📣 Access KKR's latest Health Care Growth private equity fund!

Securitize Logo

What Is a Digital Asset Security?

Key Differences Between Digital Assets and Digital Asset Securities

by Alex Broudy, Technical & Financial Writer
Oct 26, 2022

One of the major stories over the past year has been the mainstreaming of digital assets such as stablecoins and non-fungible tokens (NFTs). Now, digital asset securities have taken center stage as multi-billion dollar private equity firms like KKR and Hamilton Lane begin to provide tokenized access to their investments. As more institutions launch new initiatives to provide access to these assets, investors need to understand the ins and outs of digital asset securities and how they compare to digital assets as a whole. What makes digital assets different from digital asset securities, and what are the tradeoffs between them?

Pay Attention to the Word "Security"

“Digital assets” are more commonly known as cryptocurrency, such as bitcoin, NFTs, and stablecoins. Critically, digital assets are not digital asset securities. While the terms may sound similar, there are key regulatory and technological differences between them. Whereas digital asset securities is the term recognized by the Securities and Exchange Commission, these assets are also commonly referred to as “security tokens” or “tokenized securities.” The bottom line is that digital asset securities are asset-backed securities according to the Howey Test, which determines whether an investment is a security or not. 

Digital assets are assets that are issued and transferred from one entity to another using a distributed ledger or blockchain technology. Digital asset securities, on the other hand, largely rely upon regulatory exemptions to issue and transfer assets using blockchain technology and to meet compliance requirements. While many digital asset securities rely on exemptions, the ones that do carry similar benefits that traditional exempt securities have, plus the benefits of being on the blockchain. As with all emerging technologies, liquidity, market, and regulatory risks exist, so both digital asset and digital asset securities investors should take note.

Investing with Digital Asset Securities

The most common regulatory exemptions leveraged by digital asset securities are Reg CF, Reg A+, Reg D and Reg S. These exemptions enable both retail and accredited investors (as well as offshore companies) to acquire alternative assets issued on the blockchain and potentially sell them on regulated, blockchain-based secondary markets without all the traditional, costly intermediaries. And this has the potential to democratize access to private markets.

Using blockchain technology makes the entire exempt securities lifecycle more efficient and streamlined than using manual, book-entry methods to issue and transfer ownership records between parties. With digital asset securities, investors are able to truly own their investments with instant settlement and no counterparty risks.

Distinctions that Make a Difference

According to a recent update to 2022 tax forms in the United States, digital assets “are any digital representations of value that are recorded on a cryptographically secured distributed ledger or any similar technology.” This means that the term digital asset now encompasses stablecoins and NFTs, and newer ways of using blockchain technology.

While this definition is now broader than it used to be, it remains distinct from digital asset securities, which follow established securities regulations and do not need new definitions to be created to operate with clarity. This is a key difference that long-term investors should be aware of.

As the ecosystem evolves, regulations will likely adapt to keep up with the pace of innovation. In the meantime, digital asset securities investors have the potential to realize long-term gains without getting caught up in regulatory uncertainty. And this key distinction can make a world of difference.

To learn more about digital asset securities, subscribe for updates below.

Subscribe for Updates

© 2022 Securitize, LLC
All rights reserved
info@securitizemarkets.io
Check the background of Securitize Markets on Finra BrokerCheck.

Securities are offered through Securitize Markets, LLC, (“Securitize Markets”) a registered broker-dealer and member FINRA/SIPC. Neither Securitize Markets, nor any of its affiliates provide any investment advice or make any investment recommendations to any persons, ever, and no communication through herein or in any other medium should be construed as such. Securities offered on the Securitize Markets ATS have not been registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. Assets listed herein, such as digital assets or tokens using blockchain, are speculative, involve a high degree of risk, are generally illiquid, may have no value, have limited regulatory certainty, are subject to potential market manipulation risks and may expose investors to loss of principal. Investments in private placements, start-up investments in particular, are also speculative and involve a high degree of risk. Investors must be able to afford the loss of their entire investment. Eligibility to buy and sell securities on the Securitize Markets ATS is determined by Securitize Markets in its sole discretion. Offers to sell, or the solicitations of offers to buy any security can only be made through official offering documents that contain important information about risks, fees and expenses associated with the applicable securities available for trading on the Securitize Markets ATS. Investors should conduct their own due diligence, not rely on the financial assumptions or estimates displayed herein, and are encouraged to consult with a financial advisor, attorney, accountant, tax advisors, and any other professional that can help you to understand and assess the risks associated with any investment opportunity. Past performance is not indicative of future results. Neither the Securities and Exchange Commission nor any federal or state securities commission or regulatory authority has recommended or approved any investment or the accuracy or completeness of any of the information or materials provided herein or through any references/links herein. Any financial projections or returns shown herein are provided by the issuer of the relevant security and Securitize Markets has not verified the accuracy. Further, there can be no assurance that any valuations provided by issuers are accurate or in agreement with market or industry valuations. Securitize Markets and its affiliates make no representations or warranties as to the accuracy of such information. Securitize Markets may collect certain information about you that helps us comply with various securities regulations and rules and the USA PATRIOT Act, a Federal law that requires all securities firms to obtain, verify, and record information that identifies each applicant. The information also helps us more fully understand your investment profile and identify what types of investments or strategies may be suitable for you. The term “Investors” used on this website, typically refers to accredited investors where applicable. Please note: if we cannot verify the information you provide, we may be required to restrict or deny your account. Trading during Extended Hours Trading Sessions carries unique risks, such as greater price volatility, lower liquidity, wider bid/ask spreads, and less market visibility, and may not be appropriate for all investors. There is no guarantee that a diversified portfolio will enhance overall returns, outperform a non-diversified portfolio, or prevent against loss. By accessing this site and any pages thereof, you agree to be bound by our Terms of Service and Privacy Policy.