Crypto Assets (Virtual Currency): A New Asset Class for the Digital Age

Cryptocurrency Fundamentals

What are cryptocurrencies?

Many people have heard names like Bitcoin and Ethereum but may not fully understand what they are. As digital technology evolves, our financial system is experiencing a major transformation.

This section explains the basic attributes of cryptocurrencies and how they differ from traditional money and electronic payments. Cryptocurrencies are not merely investment vehicles—they represent innovative technology that could underpin the future of financial infrastructure.

Definition and Legal Status of Crypto Assets

Cryptocurrencies are digital forms of money exchanged over the internet. Unlike paper bills or coins, they exist solely as digital data with no physical form.

Under Japan’s Act on Settlement of Funds, crypto assets are defined by three key features:

1. They carry asset value, can be used for payments at merchants, and are exchangeable for conventional currencies such as yen or dollars.
2. They are electronically recorded on devices like computers and smartphones and can be transferred via networks.
3. They have independent value systems, distinct from government-issued legal tender or electronic money.

Previously referred to as “virtual currency,” the term was formally changed to “crypto asset” in 2020 to align with international standards. However, both terms remain in use in news and daily conversation.

Japanese law requires all crypto asset service providers to register with the Financial Services Agency, and regulations are in place to protect users.

Cryptocurrency vs. Legal Tender

The key differences between cryptocurrencies and traditional money (legal tender such as yen or dollars) include the issuer, how value is guaranteed, and where they can be used.

Because cryptocurrencies are not controlled by governments or banks, they are less influenced by political or economic restrictions. In countries facing high inflation, cryptocurrencies may be chosen for their relative stability over the local currency.

However, their high volatility can make them impractical for routine payments.

Cryptocurrency vs. Electronic Money

Although both cryptocurrencies and electronic money are digital currencies, their core nature is fundamentally different.

Electronic money, such as Suica, PASMO, nanaco, and Rakuten Edy, is issued by individual companies and fully backed by legal tender. Loading 1,000 yen always provides 1,000 yen of spendable value.

In contrast, cryptocurrencies are priced by market supply and demand, and are often held for investment. While electronic money relies on the infrastructure of specific companies, cryptocurrencies operate on decentralized networks—a fundamental distinction.

Technologies Behind Crypto Assets

How do cryptocurrencies work?

The foundation is “blockchain,” an innovative technology. While it may sound complicated, its basic principles are straightforward. Blockchain is expected to drive applications well beyond cryptocurrencies.

This section explains the mechanics and significance of the technology supporting cryptocurrencies, using minimal technical jargon.

What Is Blockchain Technology?

Most cryptocurrencies are built on the innovative blockchain technology.

Blockchain is a database that stores transaction records in “blocks,” linking them together like a chain. Unlike traditional databases, once recorded, information is extremely difficult to change.

Each block contains multiple transaction entries and encrypted data (hash value) from the previous block, making tampering highly challenging.

Attempting to alter one block would require rewriting all subsequent blocks—a practically impossible feat.

In essence, blockchain is “a system where everyone verifies records together, increasing trust without a central administrator.” This enables secure transaction records without a central bank.

Decentralized Ledger Mechanisms

Traditional banking centrally manages transaction and balance records. Information is stored on bank servers and trusted by users.

Blockchain, by contrast, uses a “decentralized ledger” maintained by numerous computers (nodes) in the network.

Benefits include:

• Fault Tolerance: If one server fails, other nodes maintain the record, keeping the system operational.
• Tamper Resistance: Fraudulent changes are detected by comparison with records held by many nodes.
• Transparency: Transactions are public, making fraudulent activities easier to spot.
• Censorship Resistance: With no central authority, blocking transactions or freezing accounts arbitrarily is difficult.

In short, “sharing and verifying records among many participants creates a safer, more reliable system.” This decentralized approach offers new value beyond traditional centralized models.

Security and Reliability

Blockchain transactions are validated using consensus algorithms, which set the rules for collective agreement on transaction validity.

Bitcoin, for example, employs Proof of Work (PoW), where participants solve complex computations to earn the right to generate new blocks. This “mining” process rewards successful participants with Bitcoin.

To compromise the network, a malicious actor would need to control over half of the total computational power—a prohibitively expensive and unrealistic goal. This is known as a “51% attack,” but for major cryptocurrencies, it is virtually impossible.

Some cryptocurrencies, such as Ethereum, use Proof of Stake (PoS), where transaction approval rights depend on the amount of crypto held. This model is more energy efficient.

These technologies allow users to transact securely without a central authority. Simply stated, “mutual oversight and advanced cryptography prevent fraud.”

Major Types of Crypto Assets

There are thousands of cryptocurrencies, including Bitcoin and Ethereum. Even if you recognize their names, their unique attributes may not be clear.

This section introduces the main types of cryptocurrencies and their differences, in a way that’s easy to grasp for newcomers. Each crypto asset is designed for distinct purposes and technical functions, offering more than just payment capabilities.

Bitcoin (BTC)

Bitcoin was introduced in 2008 by Satoshi Nakamoto (an individual or group) and launched in 2009 as the first cryptocurrency.

The whitepaper “Bitcoin: A Peer-to-Peer Electronic Cash System” proposed direct electronic payments between individuals, without financial institutions. This document is recognized as the foundation of modern cryptocurrencies.

Key attributes of Bitcoin:

• Issuance Limit: The total supply is capped at 21 million coins, creating scarcity.
• Block Creation Time: New blocks are generated roughly every 10 minutes, confirming transactions.
• Halving: Every four years, the amount of new Bitcoin issued is halved, controlling inflation.
• Market Capitalization: Bitcoin is the most prominent crypto asset by market value.
• Security: It boasts the longest operational track record and robust security.

Bitcoin is often called “digital gold” and is valued as a store of value. Institutional investors and companies increasingly include Bitcoin in their portfolios.

Ethereum (ETH)

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

While Bitcoin focuses on monetary transfers, Ethereum pioneered “smart contracts.”

Smart contracts are programmable agreements that automatically execute when conditions are met (e.g., “if A, then B”). This automates complex transactions and contracts without intermediaries.

Main features of Ethereum:

• Smart Contracts: Enables diverse decentralized applications (DApps).
• Platform Role: Widely adopted for DeFi (decentralized finance) and NFTs (digital ownership).
• Issuance Cap: Unlike Bitcoin, Ethereum’s supply is variable, with no fixed cap.
• Market Capitalization: Second only to Bitcoin by market value.
• Technical Evolution: Transitioned to PoS from PoW in 2022, dramatically cutting energy use.

Ethereum is evolving into a foundational platform for various applications, not just payments.

Other Major Cryptocurrencies (Altcoins)

All cryptocurrencies other than Bitcoin are called “altcoins.” Each is designed with unique features and objectives.

• XRP: Developed by Ripple, XRP targets fast, low-cost international transfers, settling transactions in seconds or minutes—much faster than the SWIFT banking system. Many financial institutions are testing or adopting it.

• Solana: A high-performance blockchain known for rapid processing and low fees, Solana handles tens of thousands of transactions per second. It’s often called an “Ethereum killer” and is popular for NFT and DeFi projects.

• Cardano: Cardano is a third-generation blockchain developed through academic research, focusing on security, sustainability, and scalability, based on peer-reviewed studies.

• Dogecoin: Originally a meme, Dogecoin gained value through community support and celebrity endorsements, and its use as a payment method is expanding.

• Polkadot: Polkadot enables interoperability among different blockchains and is sometimes called the “internet of blockchains.”

Each crypto asset brings distinct characteristics and goals, contributing to the ecosystem’s diversity. When considering use or investment, it’s important to understand the technical features and vision of each project.

Features and Benefits of Crypto Assets

How do cryptocurrencies benefit users compared to legal tender?

This section highlights the practical advantages and appeal of cryptocurrencies in daily life and business. Cryptocurrencies can accomplish tasks that are difficult or impossible with banks and cash.

These features provide not only technical advantages but also tangible value for individuals and businesses.

Global Transfers and Payments

A major benefit of cryptocurrencies is the ability to quickly and easily send money across borders.

Traditional international transfers require multiple financial institutions and can take days to a week, with high fees. Some destinations may require even more time.

Crypto transfers offer:

• Speed: Reach anywhere in minutes to hours (Bitcoin: ~10 minutes–1 hour; XRP: seconds).
• Low Cost: Fewer intermediaries mean lower fees (fees vary by network congestion).
• Accessibility: Anyone with a smartphone can use crypto, even without a bank account.
• Transparency: Trackable on the blockchain.
• No Time Restrictions: Available 24/7, 365 days a year.

These capabilities make crypto valuable for remittances and international business payments.

Direct payments at stores and online services are increasingly possible, boosting practical adoption.

Round-the-Clock Trading

Traditional financial instruments are traded only during exchange business hours (e.g., Tokyo Stock Exchange 9:00–15:00, NYSE 9:30–16:00).

Crypto markets operate 24/7 globally, without time or location restrictions.

This enables:

• Flexibility: Trade or invest anytime, anywhere.
• Real-Time Reactions: Respond instantly to global news and market movements.
• Lifestyle Adaptation: Trade at convenient times for your schedule.
• Global Access: Participate in a worldwide market.

Constant trading also means constant risk—major price swings can happen while you sleep. Risk management is essential.

Decentralized System Without Central Control

Traditional finance relies on central banks and governments for currency management, and banks or payment services for transaction mediation. All transactions flow through centralized systems.

Most cryptocurrencies operate via decentralized networks, with no central administrator. This offers several advantages:

• Limited Policy Impact: Less direct effect from governmental or financial policy changes.
• Censorship Resistance: Lower risk of arbitrary transaction blocks or account freezes.
• System Robustness: No single point of failure; outages are rare.
• Transparency: Public, verifiable transaction records.
• Universal Access: Usable anywhere with internet connectivity.

This is particularly valuable in geopolitically or economically unstable regions, or where banking access is limited.

Lower Transaction Costs

Cryptocurrencies enable direct transactions without intermediaries, potentially reducing costs compared to conventional financial services.

Examples:

• Lower International Transfer Fees: Traditional remittances may cost thousands of yen, while crypto transfers can be completed for hundreds of yen.
• Reduced Payment Processing Fees: Crypto payments can be cheaper than credit card fees (typically 3–5%).
• Lower Infrastructure Costs: No need for physical branches or ATMs.
• Reduced Management Costs: Automatic blockchain recordkeeping cuts labor costs.

Note: For major cryptocurrencies, network congestion can drive up transaction fees. Also, consider fees for converting crypto to legal tender.

Actual cost benefits depend on the crypto asset, timing, and transaction size.

Risks and Considerations for Crypto Assets

Despite their appeal, cryptocurrencies carry important risks. Be skeptical of “guaranteed profits” or “prices will always rise.”

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

Price Volatility Risk

Crypto prices are highly volatile and can swing dramatically in short periods.

Bitcoin, for example, has moved more than 10% in a day, and has doubled or halved in just months.

Drivers of volatility:

• Market Size: The crypto market is smaller than stocks; large trades can shift prices.
• Regulatory News: Prices react rapidly to regulatory headlines.
• Technical Events: Hacks, upgrades, or glitches can impact prices.
• Speculation: Investment-driven trading and market sentiment fuel swings.
• Liquidity: Thinly traded assets can move on small trades.
• Influencer Impact: Comments or social media posts by notable figures move markets.

Tips for investors:

• Invest only surplus funds, not essential living expenses.
• Diversify; don’t invest large sums all at once.
• Focus on long-term trends, not short-term swings.
• Set your risk tolerance and loss limits in advance.

Security Risks (Hacking, etc.)

While blockchain is highly secure, exchanges and personal wallets are vulnerable.

Major exchanges have suffered breaches with assets worth billions of yen stolen.

Main risks and countermeasures:

Exchange Hacking

• Risk: Exchange systems compromised, assets stolen.
• Defense: Use only registered, reputable exchanges; avoid leaving large balances in exchanges.

Phishing

• Risk: Fake websites or emails steal login credentials or private keys.
• Defense: Confirm URLs, use official apps, avoid suspicious links.

Malware/Viruses

• Risk: Devices infected, private keys stolen.
• Defense: Use security software; avoid dubious downloads.

Private Key Loss

• Risk: Forgotten keys or passwords mean lost access to assets.
• Defense: Back up keys securely in multiple places; consider paper backups.

Recommended practices:

• Enable two-factor authentication (2FA).
• Use strong, unique passwords; change them regularly.
• For large holdings, consider hardware wallets.
• Regularly transfer assets off exchanges to personal wallets.

Changing Regulations

Crypto regulations vary widely by country and change often. Some countries ban crypto entirely.

Recent examples:

• China: Banned crypto mining and trading in 2021, affecting global markets.
• Japan: Changed terminology from “virtual currency” to “crypto asset” and strengthened regulations in 2020.
• United States: SEC is moving to regulate some cryptocurrencies as securities.
• EU: MiCA rules unify crypto regulations across Europe.

Regulatory changes can impact pricing and access. Key considerations:

• Tighter rules may restrict certain assets.
• Tax changes may alter how gains are taxed.
• Exchange rules may affect services and fees.

Stay up to date on regulations and remain compliant.

Fraud and Scam Risks

Crypto’s popularity has fueled a rise in fraud and scams, especially through social media and dating apps. Losses are increasing.

Common scam patterns:

Ponzi Schemes

• “Guaranteed returns” or “10% monthly interest” claims.
• Payouts to early investors are funded by new ones; schemes collapse and funds are lost.

Fake Cryptos

• “Pre-listing” or “special price” offers for worthless or nonexistent tokens.

Romance Scams

• Scammers build relationships via social networks, then push investments.
• Appeal to “save for our future together.”

Withdrawal Scams

• After investing, withdrawals are blocked by demands for “taxes” or “fees.”
• No payout, regardless of further payments.

Fake Wallets/Exchanges

• Victims directed to counterfeit apps or websites; deposited crypto is stolen.

How to avoid scams:

• Be skeptical of “guaranteed profits” or “principal protection”—all crypto investment carries risk.
• Only use Financial Services Agency-registered operators.
• Don’t engage with investment offers from social media contacts.
• Consult family or friends before investing.
• If suspicious, consult consumer protection agencies or police.

The Financial Services Agency publishes a list of registered crypto exchanges—check before starting any transactions.

Crypto Asset Regulation and Future Prospects

How do countries regulate cryptocurrencies, and what is the future outlook?

This section reviews the current state of crypto regulation in Japan and globally, as well as future developments. Blockchain, the foundation of cryptocurrencies, is expanding into sectors beyond finance.

Japan’s Regulatory Landscape

Japan is a global leader in crypto asset legislation.

Since April 2017, exchange operators must register with the Financial Services Agency; crypto assets are legally recognized for payments and user protection is regulated.

The 2020 amendment changed “virtual currency” to “crypto asset” and imposed stricter asset management rules.

Main Japanese regulations:

• Mandatory Exchange Registration: All operators must register; unregistered operations are illegal.
• Anti-Money Laundering: Strict KYC and mandatory reporting of suspicious activity.
• Segregation of Customer Assets: Customer and business assets must be managed separately.
• Cold Wallet Requirement: Most customer assets must be stored offline.
• Financial Requirements: Operators must maintain certain net assets.
• Advertising Restrictions: Ban on exaggerated claims and required risk disclosures.

Taxation:

• Crypto profits are taxed as miscellaneous income.
• Progressive tax rates apply, up to ~55% (income + resident tax).
• Loss carryforwards are not permitted.

Future direction:

Further reforms are under consideration, potentially bringing crypto assets under the Financial Instruments and Exchange Act while recognizing their unique asset class status. This could enhance investor protection and market growth.

Global Approaches

National approaches to crypto differ widely, reflecting economic, policy, and technological priorities.

United States

• Multiple agencies (SEC, CFTC) regulate crypto.
• Debate over classifying some cryptos as securities continues.
• Spot Bitcoin ETFs approved in 2024, enabling institutional investment.
• State-level regulations vary; New York's BitLicense is notably strict.

European Union

• MiCA regulations are being phased in to unify EU rules.
• Crypto service providers must be licensed.
• AML and stablecoin regulations are tightening.

China

• Banned crypto trading and mining in 2021.
• Actively developing a central bank digital currency (digital yuan).
• Blockchain technology promoted as a strategic national priority.

El Salvador

• First nation to adopt Bitcoin as legal tender (2021).
• Launched the “Chivo” digital wallet for mass adoption.
• Seeks to boost tourism and remittances.

Singapore

• Relatively crypto-friendly regulatory environment.
• Many Asian crypto firms are based in Singapore.
• Licensing balances regulation and innovation.

Regulatory priorities differ by country—consumer protection, financial stability, anti-money laundering, and innovation drive policy choices.

Web3, DeFi, and New Developments

Crypto technology is quickly evolving into the core infrastructure for a new digital economy.

Web3

Web3 shifts the internet from centralized platforms (Web2) to a decentralized model.

Main features:

• Users regain data ownership.
• Decentralized applications (DApps) operate without central authorities.
• Tokens enable new economic systems.
• Creators earn directly, bypassing intermediaries.

DeFi (Decentralized Finance)

DeFi offers financial services on the blockchain, without traditional intermediaries.

Main services:

• Lending: Earn interest by lending crypto or borrow against it.
• Decentralized Exchanges (DEXs): Trade crypto without a central authority.
• Liquidity Provision: Earn rewards for facilitating trades.
• Staking: Participate in network security and earn rewards.
• Yield Farming: Combine protocols for higher returns.

DeFi benefits:

• Access 24/7, worldwide.
• No bank account required.
• High transparency (all transactions on-chain).
• Lower intermediary fees.

Risks include smart contract bugs, hacks, and regulatory uncertainties.

NFTs (Non-Fungible Tokens)

NFTs certify uniqueness and ownership of digital assets—art, music, in-game items, real estate, and more.

Use cases:

• Digital art ownership and trading.
• Trading of in-game items.
• Music and video rights management.
• Digital memberships and tickets.
• Recording property and IP rights.

NFTs enable creators to earn directly from their work and collect royalties on secondary sales.

DAO (Decentralized Autonomous Organization)

DAOs enable collective decision-making with no central leaders.

Features:

• Rules enforced by smart contracts.
• Token holders vote on key issues.
• Transparent, fully recorded decision processes.
• Global, borderless collaboration.

DAOs are used for investment funds, project management, charity, and more.

These technologies have the potential to transform industries—finance, entertainment, real estate, education, and beyond—though technical and regulatory challenges remain.

FAQ

What are crypto assets (cryptocurrencies)? What are their basic definitions and characteristics?

Crypto assets (cryptocurrencies) are digital currencies managed by blockchain technology. They operate as decentralized money, not issued or controlled by governments or central banks. Bitcoin is the most prominent example, and can be freely traded online.

How do crypto assets differ from traditional money?

Crypto assets exist autonomously on blockchains and are not managed by governments or banks. Legal tender is issued and managed by governments. Crypto assets allow peer-to-peer transactions, fast cross-border payments, and irreversible transactions.

How can crypto assets be used? What are examples in daily life?

Crypto assets can be used for payments and transfers. They’re accepted at shops, online stores, for utility bills, donations, and more.

How secure are crypto assets? What are the investment risks?

Crypto assets are highly volatile and subject to risks like hacking and exchange failures. Always use registered providers and enable two-factor authentication. Beware of scams and withdrawal freezes.

What is the relationship between blockchain technology and crypto assets?

Blockchain is the foundational infrastructure for crypto assets. It guarantees transaction immutability and transparency, enabling secure asset transfers without intermediaries.

How do I buy and store crypto assets?

Purchase crypto assets at exchanges. Store them in wallets—hardware, software, or paper options. Strict security and key management are critical.

What is the difference between Bitcoin and other crypto assets?

Bitcoin was the first crypto asset and serves as a store of value, with a fixed supply of 21 million coins. Other crypto assets address Bitcoin’s limitations and offer features like smart contracts and DeFi. They differ in market cap, technology, and volatility.

What is the future outlook for crypto assets and the market?

Crypto assets are expected to grow long term. Regulatory improvement and wider adoption fuel positive prospects. Continued blockchain innovation will likely drive further expansion.