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Asset-Backed CryptoCurrencies: Examining The Advantages and Challenges

Cryptocurrencies have dominated investment conversation in the past several years, and the world is intrigued by this new and innovative trading method. While most of today’s cryptocurrency investors are generally not considered sophisticated investors by most “Wall Street” investors, we are seeing more and more of your typical, classically classified "sophisticated" investors (investment funds, financial institutions, and private accredited investors) entering the crypto marketspace.

Dr. Brian Fontenot II
Dr. Brian K. Fontenot II
Published Date: 25 January 2023

The ICO market to date has been characterized by high volatility, instability and perceived as a high-risk investment. One of the reasons for this is that a digital currency’s value is determined partly by its technology, but primarily by the confidence the currencies’ buyers give to those behind the venture, the currencies’ trade liquidity, and even the volatility in the Bitcoin exchange rate (although this is not directly related to the said digital currency).

While the cryptocurrencies market remains speculative, and competition between cryptocurrency entrepreneurs continues to rise, entrepreneurs are consistently trying to create a unique and stable cryptocurrency fit for the use and investment of “main street” investors. The hope is that a stable cryptocurrency will add a layer to the accredited investors’ financial instruments and maybe also increase such cryptocurrency’s ability to be used as a method of payment.

The race to develop a new, unique and reliable digital currency with low volatility has prompted entrepreneurs to scale the link of blockchain technology and mainstream investments, thus creating a new wave of cryptocurrencies backed by commodities or assets.

Backing digital currencies with commodities (such as oil, gold, diamonds, etc.) or fiat (such as US dollars, euros, etc.) has many advantages. It reduces price volatility and opens the blockchain to a new kind of investors and traders (without even touching on the use of such digital currencies as actual methods of payment).

For example, we created the first commodity-backed digital currency by pegging its value to the actual physical assets versus a cryptocurrency that is mainly driven by market pressure. Other entrepreneurs have quickly followed and released their own “asset-backed” cryptocurrencies in a effort to raise capital funds (such as Cedex and Carats for diamonds and Tether for USD) off of the backs of our development product and ideas – not being aware that they are in violation of an approved United States Patent as well as many patents pending internationally. In addition, we have seen some entrepreneurs that are also trying to make the bond market (a market traditionally inaccessible to most private investors) available in the US and Europe by means of a currency backed by such bonds. They believe that this will make these markets accessible to investors all over the world, without them having to contact a broker and meet minimum conditions to purchase such asset classes.

Digital currencies backed by actual assets also receive their full value on the day of the ICO. This reduces the uncertainty of whether or not the future platform will be useful, since these currencies are backed by the tangible value of the asset (i.e. fiat, commodities). In addition, such digital currencies will be viewed by the traditional marketplace as a decent replacement for traditional investments in today’s capital markets (since due to the advent of smart contract technology, the execution of a transaction is faster and easier, and thus also reducing the costs associated with the middlemen and brokers within the traditional capital markets).

However, with the creation of asset-backed digital currencies, certain material legal issues have arisen, and we at XUSD Blockchain have taken significant measures to mitigate these acute issues. Commodity-backed digital currencies may be considered financial products and thus require the approval of the relevant financial regulator within the given country that they are offered. On the other hand, fiat-backed digital currencies may be considered as actual currencies that need to be supervised by a central bank.

The variety of regulatory challenges while developing a new crypto that will connect mainstream and sophisticated investors to the blockchain market, as well as a crypto whose value is dependent on tangible assets, is a daunting venture – to say the least!

In order to adjust this new blockchain technology to traditional law and regulation, creative legal solutions are necessary to ensure such a venture is both innovative and successful. Over the coming weeks, members of our Advisory Team will be writing reports for The Gateway Blog detailing these creative solutions and how we have proven; time and again; how XUSD Blockchain is at the cutting edge of digital ledger technologies and leading the revolution in physical to digital asset conversion!

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