March 30th, 2023
The terms digital assets, virtual assets, and crypto assets can all be used to refer to the same thing. However, these terms have different meanings, and understanding how different assets are classified can be valuable, especially from a regulatory standpoint.
In some cases, definitions of these terms only include two of the three, which can impact their meanings. The descriptions used here are based on how organizations such as the IRS and Financial Action Task Force (or FATF) use the terms.
At its core, an asset is something that has value. A digital asset is an asset that is stored and traded on a blockchain or other distributed ledger technology. Examples of digital assets include NFTs, utility tokens, and similar assets that are issued and tracked on the blockchain.
Virtual assets store value that can be stored or transferred digitally. They can also be used to make payments or investments.
Since computers can store value in various forms, there are many different types of virtual assets. For example, traditional finance (TradFi) can have digital representations of value that have nothing to do with the blockchain.
A crypto asset is an asset that derives its value from its use of cryptography and distributed ledger technology. Cryptocurrencies are the main form of digital assets.
For example, a common criticism of Bitcoin is that it has no inherent value because it is not “backed” by a tangible asset such as gold. However, the benefits that a blockchain provides for a currency (anti-censorship, transparency, etc.) create value. Bitcoin’s value would be decreased if it didn’t have these features, so its value derives from its use of distributed ledger technology.
Virtual, digital, and crypto assets are overlapping terms. In fact, all digital assets are virtual assets, and all crypto assets are digital and virtual assets.
However, not all digital assets are crypto assets and not all virtual assets are digital assets. For example, a NFT might derive its value from the fact that it represents ownership of a particular asset not from its use of blockchain technology. Similarly, virtual assets that don’t use blockchain technology are not classified as digital assets.
One of the main advantages of understanding the differences between various types of assets is that it helps with understanding how a particular asset works. For example, an asset classified as a digital asset uses the blockchain but has some value beyond the fact that it uses the blockchain.
An understanding of the various asset classes is also useful from a regulatory perspective. For example, many regulatory arguments are based on whether or not a particular asset is considered a “security”. Securities are assets that are held with the expectation that they will rise in value due to the efforts of someone other than the holder. Currencies are not considered securities, so knowing that an asset is classified as a crypto asset vs. a digital asset can be important from a regulatory perspective.
At the end of the day, the lines between the different types of assets can be blurry. A single asset may be a crypto, digital, and virtual asset, and the definitions of the various classes can vary based on the source.
However, it’s still useful to understand the various classes and how a particular asset is labeled. This provides hints about the source of the asset’s value and also the regulatory implications of holding it.