Learning Objectives:

  • Define digital assets and distinguish between different types.

  • Understand why cryptocurrencies do not fulfill the core functions of money.

  • Explain the role of stablecoins and Central Bank Digital Currencies (CBDCs).

1.1 What are Digital Assets?

A digital asset is anything of value that is stored digitally, including digital art, digital money, or physical assets represented by a digital token . The term encompasses a broad spectrum of digital representations of value, from cryptocurrencies and stablecoins to tokenised real-world assets and non-fungible tokens (NFTs). Key crypto asset types include security tokens, utility tokens, non-fungible tokens (NFTs), and stablecoins .

1.2 Cryptocurrencies and the Functions of Money

Cryptocurrencies are digital or virtual currencies that use cryptography for security and operate on decentralised networks. A key learning outcome of the HKSI course is to “recognize why cryptocurrencies do not fulfill any of the core functions of money” . Money serves three core functions:

  • Medium of exchange: Accepted for payment for goods and services.

  • Store of value: Maintains purchasing power over time.

  • Unit of account: A standard measure of value.

Cryptocurrencies have historically failed to meet these criteria due to high price volatility, limited acceptance, and lack of stability, though the rise of stablecoins and CBDCs is addressing some of these limitations.

1.3 Stablecoins and Central Bank Digital Currencies (CBDCs)

Stablecoins are crypto assets designed to maintain a stable value relative to a reference asset, typically a fiat currency like the US dollar . They achieve stability through various mechanisms, including fiat collateralisation, crypto collateralisation, and algorithmic stabilisation. Stablecoins are a critical component of the DeFi ecosystem, providing a stable medium of exchange and store of value .

Central Bank Digital Currencies (CBDCs) are digital forms of fiat currency issued by central banks. The HKSI course covers CBDCs as a key learning outcome, recognising their role as the convergence of decentralised and centralised financial realms . CBDCs are distinct from cryptocurrencies as they are centralised and backed by the state.

PreviousNext