What are crypto-assets and virtual currency?
Crypto-asset is a digital representation of value or rights which may be transferred, stored and traded electronically and may serve as a means of exchange for the settlement of goods or services with persons who accept a virtual currency on the basis of a mutual agreement.
Moreover, crypto-asset may:
- create reasonable expectations for financial benefits,
- entitle to sharing profit (income) of the project of crypto-asset issuer,
- grant the powers of authority (voting rights) in a crypto-asset issuer's company or voting rights in determining the development of a crypto-asset-related project.
Crypto-assets are based on blockchain technology.
A blockchain is a decentralised database, a continuously growing list of blocks (records). Each block contains a time stamp and a cryptographic reference to the previous block. To alter a previously created block, all subsequent blocks would also have to be altered. Therefore, the blockchain technology is secure.
Crypto-assets are maintained in a decentralized manner, using distributed ledger technology or similar technology.
Distributed ledger technology, or DLT, is a technology that uses independent computers, referred to as nodes, to record, share and synchronize transactions in their respective electronic ledgers (recording units). It differs from traditional data recording mainly because the data are not centralised but decentralised and connected to cryptographic elements.
Crypto-assets may be used to invest or start raising funds publicly through initial coin offerings.
Initial coin offering (ICO) is a public fund-raising by issuing virtual coins or tokens.
Token is an object which, depending on the characteristics attached to it, represents a crypto-asset or virtual asset, a security or any other claim against the issuer.
Tokens exist only in a virtual form and are not treated as legitimate means of payment or securities in a classical sense. However, if the invested funds are to be refunded to the token issuer on an individual basis, one of the existing frameworks may apply to the raising of such funds.
ICO issuers often accept different crypto-assets or for virtual currency settlements for issued virtual assets attached to a new company or project, i.e., representing part of the company (similar to shares) or constituting debts. Digitally issued token may be attached to a company or may be a prepayment for services offered by the issuer that will be provided within the project in the future.
One of the ways to use virtual assets is virtual currency.
Virtual currency is a digital representation of value that can be transferred, stored and traded electronically and that can function as a means of exchange but not recognised as a legal means of payment, is not liable to be considered neither a banknote and a coin, non-cash and electronic money, nor the monetary value accrued in the payment instrument used in the cases referred to in Section 3 (10) and (11) of the Law on Payment Services and Electronic Money.
A virtual currency service provider is a person that provides virtual currency services, including an exchange service provider of virtual currency issued by others, which enables users to exchange a virtual currency against another virtual currency at a commission or offers to buy and buy-back a virtual currency using a recognized legal tender.
If a virtual asset is used as a financial instrument or if it is used to raise public funds, the supervision of the issuance of such virtual assets and activities of issuers should be the competence of Latvijas Banka.
In turn, the activities of virtual currency service providers in the field of prevention of money laundering and terrorism and proliferation financing (AML/CTPF) are supervised by the State Revenue Service. Nine companies, the AML law entities, are currently registered in the State Revenue Service, which have indicated the provision of virtual currency services as their activity.
There is a very rapid growth and development of crypto-asset industry worldwide today. Crypto assets have great potential to boost innovation in the financial market.
At present, companies founded in Latvia offer customers a variety of services and products related to crypto-assets or developed using blockchain and distributed ledger technology. For example:
- public funds raising through the issuance of virtual coins or tokens,
- virtual currency wallet services,
- virtual currency trading platforms,
- development, audit and consultancy services, using the relevant technology that enables the development or improvement of customer business solutions.