Crypto Assets (Virtual Currency): New Forms of Wealth in the Digital Age

Crypto Asset (Virtual Currency) Fundamentals

What exactly are crypto assets (virtual currencies)? Many people have heard of Bitcoin or Ethereum, but aren’t sure what these assets truly are.

This guide explains the core features of virtual currencies and clearly distinguishes them from traditional money and electronic payment systems.

Definition and Legal Status of Crypto Assets

Crypto assets (virtual currencies) are digital assets exchanged over the internet. Under Japan’s Payment Services Act, they’re defined by three main characteristics:

1. They can be used for payments at merchants and can be exchanged for legal tender (such as yen or US dollars).
2. They’re recorded and transferable electronically via computers, smartphones, etc.
3. They’re independent assets, distinct from government-issued legal tender or corporate-issued electronic money.

Previously called “virtual currencies,” a legal amendment in May 2020 formally changed the name to “crypto assets.” Still, the old term remains common in news and daily conversation.

This legal framework recognizes crypto assets as property with economic value—not just as digital data. Service providers must register with the Financial Services Agency (FSA) and comply with user protection regulations.

Virtual Currencies vs. Legal Tender

The primary differences between virtual currencies and legal tender (like yen or dollars) are their issuers and how their value is guaranteed. Governments or central banks issue and back legal tender. Most virtual currencies aren’t issued by a specific entity, and their value is set by market supply and demand.

Since virtual currencies aren’t controlled by governments or banks, they’re less affected by political or economic events. For example, in countries with severe inflation, people may use Bitcoin to preserve value when the local currency rapidly depreciates.

However, virtual currencies also carry significant price fluctuation risk. In recent years, swings of dozens of percent in Bitcoin’s price over short periods have become common.

Virtual Currencies vs. Electronic Money

Virtual currencies and electronic money are both digital payment methods, but they have fundamentally different properties. Electronic money digitizes legal tender and is issued/managed by specific companies.

Electronic money—like Suica, PASMO, or nanaco—is issued by companies and pegged to legal tender. The balance holds a constant value and never fluctuates.

Virtual currencies, by contrast, have market-driven prices and are often held as investments. Electronic money is mainly used domestically, while virtual currencies can be used for cross-border payments and transfers.

The Technology Behind Crypto Assets

How do virtual currencies actually work? The answer lies in a breakthrough innovation: blockchain.

Although it may sound complex, the core principle is straightforward. Here, we explain the technology powering virtual currencies in accessible terms, minimizing jargon.

Blockchain Technology

Most cryptocurrencies rely on blockchain technology. A blockchain is a database that groups transaction records into “blocks” and links them chronologically like a chain.

Each block contains multiple transaction records and the previous block’s hash value. This architecture makes tampering with the data extremely difficult.

If someone tries to alter a block’s data, its hash value changes and breaks the connection to the next block. Successfully altering the chain would require rewriting every subsequent block, which is virtually impossible.

For example, when Person A sends 1 Bitcoin to Person B, the transaction is recorded in a new block. That block is cryptographically linked to the previous one, so the entire transaction history forms a secure chain.

In essence, blockchain is “a system where everyone verifies records together, making history tamper-proof and ensuring trust.”

How Distributed Ledgers Work

Traditional banks managed transaction and balance records centrally—a “centralized system.”

Blockchains, by contrast, use a “distributed ledger” where many networked computers (nodes) all maintain the same records.

This approach has several key advantages:

• Fault Tolerance: The system keeps running even if some nodes go offline, since others retain the records
• Tamper Resistance: It’s nearly impossible for anyone to alter the data unilaterally
• Transparency: Transaction records are public and easily verifiable
• Censorship Resistance: No central authority can arbitrarily block transactions

For instance, the Bitcoin network consists of tens of thousands of nodes worldwide, each maintaining the same blockchain. When a new transaction occurs, it’s broadcast and verified across the network.

By sharing and mutually verifying records, blockchains create a highly secure and trustworthy system.

Security and Reliability

Blockchains use “consensus algorithms” to verify transactions, allowing distributed nodes to agree on a transaction’s validity.

Bitcoin uses “Proof of Work (PoW),” where participants solve complex computations to earn the right to add new blocks. These participants, called miners, receive Bitcoin as a reward.

To compromise the system, an attacker would need to control over 51% of the network’s computing power—an extremely costly and impractical feat on major networks like Bitcoin.

Ethereum and others use “Proof of Stake (PoS),” where transaction validation rights depend on how much cryptocurrency one holds. PoS is more energy efficient than PoW.

These mechanisms allow participants to interact safely without a central authority. In short, “the system prevents fraud by enabling mutual oversight among many participants.”

Major Types of Crypto Assets

There are tens of thousands of cryptocurrencies, including Bitcoin and Ethereum. Many people recognize these names, but may not know each asset’s unique features.

This section introduces the main cryptocurrencies and highlights their differences in clear terms for beginners.

Bitcoin (BTC)

Bitcoin, the world’s first cryptocurrency, was proposed in 2008 by someone (or a group) under the name Satoshi Nakamoto and launched in 2009.

The white paper “Bitcoin: A Peer-to-Peer Electronic Cash System” outlined a way for individuals to transfer money directly without banks or financial intermediaries.

Key features of Bitcoin:

• Maximum Supply: Fixed at 21 million coins, creating scarcity
• Block Creation Time: New blocks generated every ~10 minutes
• Halving: The rate of new coin issuance halves roughly every four years
• Market Position: Most recognized and largest by market cap
• Use Case: Known as “digital gold,” widely seen as a store of value

Bitcoin is used as a hedge against inflation and for international remittances. Its price rise in recent years has also made it a major investment target.

Ethereum (ETH)

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

While Bitcoin focuses on payment, Ethereum introduced the innovative “smart contract” feature.

Smart contracts are programs that automatically execute actions when set conditions are met—e.g., “if condition A, then perform action B.”

This allows for automated, trustless transactions, such as “pay automatically on a specific date” or “release payment after delivery.”

Key features of Ethereum:

• Smart Contracts: Enables development of a wide range of applications through automated agreements
• DApp Platform: Foundation for decentralized applications (DApps)
• DeFi & NFTs: Core platform for decentralized finance and non-fungible tokens
• Supply: No fixed maximum supply, unlike Bitcoin
• Market Position: Second largest by market capitalization

Ethereum’s role extends beyond payments, providing a foundation for decentralized app development.

Other Leading Cryptocurrencies (Altcoins)

All cryptocurrencies other than Bitcoin are called “altcoins,” each with distinct features and objectives.

• XRP: Developed by Ripple, XRP specializes in international remittances. It offers faster and cheaper transfers than traditional banking, with transactions confirmed in seconds to minutes. XRP is gaining traction among financial institutions.

• Solana: Known for high-speed processing and low fees, Solana can process tens of thousands of transactions per second and is sometimes called an “Ethereum killer.” It’s quickly becoming a core platform for DeFi and NFT projects.

• Cardano: A “third-generation” blockchain developed through academic research and peer review, Cardano prioritizes security and sustainability, using the energy-efficient Proof of Stake consensus algorithm.

• Dogecoin: Originally created as an internet meme, Dogecoin has gained real value due to celebrity backing and a vibrant community. It’s now accepted as payment by some businesses.

Each of these cryptocurrencies brings unique technology and goals, enhancing the diversity of the crypto ecosystem. Thoroughly research features, use cases, and development teams before investing.

Features and Benefits of Crypto Assets

How do virtual currencies compare to legal tender? Here, we outline the practical advantages and appeal of cryptocurrencies for everyday use.

Virtual currencies can make some tasks far easier than banks or cash ever could.

Cross-Border Transfers and Payments

One of crypto’s biggest advantages is the ease of international transfers. Conventional remittances involve multiple banks, resulting in high fees and several days’ delay.

For example, sending money from Japan to the Philippines via bank transfer can cost thousands of yen and take three to five business days to complete.

Crypto transfers offer these benefits:

• Speed: Transfers complete in minutes or hours, anywhere in the world
• Low Cost: Fewer middlemen mean lower fees (though fees may rise with network congestion)
• Financial Inclusion: Anyone with a smartphone can use crypto, even without a bank account
• Always Available: Transfer funds anytime, day or night

These features make crypto assets attractive for cross-border remittances and international business payments.

Some merchants and online services now accept Bitcoin or Ethereum, further increasing crypto’s utility as a payment method.

24/7, 365-Day Trading

Traditional financial instruments like stocks or bonds trade only during exchange business hours—for example, the Tokyo Stock Exchange operates weekdays 9 a.m.–3 p.m.

By contrast, crypto markets are open 24/7, 365 days a year, accessible from anywhere.

This offers several advantages:

• Flexible Investment: Invest on your schedule, not the market’s
• Real-Time Response: React instantly to global news and market shifts
• Lifestyle Fit: Trade when convenient, even after work or on weekends
• Global Market: Trade alongside investors worldwide

For example, busy professionals can trade crypto at night or on weekends—or react immediately to overseas news events.

Decentralized Systems Without Central Authorities

Traditional finance relies on central banks, governments, and payment companies—a “centralized” model.

Most cryptocurrencies operate on decentralized networks with no single controlling entity.

This structure brings key benefits:

• Less Policy Risk: Less direct impact from government or institutional policy shifts
• Censorship Resistance: Harder for authorities to freeze accounts or block transactions
• Robustness: No single point of failure; lower risk of total system shutdown
• Transparency: Public transaction records enhance accountability

In unstable countries, crypto may serve as a safeguard against government asset freezes or currency devaluation.

However, reduced oversight can facilitate money laundering and illicit use, so risks remain.

Lower Transaction Costs

Direct peer-to-peer transactions mean crypto can reduce costs compared to traditional financial services.

Examples:

• Lower International Transfer Fees: Fees can drop from thousands to just hundreds of yen
• Lower Payment Processing Costs: Crypto payment fees are often lower than credit card rates (3–5%)
• Reduced Management Overhead: No need to maintain central systems
• Automated Recordkeeping: Blockchain logs transactions automatically, eliminating extra recordkeeping systems

Note: On major blockchains like Bitcoin and Ethereum, network congestion can cause transaction (gas) fees to spike.

There have been times when Ethereum gas fees reached thousands of yen, making small transactions uneconomical.

Always check current network conditions and fees before making transactions.

Risks and Precautions of Crypto Assets

Crypto assets offer many benefits, but also carry risks. Be skeptical of “guaranteed profits” or “certain price increases.”

This section details what to watch for when using or investing in crypto. Understanding the risks is key to safer participation.

Price Volatility Risk

Crypto prices are extremely volatile, with sharp swings both up and down. In market terms, volatility is high.

For example, Bitcoin has moved 10–20% or more in a single day—dramatic even by stock market standards, but common in crypto.

Main causes:

• Small Market Size: Large trades have outsized impact compared to stocks
• Regulatory Shifts: Government actions can trigger big price moves
• Technical Events: News of hacks or upgrades often sparks volatility
• Speculation: Investor sentiment plays a larger role than in traditional markets
• Liquidity Constraints: Thinly traded assets can move dramatically on large buys or sells

Investment precautions:

• Never invest money you can’t afford to lose
• Use only surplus funds—never borrow to invest
• Be psychologically ready for steep drops
• Diversify—don’t bet everything on one coin

Security Risks (Hacking, etc.)

While blockchains themselves are highly secure, exchanges and personal wallets remain vulnerable to attack.

Some major exchanges have seen hundreds of millions of dollars’ worth of crypto stolen.

Key security threats:

• Exchange Hacks: Hackers breach exchange security and steal holdings
• Phishing: Fake sites or emails lure users into giving up passwords or private keys
• Malware: Viruses compromise devices and steal wallet credentials
• SIM Swapping: Attackers hijack phone numbers to bypass two-factor authentication
• Social Engineering: Manipulating people into revealing sensitive info

How to protect yourself:

• Enable 2FA: Always use two-factor authentication for exchange accounts
• Strong, Unique Passwords: Use different complex passwords for every service
• Use Hardware Wallets: Store large amounts of crypto offline
• Backup Keys: Securely store wallet backups and recovery phrases
• Check Official Sources: Double-check URLs and email senders; beware of phishing

Crypto transfers are usually irreversible. Once sent, funds are almost always unrecoverable—so proactive security is essential.

Regulatory Changes

Crypto regulations differ widely and change often. Legal changes can dramatically affect both price and usability.

Recent examples:

• China’s Crackdown: Complete ban on mining and trading caused a temporary Bitcoin price drop.
• Japan’s Legal Reforms: The 2020 Payment Services Act revision changed “virtual currency” to “crypto asset” and tightened asset management rules.
• Taxation Changes: Tax treatment varies globally and can shift; in Japan, crypto gains are generally taxed as miscellaneous income.
• US Regulatory Moves: The SEC is seeking to regulate some tokens as securities, affecting the market.

To stay compliant:

• Monitor regulations in your country and abroad
• Understand how changes could impact your holdings
• Follow all laws and pay required taxes
• Account for legal risks in your investment planning

Fraud and Scams

Crypto’s popularity has spurred a rise in fraudulent schemes, especially via social media and dating apps. Losses continue to grow every year.

Common scams:

• Guaranteed Profits: Be wary of “guaranteed returns” or “principal protection”—all investments carry risk.
• Ponzi Schemes: Payouts to early investors are funded by new ones; these always collapse eventually.
• Fake Tokens: Soliciting investments in non-existent or worthless cryptocurrencies.
• Withdrawal Scams: Demanding extra fees or taxes for withdrawals that never occur—requests for additional payments to “unlock” funds are major red flags.
• Romance Scams: Building relationships online, then soliciting crypto investments.

How to avoid scams:

• Be skeptical of “guaranteed profits” or “principal protection”
• Ignore offers from unregistered providers
• Verify details even if solicited by friends or acquaintances
• Be extra cautious if large upfront payments are required
• If you’re approached by a suspicious party, consult consumer protection agencies or police

Learn from trusted sources and make careful decisions before investing in crypto.

Crypto Asset Regulation and Future Outlook

How do different countries regulate crypto, and where is the industry headed?

This section explores regulatory trends in Japan and worldwide, as well as future possibilities. Crypto technology is expanding far beyond payments and investment.

Current Legal Framework in Japan

Japan leads the world in establishing crypto asset regulations.

The revised Payment Services Act, effective April 2017, introduced mandatory registration for crypto exchanges and formally recognized crypto assets as payment methods under FSA supervision.

The May 2020 amendment brought key changes:

• Terminology: Formal switch from “virtual currency” to “crypto asset”
• Asset Safeguarding: Exchanges must store customer assets in offline cold wallets
• AML/KYC: Enhanced identity verification and anti-money laundering measures
• Advertising: Bans on exaggerated or false advertising claims

Japan’s main regulatory points:

• Exchange Registration: All crypto asset business requires registration with the FSA
• AML Compliance: Strict anti-money laundering and identity checks
• Asset Segregation: Customer funds must be kept separate from company assets
• Taxation: Crypto gains are taxed as miscellaneous income under progressive rates

Further reforms are underway, including proposals to bring crypto assets under Japan’s Financial Instruments and Exchange Act, while recognizing them as a distinct asset class.

These changes aim to strengthen investor protection and encourage healthy market growth.

Global Regulatory Approaches

Global regulatory stances on crypto vary widely—from enthusiastic adoption to outright bans.

• United States: Regulation is complex, involving agencies like the SEC (regulating some tokens as securities) and CFTC (treating Bitcoin as a commodity). The approval of Bitcoin ETFs is spurring institutional adoption.

• European Union (EU): The MiCA framework will create unified regulations, including licensing and investor protection for crypto service providers.

• China: Total ban on trading and mining, but aggressive development of the digital yuan (CBDC) as a state-backed alternative.

• El Salvador: First country to adopt Bitcoin as legal tender in 2021; launched the “Chivo” wallet, though adoption rates remain modest.

• Singapore: Maintains an open stance with strict anti-money laundering oversight, aiming to be a blockchain business hub.

Regulatory priorities differ—consumer protection, financial stability, fostering innovation, and anti-money laundering all play a role.

Web3, DeFi, and Other Innovations

Crypto tech is evolving from payments and investments to powering the next-generation digital economy.

• Web3: A move from centralized (Web2) platforms to decentralized internet (Web3), where users own their data and participate in decentralized services via blockchain.

Unlike traditional internet giants that monopolize data and platforms, Web3 aims to return data ownership and governance to users.

In decentralized social networks, users own their content and help govern the platform.

• DeFi (Decentralized Finance): Delivers financial services like lending, trading, and insurance without banks or intermediaries.

DeFi platforms are powered by smart contracts—open, transparent, and accessible to all.

For example, users can lend or borrow crypto for interest, or exchange assets peer-to-peer on decentralized exchanges (DEXs), all without central intermediaries.

• NFTs (Non-Fungible Tokens): Prove ownership of digital assets—art, music, in-game items, or real estate—on the blockchain.

NFTs are unique, tamper-resistant, and enable new creator revenue streams, with royalties on secondary sales.

• DAOs: Decentralized groups governed collectively, with voting rights allocated via governance tokens.

For example, investment funds can operate as DAOs, allowing all token holders to vote on investment decisions.

These innovations could revolutionize finance, entertainment, real estate, supply chains, and more, but technical and regulatory hurdles remain.

FAQ

What Are Crypto Assets, and How Are They Different from Traditional Currency?

Crypto assets are digital assets managed on blockchains. They exist only in digital form, enable direct peer-to-peer transactions, and can support multiple use cases like smart contracts—unlike traditional physical currencies.

How Is the Value of Crypto Assets Determined?

The value of crypto assets depends on supply and demand, investor confidence, and market momentum. Technical utility, adoption, and liquidity also influence prices.

How Do I Buy and Store Crypto Assets?

You can buy and store crypto using wallets (hot or cold) or through exchanges. Hot wallets are online and convenient; cold wallets are offline and more secure. Choose based on your needs.

What Are the Main Risks of Crypto Asset Investment?

Major risks include extreme price volatility, security threats, and changing regulations. Always be prepared for sudden market swings.

How Are Blockchain and Crypto Assets Related?

Blockchain is the foundational infrastructure for crypto, ensuring security, transparency, and immutability. Crypto assets drive blockchain adoption and development, with both technologies reinforcing each other.

What’s the Outlook for Crypto Assets and Their Practical Use?

Crypto assets are quickly becoming practical payment and remittance tools. Bitcoin is recognized as a store of value, and blockchain adoption is expanding among enterprises. As regulations mature after 2026, the market will likely stabilize and prices will reflect real-world utility.