Understanding Asset-Referenced Tokens: when Crypto Meets Stability

The crypto sector is continuing to evolve at a very high pace, bringing innovations that aim to bridge traditional finance with the complex world of digital assets. The interest of institutional investors towards this space is rising, due also to the recent approval of the Bitcoin ETF. Still, the volatility problem needs to be solved to be able to bridge these two different universes.

In this realm, Asset-Referenced Tokens bring an interesting innovation, that allows stability to enter the world of cryptocurrencies without sacrificing the high potential for appreciation that cryptocurrencies maintain. They present a unique proposition, that blends the intrinsic benefits of cryptocurrencies with the relative stability of traditional assets.

Asset-Referenced Tokens are a type of cryptocurrency that are collateralized by a basket of real assets. Unlike traditional cryptocurrencies, which are often subject to high volatility, Asset-Referenced Tokens are backed by a combination of fiat currencies, commodities or other financial instruments. The presence of an underlying mitigates the volatility of the token, since the value of the underlying assets “guarantees” the token holders from potential price depreciations.

Achieving a good collateralization is extremely important: for this reason, the asset allocation of the underlying assets needs to be carefully designed. An optimal allocation needs to include a combination of different fiat currencies (ex. US Dollar, Euro, and Yen), commodities such as gold and silver, and highly liquid securities. By referencing a diversified portfolio, the token’s value remains more stable, since the underlying is more protected from high drawdowns due to the portfolio’s diversification. The diversification of the underlying assets guarantees that, if one component of the basket loses value, the impact on the overall value is mitigated by the other more stable assets.

At the same time, if invested, reserves can grow organically. This allows the token to be even more stable, increasing the reserves-to-token ratio and allowing for even more security. Asset-Referenced Tokens can, in this sense, become an interesting entry point for all those market actors that seek to use Digital Assets for everyday transactions, without the fear of significant value fluctuations.

Asset-Referenced Tokens are particularly interesting since they closely align with the latest developments in cryptocurrency regulation. Regulatory bodies are closely scrutinizing the crypto sector, regulating the space in certain cases. Many jurisdictions explicitly allow the presence of Asset-Referenced Tokens, such as for example the MICA (Markets In Crypto Assets) regulation in Europe. In this sense, Asset-Referenced Tokens present a compliant pathway for asset tokenization, by adhering to regulatory standards and encouraging wider adoption among traditional investors.

The reduced volatility, the promise of stability, and the regulatory landscape will allow Asset-Referenced Tokens to become important players in the cryptocurrency ecosystem. Management of the underlying assets needs to be done by trustworthy and reputable asset managers, to allow the token to organically appreciate in value and to avoid the risk of frauds, which has never been higher than now in this space. Only through the successful implementation of Asset-Referenced Tokens the crypto space will become more suitable for mainstream acceptance, allowing Digital Assets to become trusted means of payment.