Assessment of Risks to Financial Stability from Crypto-assets

Crypto-assets

Crypto-assets, as the term is used in this report, are a type of private sector digital asset that depends primarily on cryptography and distributed ledger or similar technology

Characteristics

• Digital means of exchange that are not backed by an issuer (such as bitcoin), or other digital tokens, including securities tokens
•  Asset-backed tokens representing ownership interests in property, so-called utility tokens used to obtain access to goods or services on a particular digital platform
• Nonfungible tokens (“NFTs”) used as collectibles or investment instruments

Stablecoins:

A category of crypto-assets that aim to maintain a stable value with reference to a specified asset, or basket of assets, and provide perceived stability when compared to the high volatility of unbacked crypto-asset.

Uses of Stablecoins:

• Acting as a bridge between traditional fiat currencies and a variety of (typically more volatile) digital assets
• Serving as collateral in crypto-asset derivative transactions
• Facilitating trading/ lending/borrowing and acting as collateral in DeFi

Decentralised Finance (“DeFi”)

DeFi is based on distributed ledger technology (DLT) (typically public and permissionless blockchains) to offer financial services and products purportedly without the need for intermediaries.

Distinguishing DeFi from traditional finance

• Openness: DeFi relies on open-source technology
• Trustless: DeFi platforms allow anyone who can provide the requisite amount of collateral to use the platform in an automated transaction
• Permissionless: anyone can use DeFi protocols as long as they can fulfil the protocol’s requirements
• Claims of decentralised ownership and governance structure: Some DeFi protocols purport to rely on voting by governance token holders to make decisions