Crypto-assets

The first major example of a crypto-asset was Bitcoin, launched in 2009. Many others have followed since. Although they were initially created to replace traditional currency, they are still primarily used as highly risky speculative instruments.

Let's try to understand them better.

What is a crypto-asset?

Crypto-assets are digital representations of value or rights, such as ownership of a piece of art, an amount in euros or dollars, or a financial instrument (e.g., a share). They rely on cryptographic techniques to ensure data security and verifiability.

Being digital, crypto-assets do not physically exist: they can only be stored in electronic wallets and are transferred from one party to another through complex technologies, such as blockchain. They can be issued by banks and other intermediaries, but also by unidentified or non-traditional entities.

Unlike official currencies, such as the euro or the dollar, crypto-assets are not legal tender, meaning the law does not require their acceptance for payments. They are not issued or backed by a central bank or public authority and do not always fulfill the essential functions of money: a medium of exchange, a store of value, and a unit of account.

For this reason, it is more appropriate to call them crypto-assets rather than cryptocurrencies.

Not all crypto-assets are the same

The world of crypto-assets is diverse and complex. Each has its own characteristics, such as the maximum number of units that can be produced, how it is created, and the rules for its transfer.

A key distinction is between:

• fungible crypto-assets: those that have equivalent value and characteristics, and are therefore interchangeable – like two banknotes of the same denomination or two ordinary shares of the same company.
• non-fungible crypto-assets (NFTs): each has unique characteristics or represents a specific object, such as a piece of art.

Risks to watch out for

Owning a crypto-asset mainly exposes you to market risk, i.e., the fluctuations in its value over time. The greater the fluctuation, the higher the risk.

Many crypto-assets, like Bitcoin, have experienced significant value swings: sharp losses followed by steep rises. For this reason, they have not proven to be a viable alternative to money, but rather high-risk investment instruments.

Some crypto-assets, known as stablecoins, are designed to maintain a relatively stable price. This is achieved either through direct investments in other assets (like short-term government bonds, deposits, or commodities such as gold), or via algorithms that regulate supply. However, the name can be misleading: price stability depends on the quality and availability of the underlying assets and on the effectiveness of the stabilization algorithm.

Investing in crypto-assets also exposes you to operational risk, such as losses due to technical malfunctions, errors in custody or transfer, scams, or fraud. For example, crypto-assets can be stolen from your crypto wallet, the electronic wallet where they are stored.

How savers are protected

To mitigate the risks associated with the use and spread of crypto-assets, in April 2023 the European Parliament approved the Markets in Crypto Assets Regulation (MiCAR).

The new rules primarily require transparency: anyone offering crypto-assets to the public in the EU must produce a white paper, a document that clearly and transparently describes the risks and main features of each crypto-asset.

This is an important first safeguard to help us understand what we are actually buying.

In addition to the white paper, stricter rules apply to issuers of stablecoins, or crypto-assets that aim to maintain a stable value based on underlying assets:

• asset-referenced tokens (ARTs): these are linked to one or more official currencies and/or specific financial instruments, such as government bonds. ARTs can only be issued by banks or authorized entities and are subject to supervision. Issuers must guarantee redemption at the market value of the underlying assets at any time. The return and risk depend on the composition of the reserve assets.

• e-money tokens (EMTs): linked to a single official currency, they can only be issued by banks or licensed electronic money institutions. EMT issuers must redeem them at face value at any time (i.e., one-to-one). Because of this, EMTs can be considered true money substitutes and are low-risk. However, like electronic money, they offer no return.

MiCAR also identifies the crypto-asset service providers (CASPs) - entities authorized to offer services such as exchange, custody, trading, investment advice, order transmission, transfer, or placement. These CASPs will operate alongside regulated intermediaries (like banks), under the regulation's requirements.

Supervision of compliance

National authorities are responsible for ensuring compliance. In Italy, the key authorities are Banca d'Italia and Consob.

MiCAR also provides for criminal and administrative penalties for those who offer crypto-assets without proper authorization, and administrative sanctions for those who exploit privileged positions or insider information to manipulate the market.