Crypto Assets (Virtual Currency): New Assets for the Digital Era

Crypto Asset (Virtual Currency) Fundamentals

What exactly are crypto assets (virtual currencies)?

Even if you’ve heard of Bitcoin or Ethereum, you may not fully understand what they actually are.

This section offers a clear explanation of the basic properties of cryptocurrencies and highlights the key differences between them and conventional money or electronic payment systems.

Definition and Legal Status of Crypto Assets

Crypto assets (virtual currencies) are digital forms of value that can be exchanged online.

Under Japan’s Payment Services Act, they are defined by three main characteristics:

1. They can be used for payments at merchants and exchanged for legal tender (such as yen or dollars).
2. They are recorded and transferred electronically via devices like computers or smartphones.
3. They are distinct from government-issued money and electronic money.

Previously called “virtual currencies,” a legal amendment in May 2020 formally adopted the term “crypto assets.”

Nevertheless, “virtual currency” remains common in news reports and everyday conversation.

Differences Between Cryptocurrencies and Fiat Money

The primary distinctions between cryptocurrencies and fiat money (like yen or dollars) lie in who issues them and how their value is secured.

Because cryptocurrencies are not controlled by governments or banks, they tend to be less affected by political or economic changes.

However, they also carry considerable price volatility risk.

Cryptocurrencies vs. Electronic Money

Both cryptocurrencies and electronic money are digital assets, but they have fundamentally different qualities.

Electronic money (e.g., Suica, PASMO, nanaco) is issued by specific companies and its value is pegged to fiat currencies like the yen.

In contrast, cryptocurrency value is set by market supply and demand, and many holders treat it as an investment vehicle.

The Technology Behind Crypto Assets (Virtual Currencies)

How do cryptocurrencies actually function?

They are built on a specialized technology called “blockchain.”

While this may sound complex, the fundamental concept is straightforward.

This section explains the underlying technology in simple terms, minimizing technical jargon.

What Is Blockchain Technology?

The majority of cryptocurrencies are powered by blockchain technology.

A blockchain is a type of database where transaction records are grouped in “blocks,” which are then linked together in a chain.

Each block contains multiple transaction records and references the previous block’s information.

This structure makes it extremely difficult to tamper with data.

Changing the information in a single block would require altering all subsequent blocks, making unauthorized changes virtually impossible.

Put simply, blockchain is “a trust mechanism where everyone verifies records together.”

How Distributed Ledgers Work

Traditional banking systems rely on centralized management of transactions and balances by banks.

Blockchain, on the other hand, uses a “distributed ledger” model, where many computers in the network hold identical records.

The key benefits of this approach include:

• The overall system remains operational even if one part fails
• It’s extremely difficult for any one party to alter data unilaterally
• Transparency, since anyone can verify transaction records

In essence, “sharing records across many participants creates a more secure and trustworthy system.”

Security and Reliability

Blockchain transactions are confirmed using mechanisms known as “consensus algorithms.”

For example, Bitcoin relies on “Proof of Work (PoW).”

This gives the right to add new blocks to the network to those who solve complex computational problems.

To compromise the system, an attacker would need to control over half the network’s computing power—which is virtually impossible in practice.

These features enable a secure system without central oversight.

In short, “broad community verification prevents fraud.”

Major Types of Crypto Assets (Virtual Currencies)

There is a wide variety of cryptocurrencies, with Bitcoin and Ethereum among the most prominent.

Even if you know their names, you may not understand the unique features of each.

This section introduces the main differences and characteristics of leading cryptocurrencies in accessible terms.

Bitcoin (BTC)

Bitcoin, the world’s first cryptocurrency, was conceptualized by Satoshi Nakamoto in 2008 and launched in 2009.

The white paper “Bitcoin: A Peer-to-Peer Electronic Cash System” outlined a way for individuals to send money directly, bypassing banks and financial institutions.

Key features of Bitcoin:

• Maximum supply capped at 21 million coins, ensuring scarcity
• New blocks are added roughly every 10 minutes
• “Halving” events cut new issuance by half approximately every four years
• The most recognized cryptocurrency, with the largest market capitalization

Bitcoin is often referred to as “digital gold” and is valued as a store of wealth.

Ethereum (ETH)

Ethereum is a cryptocurrency and platform launched in 2015 by developer Vitalik Buterin.

While Bitcoin focuses on value transfers, Ethereum introduced “smart contracts”—self-executing agreements triggered by preset conditions (“if A, then B”).

This innovation enables advanced transactions and decentralized applications (DApps) to be built on the platform.

Key features of Ethereum:

• Supports a wide range of application development via smart contracts
• Forms the backbone of DeFi (decentralized finance) and NFTs (digital ownership proofs)
• No issuance cap; supply is variable
• Second-largest cryptocurrency by market capitalization

Other Major Cryptocurrencies (Altcoins)

All cryptocurrencies other than Bitcoin are known as “altcoins”—each with distinct features or goals.

• XRP: Created by Ripple, tailored for international remittances. Enables faster, cheaper transfers than traditional banks, completing in seconds to minutes.
• Solana: A blockchain noted for high throughput and low fees, capable of processing tens of thousands of transactions per second.
• Cardano: A “third-generation” blockchain built on academic research, prioritizing security and sustainability.
• Dogecoin: Originated as an internet meme, but gained real value through celebrity support and online popularity.

Each of these altcoins brings unique value propositions, contributing to the diversity of the crypto ecosystem.

Features and Benefits of Crypto Assets (Virtual Currencies)

What advantages do cryptocurrencies offer compared to traditional money?

This section highlights their convenience and appeal in everyday scenarios.

Some tasks that are cumbersome with banks or cash can be accomplished easily using cryptocurrencies.

Cross-Border Transfers and Payments

One of the standout features of cryptocurrencies is the ease of sending money across borders.

Traditional international remittances often involve multiple financial institutions, resulting in high fees and multi-day delays.

With cryptocurrencies:

• Funds can be transferred globally within minutes to hours
• Lower fees due to minimal intermediaries
• Accessible to unbanked populations

These features make cryptocurrencies useful for international remittances and sending funds to family abroad.

Some merchants and online platforms also now accept crypto payments.

24/7, 365-Day Trading

Traditional assets like stocks and bonds can only be traded during exchange hours.

In contrast, cryptocurrencies can be traded any time, from anywhere, throughout the year.

This allows for:

• Flexible investing, unconstrained by time or location
• Real-time response to global markets
• Trading that fits your schedule and lifestyle

Decentralized Systems without Central Authorities

Traditional finance relies on central banks and governments to manage currency, with banks and payment companies serving as intermediaries.

Cryptocurrencies operate on decentralized networks with no central authority.

Benefits include:

• Less exposure to direct intervention from governments or financial institutions
• Lower risk of censorship or account freezes
• Reduced risk of system-wide failure

Lowering Transaction Costs

Direct transactions in cryptocurrencies—without intermediaries—can reduce costs versus traditional financial services.

Examples include:

• Lower international transfer fees
• Reduced infrastructure costs for payment processing
• Lower costs for transaction record management and verification

However, network congestion can drive up fees, particularly for Bitcoin and Ethereum—an issue often discussed in the industry.

Risks and Considerations for Crypto Assets (Virtual Currencies)

While cryptocurrencies offer advantages, there are also important risks to recognize.

Be cautious of claims like “guaranteed returns.”

This section outlines key risks to be aware of when using or investing in crypto assets.

Understanding these risks enables safer participation in the crypto market.

Price Volatility Risk

Cryptocurrency prices are highly volatile and can swing sharply within short periods.

Key factors behind volatility:

• Smaller market size, making them more sensitive to large trades
• Quick reaction to regulatory or technical news
• High degree of speculation and market sentiment

When investing, use only funds you can afford to lose and prepare for major price drops.

Security Risks (Hacking, etc.)

Although cryptocurrencies are technically robust, exchanges and personal wallets remain vulnerable to hacking.

Large-scale exchange hacks have occurred in the past.

Major security risks include:

• Asset loss due to exchange hacks
• Phishing scams targeting account credentials
• Theft of wallet private keys via malware

To mitigate these risks, enable two-factor authentication and consider storing significant assets offline using hardware wallets.

Legal and Regulatory Changes

Crypto regulations differ widely by country and are frequently updated. Some jurisdictions have imposed outright bans.

Examples include:

• China’s ban on crypto mining (2021)
• Japan’s Payment Services Act revisions (2020)
• Changes in tax treatment around the world

Regulatory shifts can have major effects on crypto prices and usage.

Fraud and Unsolicited Solicitations

As cryptocurrencies have grown in popularity, so have scams and fraudulent schemes.

Investment scams via social media and dating apps are especially prevalent.

Be alert for:

• Exaggerated promises such as “guaranteed profits” or “will definitely go up in value”
• Ponzi schemes that pay old investors with new investors’ money
• Scams promoting investment in non-existent cryptocurrencies
• Repeated demands for additional fees during withdrawal

Remain cautious of “guaranteed profit” claims and avoid dealing with unregistered entities or suspicious solicitations.

Crypto Asset (Virtual Currency) Regulation and Future Outlook

How are cryptocurrencies regulated globally, and what does the future hold for the sector?

This section outlines Japan’s and other countries’ regulatory approaches and discusses future possibilities for the crypto landscape.

Crypto technologies are extending beyond money into many other fields.

Current Legal Regulations in Japan

Japan is a global leader in crypto regulation.

The revised Payment Services Act, implemented in April 2017, requires crypto asset exchanges to register with authorities.

Further amendments in 2020 renamed “virtual currencies” as “crypto assets” and strengthened rules for customer asset management.

Key Japanese regulations include:

• Registration requirement for crypto exchanges (Financial Services Agency and local finance bureaus)
• Anti-money laundering measures (strict identity verification)
• Mandatory use of cold wallets (offline storage) for customer assets
• Capital gains from crypto transfers are generally taxed as miscellaneous income

Further legal reforms are under consideration, including frameworks to treat crypto assets as a unique asset class distinct from traditional securities under the Financial Instruments and Exchange Act.

Global Approaches

Crypto regulation varies dramatically worldwide.

• United States: Oversight split among agencies such as the SEC and CFTC; crypto ETF approvals are advancing.
• European Union (EU): The MiCA regulatory framework is establishing unified rules across member states.
• China: Comprehensive ban on crypto trading and mining, but active development of CBDC (“digital yuan”).
• El Salvador: Made Bitcoin legal tender in 2021 and introduced the official “Chivo” digital wallet.

National regulatory approaches are shaped by priorities such as consumer protection, financial stability, and fostering innovation.

New Developments: Web3, DeFi, and More

Crypto technology is evolving into the foundation for a new digital economy, far beyond payments or investment.

• Web3: The shift from centralized platforms (Web2) to a decentralized internet (Web3), giving users control over their own data and access to decentralized services.
• DeFi (Decentralized Finance): Financial services such as lending, trading, and insurance without traditional intermediaries. Automated by smart contracts for transparency and open access.
• NFTs (Non-Fungible Tokens): Proof of ownership for digital assets (art, music, in-game items), creating new income models for creators.
• DAOs (Decentralized Autonomous Organizations): Organizations governed collectively by token holders, with no central administrator, using on-chain voting for governance.

These innovations have the potential to disrupt established industries and drive advancements across various sectors.

Summary

Cryptocurrencies are a rapidly evolving asset class fueled by technological innovation.

Their disruptive potential could reshape traditional finance, but they also present unique risks.

Before investing in or using cryptocurrencies, thoroughly understand their mechanisms and risks, and act based on personal responsibility.

FAQ

What are crypto assets (virtual currencies), and how do they differ from traditional currencies?

Crypto assets are digital assets leveraging blockchain technology. They offer global, 24/7 trading and dramatically lower transfer costs. Unlike traditional currencies, they have no central issuer and are managed in a decentralized way.

How do you buy, store, and use crypto assets?

You purchase crypto assets on exchanges and store them in wallets (hot or cold wallets). Usage involves sending and receiving via public key addresses, as well as participating in DeFi, NFT trading, and payments. Strict control of private keys is essential.

What are the main risks and safety considerations for crypto assets?

The primary risk is exchange hacking. Blockchain technology itself is highly secure and tamper-resistant. Choose reputable exchanges and always enable two-factor authentication.

How do major crypto assets like Bitcoin and Ethereum differ?

Bitcoin is designed for value storage and payments, with a fixed supply of 21 million coins. Ethereum is a platform for decentralized applications and smart contracts, serving as the backbone for projects like DeFi and NFTs. Each has a distinct role and value proposition.

What role are crypto assets expected to play as digital-era assets?

Crypto assets are positioned to form the foundation of financial infrastructure, with stablecoins serving as key payment instruments. The tokenization of assets will become widespread, redefining how ownership is represented.