Cryptoasset Derivative

Concept

A derivative in which the underlying is, or includes, a transferable cryptoasset or an index or derivative relating to a transferable cryptoasset. A cryptoasset is a digital asset that represents any digital store of value or medium of exchange (currency) that is stored as entries on the blockchain. It is a digital representation of value or a right that can be transferred or stored electronically (digitally) using distributed ledger technology (DLT) or similar technology. Cryptoassets use cryptography (a method to secure data), peer-to-peer networking, and a sort of general ledger to initiate, verify and record transactions. DLT is a technology that enables the decentralized storage, update and validation of encrypted data. One example of DLT are blockchains on which entries are added as ‘blocks’, which form a ‘chain’ that cannot be manipulated or broken. Transactions are recorded on the chain to facilitate verification and provision of proof about existence without the need for a third-party. By nature, cryptoassets are at large unregulated. A derivative is a financial instrument where the performance is determined based on the movement of the price of the underlying asset or a certain market rate or variable.

Nature

Under a cryptoasset derivative, the holder does not hold the underlying cryptoasset (e.g., a cryptocurrency), but rather can gain exposure to the movements in the cryptoasset market by using, or by means of, the derivative. Holding a derivative is typically very different to directly holding a cryptoasset. Specifically, a derivative gives rise to contractual rights and obligations that are established for and between the two parties.

Transferable cryptoasset

An unregulated transferable cryptoasset is any cryptoasset that is transferable, is not pure utility tokens (i.e., those tokens that can only be transferred to their issuer in exchange for a good or service, or to an operator of a network that facilitates their exchange for a good or service), is not regulated instruments (such as securities or electronic money), is not a representation of ownership or other property right in a commodity and is not fiat money issued by a central bank.