1) Crypto Assets and Their Categories

Crypto assets are a form of digital asset that leverage cryptography and Distributed Ledger Technology (DLT), primarily blockchain, to record and secure transactions. The defining feature of DLT is decentralization, meaning transaction records are distributed across multiple network participants, ensuring transparency and security.

Crypto assets can be backed by another asset or unbacked. They are generally not considered money as they do not consistently function as a medium of exchange, store of value, or unit of account. Their value is often driven by supply and demand, leading to high volatility.

There is no single internationally accepted classification system for crypto
assets, but global financial regulators broadly categorize them based on their
function, risks, and issuance model.

Although financial regulators primarily classify crypto assets into four main categories (Unbacked Crypto Assets, Utility Tokens, Security Tokens, and Stablecoins), additional digital asset types such as Non-Fungible Tokens (NFTs) and Central Bank Digital Currencies (CBDCs) have emerged. These assets serve distinct purposes and are gaining increasing regulatory and market attention.

1. Unbacked Crypto Assets
   • These digital currencies, such as Bitcoin (BTC) and Ethereum (ETH), have no underlying asset or backing.
   • Their value is determined purely by market demand and supply dynamics.
   • Due to high price volatility, they are primarily used for speculation rather than for transactions.
   • They are decentralized, meaning no central authority controls their issuance or supply.
   • Example assets:
     • Bitcoin (BTC): The most widely recognized unbacked crypto asset, mainly used for speculative investment.
     • Ethereum (ETH): Supports smart contracts and decentralized applications (DApps) but also experiences high volatility.
     • Monero (XMR): A privacy-focused cryptocurrency designed for anonymous transactions, making it harder to trace sender/receiver details.
     • Litecoin (LTC): Originally designed for payments but is now largely speculative.
       
   • ✅ Key Features: Transferable, decentralized, not backed by a physical or financial asset, subject to price volatility.
2. Utility Tokens
   • FThese tokens provide holders with access to a specific product or service within a particular platform or network.
   • Unlike security tokens, they do not represent ownership or financial rights.
   • Their function is often to incentivize participation in a blockchain ecosystem.
   • Examples include:
     • Basic Attention Token (BAT): Used in the Brave browser for rewarding users and advertisers.
     • Chainlink (LINK): A decentralized oracle network that connects smart contracts with real-world data.
     • Golem (GLM): Allows users to monetize excess computing power in a decentralized network.
     • Filecoin (FIL): A decentralized storage network where users pay for and provide data storage.
   • ✅ Key Features: Used within a blockchain ecosystem, facilitates access to services, typically not considered financial instruments.
3. Security Tokens
   • Security tokens represent an investment asset, such as company stocks or financial securities, but in a tokenized digital form.
   • They may provide financial rights like dividends or profit shares, similar to
     traditional securities.
   • Due to their investment nature, they are subject to strict financial
     regulations in many jurisdictions.
   • Example assets:
     • Polymath (POLY): A security token platform enabling regulated
       securities issuance.
     • Harbor (HBR): A platform for tokenized real estate investments.
     • Securitize (DS Token): A regulated security token platform for private
       equity and debt markets.
     • tZERO: A regulated platform for digital securities trading.
       
   • ✅ Key Features: Subject to securities regulations, represents ownership or financial investment, provides legal rights similar to traditional assets.
4. Stablecoins
   • These assets aim to maintain a stable value by being pegged to fiat currencies, commodities, or other financial assets.
   • They reduce volatility, making them more practical for transactions compared to unbacked crypto assets.
   • Stablecoins can be either centralized (backed by reserves) or
     decentralized (algorithmically controlled).
   • Example assets:
     • Tether (USDT): Pegged to the US dollar, widely used for trading and
       payments.
     • USD Coin (USDC): A stablecoin with transparent reserve audits.
     • DAI: A decentralized stablecoin backed by crypto collateral rather than
       fiat reserves.
     • Pax Dollar (USDP): A regulated stablecoin issued by Paxos Trust
       Company, backed 1:1 by U.S. dollar reserves.
       
   • ✅ Key Features: Pegged to stable assets, reduces volatility, practical for
     payments, may be centrally issued or decentralized.
5. Non-Fungible Tokens (NFTs)
   • NFTs are unique digital assets that represent ownership of an item or
     collectible.
   • Unlike cryptocurrencies, which are fungible (each unit is identical), NFTs
     have distinct properties that cannot be replaced or exchanged on a one-to-one basis.
   • NFTs can represent:
     • Digital art (e.g., Beeple’s $69 million NFT sale).
     • Gaming assets (e.g., Axie Infinity creatures).
     • Virtual real estate (e.g., Decentraland land parcels).
     • Music & videos (e.g., Kings of Leon album NFTs).
   • Example assets:
     • CryptoPunks: One of the first and most famous NFT collections, consisting of 10,000 unique pixel-art characters.
     • Bored Ape Yacht Club (BAYC): A high-profile NFT collection of unique, hand-drawn apes, often owned by celebrities and investors.
       
   • ✅ Key Features: Unique, non-interchangeable, ownership verified on
     blockchain, collectible, used in art, gaming, and entertainment.
6. Central Bank Digital Currencies (CBDCs)
   • CBDCs are digital versions of national currencies issued by central banks.
   • Unlike cryptocurrencies, CBDCs are centralized, regulated, and backed by the government.
   • Primary purpose:
     • Improve financial inclusion.
     • Increase efficiency of cross-border transactions.
     • Reduce reliance on physical cash.
   • CBDCs can be classified as:
     • Retail CBDCs: Issued for general public use.
     • Wholesale CBDCs: Used by banks and financial institutions for interbank settlements.
   • Example assets:
     • Digital Yuan (e-CNY): China’s official CBDC pilot program with over
       250 million users.
     • Sand Dollar (Bahamas CBDC): The world’s first official CBDC,
       introduced by The Bahamas in 2020.
       
   • ✅ Key Features: Issued by central banks, pegged to sovereign currency, enhances financial stability, improves transaction efficiency.

• Key Takeaways on Crypto Asset Classification
  • Crypto assets differ significantly in function and risk—some serve as investments, others as utility-based access tokens.
  • Regulatory classification varies across jurisdictions, but security tokens face the most stringent oversight.
  • Stablecoins are the closest to traditional financial instruments,
    providing price stability.
  • Unbacked crypto assets like Bitcoin remain highly volatile and
    speculative.
  • No single global framework exists for crypto regulation, creating
    challenges for oversight and compliance.
    
    By classifying crypto assets appropriately, regulators aim to balance
    innovation with financial stability and investor protection.

2) Key Components of the Crypto Ecosystem, Associated Risks, and Regulatory Responses

The crypto ecosystem consists of various key components, each playing a crucial role in its functionality and structure. While these components foster financial innovation, they also introduce significant risks, which require regulatory measures to address them.

Additionally, the concentration of multiple functions within the same crypto entities increases systemic risks, potentially leading to broader market disruptions. As the crypto market expands, its potential impact on financial stability grows, particularly in regions where crypto adoption is high. Regulatory supervision and oversight are necessary to mitigate these risks, especially for entities deemed systemic, such as major exchanges or stablecoin issuers.

A. Key Components, Associated Risks and Regulatory Responses

• Isuers
  Role: Issuers create or “mint” crypto assets, which can be either centralized
  or decentralized.
  Risks:
  FDecentralized issuance removes central control, offering anonymity,
  liquidity, and broad access, but makes monitoring and regulation
  difficult.
  FMany issuers operate anonymously, making it challenging to track
  financial activities or enforce legal standards.
  FLimited disclosure on issuers’ identity, governance, financial
  backing, and intended asset purpose, which can mislead investors.
  FExposure to operational failures and cyberattacks at any point in the
  network. .
  FRisks associated with different issuance methods:
  oPre-mining: A batch sale of tokens to a small group before public
  distribution—may lead to price manipulation.
  oContinuous mining: Ongoing token generation, which could create
  concentration risks.
  oAirdrops: Free distribution of tokens, sometimes used as a marketing
  tool, which can distort demand.
  oICOs (Initial Coin Offerings): Can be exploited for pump-and-dump
  schemes and fraudulent fundraising.
  Regulatory Response:
  FImproving white paper disclosures: Information must be clear,
  accurate, and include governance, risk factors, and technology
  details.