An overview of fintech and cryptoassets

What are cryptoassets?

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What are cryptoassets?

How are cryptoassets used?

Published: 19 May 2022

Most cryptoassets have been used as speculative investments

Non-collateralised cryptoassets are used mainly as speculative investments; that is, they are bought in the hope that they will gain value. An indication of this is that a large proportion – over 50 per cent – of the available Bitcoin supply is kept for periods of at least a year.[50] Citibank (2021), “Bitcoin: At the Tipping Point”, Citi GPS: Global Perspectives & Solutions, March 2021, Citibank. Had their main purpose rather been as a means of payment, the turnover period would be shorter.

Although not much data is available, most indications point to cryptoasset investors mainly being private individuals.[51] A. Blandin et al. (2020), “3rd Global Cryptoasset Benchmarking Study”, September 2020, Cambridge Centre for Alternative Finance. In the past few years, however, a number of institutional investors also have increased their exposures to cryptoassets, for instance in their hunt for yield and for the sake of diversification.[52] J. Neureuter (2021), “The Institutional Investor Digital Assets Study”, September 2021, Fidelity Digital Assets. Interest is particularly high among institutional investors in Asia and Europe.

The correlation of cryptoassets, such as Bitcoins, with the stock market has strengthened, however, suggesting that they have limited diversification characteristics.[53] T. Adrian et al. (2022), “Crypto Prices Move More in Sync With Stocks, Posing New Risks”, 11 January 2022, IMF Blog. Blog post available at: Crypto Prices Move More in Sync With Stocks, Posing New Risks – IMF Blog. This could pose financial risks for the investors who are exposed to cryptoassets if they do not bear this relatively strong correlation in mind. So far, however, exposure among institutional investors is limited compared with their total assets. Banks’ exposures to cryptoassets has also been considered limited thus far.[54] Basel Committee on Banking Supervision (2021), “Prudential treatment of cryptoasset exposures”, 10 June 2021, Bank for International Settlements.

Cryptoassets have served as a means of payment to a relatively minor extent

Most cryptoassets are used to a relatively minor extent as a means of payment in most countries. One reason for this is that many cryptoassets do not have the characteristics that we generally associate with means of payment. Two such characteristics are that a means of payment should be quick to use and maintain a stable value. In previous sections, we ascertained that cryptoassets such as Bitcoin and Ethereum have been volatile and can thus not be trusted to maintain an equal value from day to day. Also, it takes around ten minutes to carry out a transaction in, for instance, Bitcoin.[55] O. Bosun (2022), “Cryptocurrencies like Bitcoin are still not effective payment options”, 23 January 2022, Yahoo Finance. As a comparison, a Swish transaction only takes a couple of seconds. Also card payments, for example, are fast from the customer’s perspective, even though it ultimately takes much longer to settle the payment.

Stablecoins fulfil certain criteria relating to means of payment, because they aim to maintain a stable value over time. Thus far, they have however mainly been used to facilitate trade in other cryptoassets. For example, USD Tether is one of the most traded cryptoassets with a volume of around SEK 60 billion per 24-hour period.[56] Based on the 24-hour volume on 16 May.

Lately, many of the largest payment service providers such as Mastercard, Visa and PayPal have started to get involved in cryptoassets in different ways. For example, PayPal has launched a service for American users to buy, sell and hold cryptoassets. PayPal is also looking into the possibility of launching its own stablecoin based on US dollars.[57] M. Bellusci (2022), “Paypal Is Exploring Creating Its Own Stablecoin as Crypto Business Grows”, 7 January 2022, updated 8 January 2022, CoinDesk. Card companies Mastercard and Visa have largely focused on facilitating the use of cryptoassets as a means of payment in different ways.[58] For more information, see Payments report (2021), Sveriges Riksbank. For example, they have initiated cooperation with a number of cryptoasset trading venues and issued payment cards linked to these. When a purchase is made with these cards, the cryptoassets are converted to regular currency through the sale of the cryptoassets. The payment then goes through the regular card networks. There are currently a number of crypto payment cards available for Swedish customers – both credit and debit cards. Even more options are available internationally. Visa reported that use of cryptoasset cards reached USD 2.5 billion dollar in the first financial quarter of 2022, compared with USD 1 billion in the first half of 2021.[59] F. Holland (2022), “Visa says crypto-linked card usage hit $2.5 billion in its first quarter", 28 January 2022, CNBC. In the future, cryptoassets might thus be used to a greater extent for payments, even in ordinary society.

Financial products that are based on cryptoassets

The traditional way of investing in cryptoassets has been to buy them directly. As the market for cryptoassets has grown in size, a number of financial products have emerged that have cryptoassets as their underlying asset. These include financial instruments, such as tracker certificates, that exactly follow the price of the underlying asset, as well as futures and options. Some of these are primarily directed at institutional investors, while others are also available to private individuals. A difference between investing directly in cryptoassets and investing in various financial instruments that have cryptoassets as their underlying asset is that many of the instruments are traded on regulated markets, while the cryptoasset is often unregulated.

Some trading venues on which the financial products are sold allow high leverage.[60] S. Potter (2022), “Wild Crypto Leverage Is On Offer for Pros In 20 Times Bitcoin Bet”, 26 January 2022, Bloomberg. This means that investors only need to invest a small amount of equity and borrow the rest. There is thus an opportunity to make major gains with a small investment, while at the same time the risk of financial losses can be substantial. If for example a person has SEK 100 in equity to invest and does not use leverage, the loss can be a maximum of SEK 100, if the investment loses 100 per cent of its value. If however the investment is made at a leverage of 10 times, this means that the total investment will be SEK 1,000 – that is, 10 times the equity. In a 20 per cent price change, the gain or loss will then be SEK 200. On the whole, this therefore means that an investor can lose more than their invested capital, while at the same time there is a chance of making a gain that is greater than it would have been had equity alone been invested.

There are also funds specialised in cryptoassets and related operations. Some of these are exchange-traded funds (ETFs). This means that investments can be made in them over a regular stock exchange.

Some cryptoasset trading venues also offer other services besides trade in cryptoassets, such as loans collateralised by cryptoassets. Often, these loans are overcollateralised, which means that the collateral in the form of the cryptoassets exceeds the amount of the loan.