tour, which risks leaving you more confused than before you started.
So, following the recent news that the UK is pushing ahead with plans to regulate the crypto industry to “become a global crypto hub”, I thought I would try to clearly explain what we mean by digital assets, homing in on investment funds and looking at how digital assets might impact them in the future.
Firstly, let’s address some of the terms we hear.
‘Digital assets’ is a very broad term to describe anything that is created and stored digitally that has value. The mind boggles as this can be all sorts of things including videos, images and data.
But, in the world of finance, digital assets relate to things like crypto tokens (aka cryptocurrencies and non-fungible tokens), collateralised stablecoins and central bank digital currencies (CBDCs), and everything in between.
There is a growing belief that digital assets will become more mainstream.We hear a lot about crypto currencies and crypto assets. The term crypto essentially means that the currency or asset is digitally secured by cryptography.
Most cryptos exist on decentralised networks using blockchain technology – a distributed ledger enforced by a disparate network of computers or nodes.
Bitcoin is the original cryptocurrency to use this new technique and is still the most well-known, although as of the time of writing there are more than 8,000 active cryptocurrencies in existence, according to data from Exploding Topics, a trend-tracking website.
It was created in 2009 and is currently the largest cryptocurrency by market capitalisation, worth around $690bn (£555bn) at the time of writing, according to price-tracking website CoinMarketCap.
The potential uses of crypto assets have expanded in recent years, with the introduction of new asset classes. For example, NFTs are unique digital tokens that can represent a unique item such as art.
Bitcoin recently hit a 17-month high on rising speculation that US regulators will approve conventional stock market funds to invest directly in cryptos.
Traders are growing increasingly confident that the US Securities and Exchange Commission will approve a Bitcoin exchange-traded fund soon.
This could have far-reaching implications even in the UK if this were to happen, including allowing investors to gain exposure to Bitcoin without owning the cryptocurrency directly, and could lead to a wave of new interest.
According to Reuters, the speculation has been further fanned by the listing of BlackRock’s iShares Bitcoin ETF on the website of clearing firm DTCC.
