What Virtual Assets Are and How They Are Classified

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Virtual assets are digital representations of value that can be traded, transferred, or stored electronically. According to frameworks like the Financial Action Task Force (FATF), a virtual asset is defined as a digital item that holds value, can be digitally traded or transferred, and is used for payment, investment, or other financial purposes.

This definition excludes digital representations of fiat currencies, securities, or other financial instruments already regulated under traditional laws.

Virtual assets operate mainly on distributed ledger technologies such as blockchains, which enable decentralized recording and verification of transactions without the need for intermediaries like banks.

While all cryptocurrencies are virtual assets, not all virtual assets are cryptocurrencies. Cryptocurrencies, including Bitcoin and Ethereum, are designed to serve as a medium of exchange, a unit of account, or a store of value, and are secured by cryptography.

Other virtual assets may represent ownership rights, access privileges, or utility within specific ecosystems, rather than functioning as currency. This distinction helps regulators address risks such as fraud, money laundering, and financial misrepresentation across diverse digital assets.

The classification of virtual assets depends on their purpose, structure, and regulatory implications. Common categories include utility tokens, security tokens, stablecoins, and non-fungible tokens (NFTs), though overlaps may exist.

Utility tokens grant holders access to a specific product, service, or feature within a platform or network. They do not represent ownership or promise financial returns, functioning more like digital keys or coupons.

For example, in decentralized applications (dApps), utility tokens might be used to pay transaction fees, such as gas on Ethereum, or unlock premium content on gaming platforms.

These tokens are often issued during initial coin offerings (ICOs) to fund development, provided they are structured to avoid resembling investments, keeping them outside securities regulations.

Security tokens digitize traditional securities like stocks, bonds, or shares in real estate. They represent fractional ownership or rights to dividends, profits, or voting, making them subject to securities laws in many jurisdictions.

Security token offerings (STOs), facilitated by platforms like tZERO, aim to increase liquidity and efficiency compared to conventional markets. Holders may receive revenue shares or voting rights, but compliance with KYC (Know Your Customer) and AML (Anti-Money Laundering) requirements is mandatory.

Stablecoins are virtual assets designed to maintain a stable value by pegging to fiat currencies, commodities, or algorithmic mechanisms.

Centralized stablecoins, such as Tether (USDT) and USD Coin (USDC), are backed by reserves held by issuers, whereas decentralized stablecoins like DAI rely on over-collateralized crypto assets. Algorithmic stablecoins adjust supply dynamically but carry higher risk.

Stablecoins are often used in payments, remittances, or as a bridge between cryptocurrency and traditional finance, offering a solution to cryptocurrency volatility.

Non-fungible tokens (NFTs) are unique, indivisible virtual assets that verify ownership or authenticity of digital or physical items, including art, music, collectibles, or virtual real estate.

Unlike fungible tokens, where one unit is equivalent to another, NFTs are one-of-a-kind. Standards such as ERC-721 on Ethereum ensure uniqueness and provenance.

Platforms like OpenSea host NFT marketplaces where tokens may include metadata linking to digital files or experiences. NFTs derive value from scarcity and provenance but face challenges including environmental impact from energy-intensive blockchains and speculative market behavior.

Jefferson Wachira is a writer at Africa Digest News, specializing in banking and finance trends, and their impact on African economies.