Blockchain technology and crypto assets

What is a blockchain? 

Blockchain technology is an immutable, shared ledger based on open-source technology that can facilitate the process of recording transactions. While Blockchain technology has grown in exposure in the media in recent times, the technology itself was originally proposed as a use case in 2008 by the person, or group, known as Satoshi Nakamoto who conceptualised the first decentralised blockchain network. This was implemented a year later as a core component of the cryptocurrency bitcoin which served as a public network for all transactions on the network. 

The network is immutable as a result of participants (sometimes defined as nodes) all maintaining the blockchain network and potentially also validating transactions. Validators of transactions are often incentivised for these positive activities. Combined with a highly decentralised structure (a high number of nodes and validators with low individual concentrations) results in a network that is highly secure through how it is structured. Blockchain networks can also be private, running within a private intranet network, or publicly accessible to anyone with internet access.  

Blockchain technology presents many opportunities and real-world use cases including: 

• Decentralised finance and low friction payments with less intermediation 
• Governance and voting 
• Agency management for artists 
• Secure information storage 
• Digital and physical art and collectibles in the form of non-fungible tokens (NFTs) 
• Other financial service uses including lending, insurance and physical investments. 

What is a crypto currency and crypto assets more generally? 

The introduction of bitcoin as a use case for blockchain technology also brought into adoption the first mass adopted crypto asset or crypto currency. A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend.  

There are also hundreds of blockchain networks in development with different use cases and native crypto tokens. The market capitalisation of crypto networks tops around $1.7bn and includes networks such as Bitcoin, Ethereum, Binance, Cardano, Solana, Terra and Avalanche. As well as tokens that can fluctuate in price in line with market demand, assets also comprise of tokens called “stable coins” whose value is in the name, being stable usually at $1 each.   

Crypto assets represents a broader definition of items covering currencies, digital media (including NFTs) and tokens and other items transferrable over blockchain networks. Crypto assets can be traded as with traditional equity securities and NFTs have exploded in popularity with notable sales making the headlines with projects such as the Bored Ape Yacht Club, CryptoPunks and Fidenza by Tyler Hobbs. 

What are the key risks associated with crypto assets? 

Crypto assets by their very nature are high risk bearing assets. 2021 was largely a strong bull period for crypto assets with wider scale adoption and existing corporates such as Adidas, Nike and GAP all venturing into the space through NFTs as well as through headlines such as Facebook rebranding to Meta. The start of 2022 highlighted the risky nature of crypto assets with many popular tokens losing around 40-50% of their value. This perception is also highlighted by so called “meme coins” such as Dogecoin and Shiba Inu whose value is largely underpinned by speculation and attitude as opposed to tangible future value.  

While larger crypto exchanges require knowing your customer and anti-money laundering checks (KYC and AML), depending on which jurisdiction the exchange operates from, this is not always required. Many governments are currently wrestling with the required legislation and oversight required on crypto assets as well as potential tax treatments on gains, losses and research spending.  

How AAB can help  

The AAB Tech team are a group of specialists across all our service lines who understand the needs of innovative companies including those in the cryptocurrency space. We offer support to the ever-changing market with assistance in funding support, robust financial system advice, and specialist advice on Research and Development Tax Credits to name a few.   

With a collaborative approach from business professionals within various industries, cryptoassets and Blockchain technology could capitalise on the market opportunities and represent an exciting advancement in the adoption of these technologies.  

If you would like more information or guidance on issues relating to blockchain technology or crypto assets, please contact Andrew Freeman, a member of our dedicated Tech team.

Find out more about AAB’s Tech team here.