The Sygnum Digital Asset Framework
The invention of blockchain and Bitcoin was a vital point which turned digital assets into a viable reality. The technology of the Bitcoin protocol solved a fundamental problem which had hitherto not been overcome – the prevention of double spending of a digital asset without the intervention of a centralised third party.
At the same time, Bitcoin became the first of a new digitally native asset class, commonly known as ‘cryptocurrencies’ or as referred to by Sygnum, protocol tokens. With Bitcoin, the protocol token is part of an incentive structure which keeps the network in balance, but also functions as a medium of payment and can be traded against other assets, digital and traditional, for a price. After Bitcoin, many other types of protocols were launched with their own corresponding protocol tokens and use cases.
Blockchain technology has now also been used to bring traditional assets of value into the digital world, with improved or new functionality from its existing form. For example, equity ownership of a company can now be tokenized, and the rights and terms of the ownership written into a smart contract which is embedded in the token. Blockchain technology enables us to make assets smart, fungible and more easily transferable.
Sygnum’s Digital Asset Framework recognises three distinct categories of digital assets, each unique and representative of a specific range of assets. These token categories include protocol tokens, settlement tokens and asset tokens, which all fit under the wider umbrella of “digital assets”.
Protocol tokens are digital assets which are native to an underlying blockchain. Bitcoin is the most well-known protocol token, and is the protocol-level token for the Bitcoin blockchain - as Ether is for Ethereum. A key feature of protocol tokens is that they operate without a counterparty on a decentralised ledger and are managed and presided over by no centralised authority.
There are two distinct types of protocol tokens. Some protocol tokens are intended to be used exclusively as a digital currency or unit of exchange, for example Bitcoin Cash, whereas other protocol tokens belong to infrastructure protocols, such as Ether, which are designed to be used within the ecosystem of their associated protocol.
Settlement tokens have their value pegged to an underlying fiat currency. This type of digital asset has traditionally been referred to as a ‘stablecoin’, or in some cases ‘digital currency’.
A common requirement of settlement tokens is that the assets they represent are physically held as collateral by the token issuer. Therefore, there is an element of risk associated with settlement tokens, in that the buyer must trust that the issuer holds the necessary collateral – for example fiat currency for a Swiss Franc-backed coin.
A settlement token acts as a bridge between digital assets and the traditional fiat economy, increasing the ease and efficiency of transacting. A token can be transferred in real-time, resulting in almost immediate settlement of transactions, eliminating the need for intermediaries. This reduces complexity, costs and time, and alleviates counterparty risk.
In addition, settlement tokens can be used to execute payments such as dividend pay-outs and other corporate actions. They are also a useful tool for providing trading liquidity and acting as a safe hedge against the volatility of other digital assets. With all these use cases, settlement tokens are an integral component of the digital asset economy.
Asset tokens represent an ownership right to an underlying asset, such as equity, debt or real estate. These tokens confer economic rights just like a traditional security, and there is a counterparty who issues the token. The rights of the token holder in relation to the counterparty can also be written into a smart contract that is embedded into the blockchain.
These tokens are generally subject to the same legal and regulatory requirements as traditional securities, which has resulted in a far clearer regulatory landscape for asset tokens, in contrast to other token types which have been typically more difficult for lawmakers to classify.
As technology progresses and companies have time to explore and refine use cases, we expect that a greater variety of assets will eventually be ‘tokenized’ and brought into the digital asset space. For example, over time utility tokens, which are tokens representing the right to access a service or good, may come to greater prominence (see figure 1).
This classification framework is therefore a dynamic one, which is likely to expand and change over time to accommodate the developing digital asset economy.
Sygnum will continue to empower institutional investors, qualified private, corporates and banks to invest into the digital asset economy with complete trust. This entails offering products and services across all digital asset categories – all in one account.