Crypto Assets (Virtual Currency): Emerging Assets for the Digital Age

Cryptocurrency Fundamentals

What are cryptocurrencies, exactly?

Even if you’ve heard of Bitcoin or Ethereum, many people aren’t clear on what they actually are or how they work.

This section provides a clear overview of cryptocurrency fundamentals and explains how they differ from traditional money and electronic payments.

Definition and Legal Classification of Crypto Assets

Cryptocurrencies are digital assets that can be transferred online, essentially functioning as digital money.

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

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

Previously called “virtual currencies,” the legal term was changed to “crypto assets” after a law revision in May 2020.

However, the term “virtual currency” is still widely used in media and everyday conversation.

How Cryptocurrencies Differ From Fiat Currency

The primary differences between cryptocurrencies and traditional money (like yen or dollars) are in their issuers and how their value is guaranteed.

Because cryptocurrencies aren’t managed by governments or banks, they tend to be less subject to political or economic intervention.

However, this also means their prices can fluctuate dramatically.

How Cryptocurrencies Differ From Electronic Money

Although both cryptocurrencies and electronic money are digital, they differ in fundamental ways.

Electronic money—such as Suica, PASMO, or nanaco—is issued by specific companies and fully backed by fiat currency like yen.

In contrast, cryptocurrency prices are determined by supply and demand in the market, and many people hold them primarily for investment purposes.

The Technology Powering Cryptocurrencies

How do cryptocurrencies work behind the scenes?

They’re built on a unique technology called blockchain.

Although it may sound complicated, its core concept is straightforward.

This section explains the technology behind cryptocurrencies, in plain terms and with minimal jargon.

What Is Blockchain Technology?

Most cryptocurrencies rely on blockchain technology.

Blockchain is a kind of database where transaction records are grouped into “blocks,” linked together in a chain.

Each block contains multiple transactions and information about the previous block.

This design makes tampering with data extremely difficult.

To alter a single block, you’d have to change every subsequent block as well—which is practically impossible.

In short, blockchain is a system where everyone can verify records together, increasing overall trust.

How Distributed Ledgers Work

Traditional banks centrally managed all transaction and balance records.

In contrast, blockchains use a “distributed ledger,” where many computers in the network each hold identical copies of the records.

Key advantages of this system include:

• The network keeps running even if one node goes down
• No individual can easily tamper with data
• High transparency, since anyone can review the records

In summary, sharing records among many participants creates a more secure and trustworthy system.

Security and Trust in Blockchain

On a blockchain, transactions are validated using a process known as a “consensus algorithm.”

For instance, Bitcoin uses a method called “Proof of Work (PoW).”

In PoW, participants solve complex mathematical puzzles to earn the right to add new blocks.

To take over the system, a malicious actor would have to control more than half of the network’s computing power, which is nearly impossible in practice.

These mechanisms enable everyone to use the system securely, even without a central administrator.

Simply put, blockchain prevents fraud through collective oversight.

Major Types of Cryptocurrencies

There are many different cryptocurrencies—Bitcoin and Ethereum are the most widely recognized.

Even if you’ve heard the names in the news, you may not know what makes each one unique.

This section introduces the key features and differences of the most prominent cryptocurrencies, with beginners in mind.

Bitcoin (BTC)

Bitcoin, launched in 2009 by someone (or a group) using the name Satoshi Nakamoto, is the world’s first cryptocurrency.

The white paper “Bitcoin: A Peer-to-Peer Electronic Cash System” proposed a way for people to send money directly to each other without banks.

Bitcoin highlights:

• Maximum supply capped at 21 million coins, creating scarcity
• New blocks are generated about every 10 minutes
• Issuance rate halves roughly every four years (“halving”)
• Most well-known cryptocurrency and largest by market capitalization

Bitcoin is sometimes called “digital gold” and is valued as a store of wealth.

Ethereum (ETH)

Ethereum, created in 2015 by developer Vitalik Buterin, is both a cryptocurrency and an application platform.

Unlike Bitcoin, which focuses on payments, Ethereum introduced “smart contracts”—self-executing agreements that run automatically when preset conditions are met.

A smart contract can, for example, automatically execute “if A, then do B.”

This enables complex transactions and applications (decentralized apps, or DApps).

Ethereum highlights:

• Enables development of a wide range of applications through smart contracts
• Powers DeFi and NFTs
• No fixed supply limit; issuance is variable
• Second largest market capitalization among cryptocurrencies

Other Leading Cryptocurrencies (Altcoins)

Any cryptocurrency other than Bitcoin is called an “altcoin,” each having its own unique features and use cases.

• XRP: Developed by Ripple, XRP specializes in international remittances. It enables faster and cheaper transfers than traditional banks—settling in seconds to minutes.
• Solana: A blockchain with extremely fast processing speed and low fees, capable of handling tens of thousands of transactions per second.
• Cardano: A “third-generation” blockchain built on academic research, prioritizing security and sustainability.
• Dogecoin: Originally created as an internet meme, it has gained value through celebrity attention and community support.

These cryptocurrencies add variety and innovation to the crypto ecosystem.

Key Features and Benefits of Cryptocurrencies

How are cryptocurrencies better than traditional money?

This section outlines the core advantages and practical benefits of cryptocurrencies in daily life.

They make some things—difficult or impossible with banks or cash—much easier.

Borderless Transfers and Payments

A major advantage of cryptocurrencies is the ability to transfer value across borders easily.

Traditional international transfers require multiple intermediaries, resulting in high fees and long processing times.

With cryptocurrencies, transfers:

• Settle globally within minutes to hours
• Have minimal fees, since there are few intermediaries
• Are accessible even to those without bank accounts

As a result, cryptocurrencies are used for remittances and sending money to family abroad.

Some stores and online services also accept cryptocurrency payments.

24/7, 365-Day Trading

Traditional assets like stocks or bonds trade only during set exchange hours.

Cryptocurrencies, by contrast, can be traded worldwide at any time, every day of the year.

Key benefits:

• Flexible investing not limited by time or location
• Ability to respond to global markets in real time
• Trading that fits your schedule and lifestyle

Decentralization: No Central Authority

Traditional finance relies on central banks and intermediaries to control and facilitate transactions.

Cryptocurrencies operate without a central authority, managed instead by decentralized networks.

Main advantages:

• Less exposure to direct government or institutional interventions
• Reduced risk of censorship or account freezes
• Lower risk of system-wide outages

Lower Transaction Costs

Cryptocurrencies enable direct transactions, potentially lowering costs versus conventional financial services.

Examples of cost reductions:

• Lower fees for cross-border transfers
• Reduced infrastructure expenses for payment processing
• Decreased costs for record management and verification

However, during times of network congestion, fees can spike—especially for Bitcoin and Ethereum.

Crypto Asset Risks and Precautions

While cryptocurrencies offer many benefits, you should also be aware of their risks.

Be especially cautious of promises like “guaranteed profits.”

This section covers key risks to consider when using or investing in crypto assets.

Understanding these risks helps you engage with crypto more safely.

Price Volatility

Cryptocurrency prices are extremely volatile and can swing dramatically in short periods.

Main causes of price swings:

• Small market size makes them sensitive to large trades
• Quick reactions to regulatory changes or technology news
• Heavy influence from speculation and market sentiment

Invest only what you can afford to lose, and be prepared for sudden drops.

Security Risks (Hacking, etc.)

While blockchains are technically secure, exchanges and personal wallets can be hacked.

There have been several high-profile exchange breaches resulting in major losses.

Key security risks:

• Loss of assets from exchange hacks
• Phishing scams that steal account info
• Malware targeting wallet private keys

Protect yourself by enabling two-factor authentication and using offline (hardware) wallets for significant holdings.

Regulatory Changes

Crypto regulations differ significantly by country and change frequently. Some countries have banned cryptocurrencies outright.

Notable regulatory changes:

• China’s 2021 crypto mining ban
• Japan’s 2020 Payment Services Act revision
• Tax law changes worldwide

Such changes can have a major impact on prices and usability.

Fraud and Scams

As crypto has grown more popular, scams and fraudulent solicitations have also increased.

Investment fraud via social media and dating apps is common.

Common scam types:

• Hyped claims like “guaranteed profits” or “prices will definitely rise”
• Ponzi schemes that use new investors’ money to pay existing ones
• Soliciting investments in non-existent cryptocurrencies
• Repeatedly demanding additional fees to withdraw funds

Be wary of anyone promising guaranteed returns, and avoid unregistered operators or suspicious solicitations.

Crypto Asset Regulation and Future Outlook

How are crypto assets regulated globally, and what’s next for the industry?

This section covers crypto regulations in Japan and worldwide, and discusses future developments.

Crypto technology is rapidly expanding beyond payments to impact many other fields.

Japan’s Legal and Regulatory Landscape

Japan is a global leader in establishing legal frameworks for cryptocurrencies.

The revised Payment Services Act, effective April 2017, introduced mandatory registration for crypto exchanges.

Further revisions in 2020 changed the official term from “virtual currency” to “crypto asset” and tightened customer asset management rules.

Key regulations in Japan include:

• Mandatory registration for crypto exchanges (regulated by the FSA and finance bureaus)
• Anti-money laundering measures (strict customer ID verification)
• Obligation to store customer assets in cold (offline) wallets
• Crypto asset gains are generally taxed as miscellaneous income

Additional updates are under consideration, including proposals to integrate crypto into the Financial Instruments and Exchange Act as a distinct asset class.

Approaches in Other Countries

Crypto regulations vary widely around the world.

• United States: Multiple agencies (SEC, CFTC, etc.) regulate the sector; crypto ETFs are being approved.
• European Union (EU): MiCA regulation is building a uniform crypto regulatory framework across the EU.
• China: All crypto trading and mining are banned; the central bank is developing a digital yuan (CBDC).
• El Salvador: Adopted Bitcoin as legal tender in 2021 and launched the official digital wallet “Chivo.”

Countries set priorities differently: some focus on consumer protection, others on stability or innovation.

Emerging Trends: Web3, DeFi, and More

Crypto is evolving into a core technology for the digital economy, beyond just payments or investments.

• Web3: The shift from centralized platforms (Web2) to a decentralized internet, giving users data ownership and access to decentralized services.
• DeFi (Decentralized Finance): Financial services like lending, trading, and insurance without traditional intermediaries, powered by smart contracts for automation and transparency.
• NFTs (Non-Fungible Tokens): Technology for digital ownership of assets like art, music, and in-game items, opening new revenue streams for creators.
• DAOs (Decentralized Autonomous Organizations): Organizations governed by token holders through collective voting, with no central authority.

These innovations have the potential to transform industries and drive disruptive change in many fields.

Summary

Cryptocurrencies are a new asset class, evolving rapidly alongside technological progress.

Their disruptive features could transform the global financial system, but they also introduce unique risks.

Before investing in or using crypto, it’s essential to fully understand how it works and the risks involved—and to act responsibly.

FAQ

What exactly is a cryptocurrency, and how is it different from traditional money?

Crypto assets are electronic assets managed on blockchains. Unlike conventional currency, they’re not controlled by central banks; instead, distributed networks record and validate all transactions. They enable transparent, cross-border transfers.

What do I need to buy and store crypto assets? How should beginners start?

You’ll need a wallet—either software-based or hardware-based. Beginners can start with a software wallet app on their phone; as holdings grow, it’s recommended to move assets to a more secure hardware wallet. Always write down your seed phrase and store it securely offline.

What are the benefits and risks of crypto investing? What security measures should I take?

Benefits include 24/7 trading, fast cross-border transfers, and the potential for quick gains. Risks include major price swings, exchange hacks, and fraud. For safety, choose reputable exchanges and manage your private keys yourself.

What’s the difference between Bitcoin and altcoins? What are some leading crypto assets?

Bitcoin was the first crypto asset and is mainly used as a store of value. “Altcoins” refers to all other cryptocurrencies. Leading examples include Ethereum (for smart contracts), Solana (high-speed processing), Chainlink (DeFi infrastructure), and Dogecoin (meme coin).

Are crypto assets legally recognized in Japan? What about taxes and regulations?

Yes. Crypto assets are recognized and regulated under Japan’s Payment Services Act. Profits from selling or trading crypto assets are subject to income tax. Japan is also tightening regulations in line with international tax transparency standards like CARF.

What is blockchain technology, and how does it relate to crypto assets?

Blockchain is the underlying technology that securely and transparently records crypto asset transactions. It makes records immutable, removes intermediaries, and provides trust and efficiency to the system.