Digital assets are any assets represented digitally on blockchains. Collectively, they tend to be referred to as “cryptocurrencies”. This term is often inaccurate, however. Many of these coins (or “tokens”) are not intended to be used like traditional currencies. Rather, they can have a variety of functions and derive their value in a number of ways.

Here are the main types of digital asset: 

Digital currencies: Coins like Bitcoin or Litecoin are pure digital currencies. They are like national or “fiat” currencies insofar as they are primarily an abstract medium of exchange, used to represent the relative values of different goods with respect to each other. Unlike national currencies, most digital currencies are not controlled by a central bank and many have a fixed supply.

The value of Bitcoin and Litecoin is simply the same as their price, which is set by the market in response to demand and scarcity. Of course, demand is fueled by potential use as a means of payment, an investment or a store of value.

Digital currencies have no other fundamental functions.

Utility tokens: A large number of tokens are intended to pay for the services provided by particular platforms. These are known as “utility tokens”. Ether, the token of the Ethereum blockchain, is required to pay transaction fees on that blockchain, which has broader use cases: entire decentralized applications can be built on top of Ethereum. Similarly, GAS is used to pay fees on the NEO blockchain, which can also be used to build decentralized applications.

The value of these tokens depends on demand for the services provided by their underlying platforms. They continue to be the object of speculation, but in this case, investors are assuming that the underlying platforms will be in high demand, and that their utility tokens will be required in the future.

Many projects sought funding by selling utility tokens for their platforms in ICOs.

Backed assets: While cryptocurrencies like Bitcoin and Litecoin are not backed by any other assets, some tokens can be redeemed for assets off the blockchain. Their value hence does not depend purely on the market for digital assets, but on the base assets to which they are pegged. For instance, Digix is backed by gold and USDC is a “stablecoin” backed by the US dollar – the main stablecoin offered by the Nash Exchange.

Backed coins are an example of “tokenized assets” and represent a point at which traditional assets intersect with the blockchain. They are digital representations of things that also exist elsewhere.

Of course, your ability to redeem USDC depends on its issuing company, Circle, so you are trusting Circle to have sufficient reserves or insurance to provide you with dollars for your USDC.

Backed assets are a clear example of a case where legal infrastructure is crucial in providing users with adequate protection. 

Security tokens: Digital security tokens are legally registered financial securities that exist on the blockchain (e.g. stocks or bonds). They are subject to the same regulations as traditional securities and hence provide investors with the same protections against fraud, market manipulation and insider trading.

The Nash Exchange token (NEX) was the first digital security to be registered in Europe. By registering our token as a security, we have a firm legal basis for distributing a share of our exchange revenue to investors. Other tokens that provide similar functionality may face troubles when regulations are eventually enforced.

Long term, digital securities potentially represent a major market, with traditional financial services moving to the blockchain to take advantage of improved security, liquidity and automation.

An exchange can only support the trading of security tokens if it has the appropriate licenses. Nash is working to obtain licenses so as to list the NEX token and other digital securities.