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

Fundamentals of Crypto Assets (Virtual Currency)

What are crypto assets (virtual currencies)?

While many have heard of Bitcoin or Ethereum, most people are uncertain about what these assets actually are.

Since Bitcoin’s inception, the number of crypto assets has soared into the tens of thousands. At one point, a single Bitcoin traded above 15 million yen, capturing global attention.

Unlike fiat currencies, virtual currencies operate on unique value systems and are traded 24/7 across borders, reshaping the foundations of modern finance.

This article explains the essential characteristics of virtual currencies and clarifies how they differ from traditional money and electronic payment systems.

Definition and Legal Status of Crypto Assets

Crypto assets (virtual currencies) are digital forms of money exchanged via the internet.

Japan’s Payment Services Act defines them by three key attributes:

1. Usable for payments at merchants and exchangeable for conventional currencies (like yen or US dollars).
2. Electronically recorded and transferable through devices such as computers or smartphones.
3. Distinct from government-issued currencies and electronic money.

The term “virtual currency” was officially replaced by “crypto asset” in May 2020 to align with global standards and reflect the asset’s true nature. Despite this, “virtual currency” remains common in media and conversation, so both terms are still in use.

Virtual Currency vs. Fiat Currency

The main differences between virtual currencies and fiat money (yen, dollars, etc.) lie in the issuing authority and guarantees of value.

Because virtual currencies aren’t managed by governments or banks, they’re less directly influenced by political and economic changes like inflation or monetary policy. This independence makes them an attractive choice for asset diversification.

However, prices can swing sharply due to market dynamics or investor sentiment. This volatility offers investment opportunities but also requires robust risk management.

Virtual Currency vs. Electronic Money

Both virtual currencies and electronic money are digital, but their structures and functions differ significantly.

Electronic money—such as Suica, PASMO, or nanaco—is company-issued and backed by fiat currency. It’s designed for payment, allowing users to spend only what they’ve loaded.

Virtual currencies, in contrast, have prices set by market supply and demand and are often held for investment. They also enable diverse functions, including cross-border payments and programmable transactions, beyond those of electronic money.

Technology Behind Crypto Assets (Virtual Currency)

How do virtual currencies operate?

Their foundation is a breakthrough technology called “blockchain.”

Despite appearing complex, blockchain is based on simple principles. It offers a secure, decentralized way to record transactions, attracting interest across finance and other industries.

This section explains the technology underpinning virtual currencies in accessible terms, minimizing technical jargon.

What Is Blockchain Technology?

Most virtual currencies rely on blockchain.

Blockchain is a database that stores transaction records in “blocks,” which are linked sequentially like a chain.

Each block contains multiple transactions and the encrypted hash of the previous block, making data tampering extremely difficult.

To alter one block, an attacker must modify every subsequent block—an impractical feat requiring enormous computing power. For instance, with 100 connected blocks, changing the first block would necessitate rewriting all 99 following blocks.

In essence, blockchain is “a system of shared verification that builds trust.” It enables secure transactions without intermediary institutions like banks.

How Distributed Ledgers Work

Traditional banks centrally manage transaction records and balances on their own servers, guaranteeing accuracy.

In blockchain, many network participants (nodes) maintain identical records through a “distributed ledger.”

Benefits of this approach:

• Robustness: If one node fails, others maintain operations, keeping the system running.
• Resistance to Tampering: Altering data requires controlling a majority of the network, which is highly impractical.
• Transparency: Transactions are publicly accessible, making fraud easier to detect.
• Censorship Resistance: Without a central authority, arbitrary freezing or rejection of transactions is difficult.

Sharing records across many participants creates a more secure, trustworthy system. This decentralization is the core innovation of virtual currencies.

Security and Reliability

Blockchain transactions are validated using “consensus algorithms,” which ensure network participants agree on transaction legitimacy.

Bitcoin employs “Proof of Work (PoW),” where new blocks are created by solving complex computations. This process—known as “mining”—rewards successful miners with new Bitcoin.

To compromise the system, an attacker would need to control over half of the network’s computing power—a “51% attack.” While theoretically possible, the cost far exceeds any potential reward in major cryptocurrencies.

Ethereum and similar platforms use “Proof of Stake (PoS),” which grants validation rights based on holdings rather than computational power, reducing energy consumption dramatically.

These technologies establish a decentralized system where collective oversight helps prevent fraud and maintain trust.

Major Types of Crypto Assets (Virtual Currency)

Tens of thousands of virtual currencies exist, including Bitcoin and Ethereum.

Although the names are familiar, many people don’t know the unique features of each.

Each cryptocurrency is designed for specific purposes and technical goals, offering a range of functions beyond simple transactions.

This section introduces the key features and differences of leading cryptocurrencies for newcomers.

Bitcoin (BTC)

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

The whitepaper, “Bitcoin: A Peer-to-Peer Electronic Cash System,” proposed direct money transfers between individuals, bypassing banks and financial institutions. Released during the financial crisis, it drew widespread interest as a response to distrust in traditional finance.

Key characteristics of Bitcoin:

• Maximum Supply: Capped at 21 million coins, ensuring scarcity and minimizing inflation risk.
• Block Time: New blocks are generated approximately every 10 minutes to confirm transactions.
• Halving: The issuance rate halves about every four years, impacting supply and price dynamics.
• Market Capitalization: Largest and most recognized crypto asset by market value.
• Network Effect: Widely accepted and highly liquid due to broad exchange support.

Often called “digital gold,” Bitcoin is increasingly used as a store of value, especially in countries facing inflation or financial instability.

Ethereum (ETH)

Ethereum was launched in 2015 by developer Vitalik Buterin as both a cryptocurrency and a decentralized platform.

Unlike Bitcoin, which focuses on payments, Ethereum introduced “smart contracts,” enabling programmable, self-executing agreements.

Smart contracts automatically trigger actions when specific conditions are met—for example, releasing payment on delivery confirmation or executing transactions at predetermined dates, all without human intervention.

This functionality allows for complex transactions and the development of decentralized applications (DApps).

Key characteristics of Ethereum:

• Smart Contracts: Automated agreements that support a wide range of applications.
• Platform Utility: Foundation for DeFi (decentralized finance) and NFTs (digital ownership certificates).
• Supply Dynamics: No hard cap, but recent upgrades have curbed issuance growth.
• Market Capitalization: Second-largest after Bitcoin.
• Active Developer Community: Continuous improvements and upgrades driven by a vibrant community.

Ethereum aims to serve as a “world computer,” expanding blockchain’s potential far beyond currency.

Other Leading Cryptocurrencies (Altcoins)

Cryptocurrencies other than Bitcoin are known as “altcoins” (alternative coins), each with unique features and purposes.

• XRP: Developed by Ripple for fast, low-cost international transfers, often completing transactions in seconds or minutes. Increasingly adopted for interbank payments and designed for integration with traditional financial institutions.

• Solana: A high-speed blockchain capable of processing tens of thousands of transactions per second with very low fees. Dubbed the “Ethereum killer,” it is rapidly expanding as the backbone for DeFi and NFT projects.

• Cardano: A “third-generation” blockchain built on peer-reviewed academic research, emphasizing security and sustainability. Cardano uses an energy-efficient Proof of Stake mechanism.

• Dogecoin: Originally a meme coin featuring a Shiba Inu dog, Dogecoin gained real value and utility through community engagement and celebrity support. Its development is driven by its user base.

These cryptocurrencies each bring their own innovations and objectives, enriching the crypto ecosystem. Before investing or using them, it’s important to understand their characteristics, development status, and community activity.

Benefits and Features of Crypto Assets (Virtual Currency)

What advantages do virtual currencies offer over traditional money?

This section explores the practical benefits and appeal of crypto assets in everyday contexts.

Virtual currencies can accomplish tasks that are difficult with cash or banking—especially in a global society, enabling cross-border transactions and financial activities unconstrained by time, which traditional systems cannot easily support.

Efficient Cross-Border Transfers and Payments

One major strength of virtual currencies is the ease of sending payments across borders.

Traditional international transfers require multiple financial institutions, leading to high fees and multi-day processing times. For example, remitting money from Japan to the Philippines can cost thousands of yen and take several business days to complete.

With virtual currencies:

• Speed: Transfers complete worldwide within minutes to hours—about 10 minutes to 1 hour for Bitcoin, and mere seconds for XRP.
• Low Cost: Fewer intermediaries mean much lower fees, especially for large transactions.
• Financial Inclusion: Even those without bank accounts (1.7 billion globally) can use crypto with just a smartphone.
• 24/7 Access: Transfers are possible any time, unaffected by bank hours or holidays.

These features make crypto assets popular for international remittances and family support payments.

Some merchants and online services now accept crypto payments, often with lower fees than credit cards.

24/7/365 Trading Availability

Traditional assets like stocks and bonds trade only during exchange hours, such as 9 AM to 3 PM on weekdays for the Tokyo Stock Exchange.

Virtual currencies, however, are accessible from anywhere in the world 24 hours a day, 365 days a year.

This enables:

• Time Freedom: Trade in the evenings, on weekends, or whenever convenient—even for busy professionals.
• Global Responsiveness: React in real time to news and market events worldwide.
• Flexibility: Tailor trading to personal schedules, minimizing missed opportunities.
• Immediacy: Respond instantly to price changes.

However, constant trading also means constant risk—prices can move sharply at any hour, so robust risk management is crucial.

Decentralization: No Central Authority

Traditional financial systems rely on central banks and government oversight, with intermediaries recording and validating all transactions.

Virtual currencies are governed by decentralized networks, with no central authority.

Advantages of decentralization:

• Policy Independence: Less direct impact from government policies, such as inflation or devaluation.
• Censorship Resistance: Difficult for anyone to arbitrarily block or freeze transactions or accounts—especially important in politically unstable regions.
• System Robustness: No single point of failure, reducing the risk of total system outages.
• Transparency: Public transaction records make it easier to detect and prevent fraud.

This lack of central oversight also means users bear greater personal responsibility for their assets and actions.

Reduced Transaction Costs

Crypto assets allow direct peer-to-peer transactions, eliminating many traditional financial service fees.

Examples of cost savings:

• International Transfer Fees: What once cost thousands of yen may now cost only hundreds.
• Payment Fees: Crypto transactions may incur less than 1% in fees, compared to 3–5% for credit cards.
• Infrastructure Savings: No need for physical branches or ATMs, lowering long-term costs.
• Management Savings: Automated record-keeping and verification reduce labor and overhead.

Note that fees can spike during network congestion, especially for Bitcoin and Ethereum. Choosing the right crypto asset for each use case is important.

Risks and Precautions of Crypto Assets (Virtual Currency)

Despite their advantages, crypto assets come with important risks and considerations.

Be skeptical of promises like “guaranteed profits.” Understanding the risks is vital before investing or using crypto assets.

This section details key risks and safety tips for crypto asset users and investors.

Proper risk awareness enables safer participation in the crypto market.

Price Volatility Risk

Crypto asset prices are highly volatile, with frequent, dramatic swings—often described as “high volatility.”

Major factors driving price changes include:

• Market Size: Crypto markets are smaller than equity markets, so large trades can move prices significantly.
• Regulatory Changes: New laws or policy shifts can trigger sharp price drops, as seen when governments announce bans.
• Technical News: Hacks, technical failures, or major upgrades can drive rapid price movements.
• Speculation: Many traders seek short-term gains, amplifying market sentiment and volatility.
• Liquidity: Low trading volumes can make prices more sensitive to individual transactions.

Daily price swings of 20–30% are not uncommon. Invest only what you can afford to lose, and be prepared for sudden downturns.

Strategies like diversification and dollar-cost averaging can help manage risk.

Security Risks (Hacking, etc.)

While blockchain itself is highly secure, exchanges and personal wallets remain vulnerable to hacks.

Major exchanges have experienced significant thefts, resulting in large losses for users.

Key security threats include:

• Exchange Hacking: Security breaches can result in massive asset losses, sometimes in the billions of yen.
• Phishing: Fake websites or emails trick users into revealing login credentials or private keys.
• Malware: Viruses and spyware target wallet private keys.
• Social Engineering: Scammers impersonate support staff to extract sensitive information.

Recommended security practices:

• Two-Factor Authentication: Add an extra verification step, such as a smartphone-generated code.
• Strong Passwords: Use complex, unique passwords and update them regularly.
• Hardware Wallets: Store large holdings offline to minimize risk.
• Diversified Storage: Spread assets across multiple wallets or exchanges.
• Verify Official Sites: Access platforms through bookmarked, verified URLs.

Regulatory Changes

Crypto asset regulations vary by country and shift frequently. Some nations ban crypto altogether.

Notable regulatory developments:

• China’s Crackdown: In 2021, China banned mining and trading, shaking markets globally.
• Japan’s Legal Update: The 2020 revision renamed “virtual currency” to “crypto asset” and tightened asset management rules.
• Tax Changes: Tax treatment is evolving, with rates in Japan reaching up to 55% for crypto gains.
• International Harmonization: G20 and other forums are working toward coordinated global regulations.

Regulatory shifts can strongly affect prices and usability. Always check local laws and monitor changes before investing or using crypto assets.

Fraud and Unlawful Solicitation

The popularity of crypto assets has led to a rise in scams and illicit promotion.

Investment fraud via social media and dating apps has increased, prompting official warnings.

Common scams include:

• Guaranteed Returns: Promises like “guaranteed profits” or “10% monthly interest” are classic red flags. All investments involve risk.
• Ponzi Schemes: Returns paid to existing investors from new deposits, with no real investment activity. Such schemes collapse when new investors dry up.
• Fake Cryptocurrencies: Scams promoting nonexistent or worthless tokens, often using fake endorsements or partnerships.
• Withdrawal Scams: Investors are hit with repeated requests for fees or taxes when they try to withdraw funds.
• Romance Scams: Scammers exploit relationships built via apps or social media to promote fraudulent crypto investments.

How to avoid scams:

• Check Registrations: Confirm exchange operators are registered with the Financial Services Agency.
• Verify Information: Search for reviews and warnings online about promoters or companies.
• Stay Calm: Beware of pressure to act quickly; take your time to evaluate opportunities.
• Consult Others: Seek advice from trusted contacts or professionals.
• Start Small: Begin with small investments and increase only after confirming legitimacy.

Be vigilant about “guaranteed profit” claims and avoid unregistered operators. If you suspect fraud, contact law enforcement or a consumer protection agency immediately.

Crypto Asset Regulation and Future Outlook

How do countries approach crypto assets, and what’s next for the industry?

This section reviews Japanese and global rules for crypto assets and discusses future developments.

Crypto technology is rapidly expanding, with the potential to transform numerous sectors beyond finance.

Japan’s Regulatory Landscape

Japan is a global leader in crypto asset regulation.

The 2017 Payment Services Act introduced mandatory registration for exchange operators, establishing crypto assets as recognized payment methods and strengthening user protection.

The 2020 revision further changed terminology and tightened asset management requirements.

Key regulatory features:

• Registered Exchanges: Operators must register with the Financial Services Agency and pass rigorous reviews of financial stability, security, and internal controls.
• Anti-Money Laundering: Strict KYC procedures are enforced, requiring ID verification for account openings.
• Asset Segregation: Client assets must be separated from company assets, with hot wallet balances matched by separate reserves.
• Taxation: Crypto gains are taxed as miscellaneous income at rates up to 55% including local taxes.

Further legal reforms are underway, aiming to classify crypto assets as a distinct asset class under the Financial Instruments and Exchange Act, separate from traditional securities.

These changes promise improved regulation and better user protection.

Global Approaches

Regulation varies widely worldwide, from proactive acceptance to outright bans.

• United States: Multiple agencies regulate crypto, with the SEC treating some assets as securities and the CFTC as commodities. Recent ETF approvals are accelerating institutional adoption.

• European Union (EU): The MiCA framework is harmonizing crypto regulation across the EU, clarifying service rules and enhancing user protection.

• China: Banned crypto mining and trading in 2021 to address financial risks and energy usage, while actively developing the digital yuan CBDC.

• El Salvador: Became the first country to adopt Bitcoin as legal tender, launching the Chivo wallet and distributing Bitcoin to citizens, though international agencies have expressed concern.

• Singapore: Maintains an open stance with robust regulations, making it a hub for crypto businesses.

Regulatory priorities differ by country, balancing consumer protection, financial stability, innovation, and anti-money laundering. Global coordination remains a key challenge.

Web3, DeFi, and Emerging Trends

Crypto technology is evolving into the backbone of new digital economies.

• Web3: Transitions the internet from centralized (Web2) platforms to decentralized (Web3) ecosystems, restoring user data ownership and enabling services without central authorities via blockchain.

• DeFi (Decentralized Finance): Automates lending, trading, and insurance through smart contracts, making financial services transparent and accessible globally—even to the unbanked. Risks include regulatory uncertainty and smart contract vulnerabilities.

• NFTs (Non-Fungible Tokens): Certify ownership of digital art, music, game items, or real estate, enabling creators to monetize directly and deliver unique content to fans.

• DAOs (Decentralized Autonomous Organizations): Enable collective decision-making and governance without central management, with all actions transparently recorded on blockchain.

These technologies are poised to disrupt finance, art, gaming, real estate, and supply chains, though technical and regulatory challenges remain.

FAQ

What Are Crypto Assets (Virtual Currency)? Definition and Basics

Crypto assets are digital assets exchanged online. They can be traded for fiat currencies and used for payments between parties. Managed through blockchain, they’re available via exchanges registered with Japan’s Financial Services Agency.

How Do Crypto Assets Operate? What Is Blockchain’s Role?

Crypto assets run on blockchain, a distributed ledger secured by cryptographic hashes and consensus algorithms. This resolves double-spending and ensures secure, transparent transactions, driving financial innovation.

What Are the Pros and Cons of Holding Crypto Assets?

Pros include low transaction fees, 24/7 global transfers, and borderless payments. Cons include hacking risks, price volatility, and complex tax obligations.

How Do Crypto Assets Differ From Traditional Money or Financial Assets?

Crypto assets operate without central banks or governments, relying on blockchain decentralization. Traditional currencies are backed by governments, while crypto assets derive value from user trust. They offer 24/7 trading and instant global transfers.

Where Are Crypto Assets Used in Practice?

Crypto assets serve for international remittances, digital art trades in NFT markets, DeFi lending, and online purchases. Bitcoin is a store of value, while Ethereum powers smart contract platforms.

How Safe Are Crypto Assets? What About Fraud or Hacking?

Crypto assets are highly secure thanks to blockchain, but exchange hacks and fraudulent coins are risks. Using reputable platforms and strong security practices greatly reduces exposure.

How Can You Buy and Store Crypto Assets?

Purchase crypto assets via trading platforms after setting up a wallet. For safe storage, use hardware wallets for private keys and keep backup phrases secure.

What Are the Main Types of Crypto Assets?

Major crypto assets include Bitcoin, Ethereum, and Ripple. Bitcoin is used for payments and storing value; Ethereum enables smart contracts; Ripple specializes in international payments.

What Determines the Value of Crypto Assets?

Value depends on supply-demand dynamics, investor confidence, market recognition, and network utility. Technical innovation and community growth also impact price fluctuations.

Are Crypto Assets Suitable for Building Future Wealth?

Crypto assets are a viable option for wealth building, with 24/7 trading and low entry barriers. However, their high volatility means they’re best suited for investors who can tolerate risk and align with personal financial goals.