Digital Asset Framework

What Is a Digital Asset Framework?

Digital asset framework refers to the criteria that a cryptocurrency must meet in order to be listed on an exchange. The digital asset framework is released publicly, and lets both developers and currency holders understand why an asset may or may not be traded on a specific platform.

Key Takeaways

  • A digital asset framework is used by exchanges to evaluate coins for listing.
  • The SEC has also released a framework to evaluate whether a given token is a security or not.
  • Coinbase pioneered the framework method to evaluate tokens for listing.
  • Digital asset framework criteria encompass a wide aspect of a coin's operations, from its economics to governance characteristics.

Understanding Digital Asset Frameworks

Just as the process for listing a company on an exchange involves multiple regulatory checks and balances, a digital asset framework enables exchanges to evaluate potential cryptocurrencies for listing. Coinbase pioneered this method by listing out several criteria to assess whether a given coin was fit to be listed on its exchange. There are six broad criteria Coinbase considers when deciding to list a digital asset on its platform. These include an assessment of the coin's open financial system, technology, legal and compliance, market supply, market demand, and crypto-economics, or how the ecosystem's participants are incentivized to behave.

Another prominent cryptocurrency exchange, Binance, has released a Digital Asset Risk Assessment Framework to evaluate tokens for listing considerations on its platform.

The Securities and Exchange Commission (SEC) has also released a digital asset framework to assess whether a given coin is a security or not. The SEC uses the precedent set by SEC v. W. J. Howey, otherwise known as the Howey test to determine this. The framework reiterates the definition of an investment contract as it was outlined in the Securities Act of 1933 and is to be used mainly by issuers of offerings intending to fund their ventures or projects through the use of tokens.

The SEC defines "digital asset" as "an asset that is issued and transferred using distributed ledger or blockchain technology, including, but not limited to, so-called 'virtual currencies,' 'coins, and 'tokens.'"

Why Listing on Exchanges Is Important for Tokens

In recent years the number and popularity of cryptocurrencies have proliferated. Investors buy and sell these cryptocurrencies on exchanges, which vary in the number of currencies on offer and in popularity.

Larger exchanges that allow investors to buy currencies in dollars—Coinbase, for example—tend to focus on more established currencies, such as Bitcoin and Ethereum. The creators of smaller currencies often seek to have them listed on these larger exchanges.

On April 14, 2021, Coinbase became the first cryptocurrency company to be publicly traded. The exchange trades on Nasdaq under the $COIN ticker.

When a new currency is listed on a large exchange, several things happen. For one, the listing immediately increases awareness of the currency, since larger exchanges tend to attract more investors. This can, in turn, increase currency trading volumes. As trading volumes for a particular currency increase on larger exchanges, trading volumes for that same currency may decline on smaller exchanges. Because exchanges charge investors fees, bigger trade volumes make the exchange more profitable.

Large exchanges tend to be selective in their choice of coins. This is primarily due to legal and regulatory reasons. To help the wider cryptocurrency community understand their evaluation criteria, exchanges provide a public digital asset framework.

While the digital asset framework provides some transparency into the factors that an exchange uses in evaluating the suitability of a digital asset, it does not tell crypto developers precisely how to meet all of the requirements. It is the responsibility of the currency developers to determine how to meet these requirements. By leaving some of the details ambiguous, exchanges are able to exercise their own judgment and not commit to a static methodology.

Being listed on an exchange is not an explicit endorsement of a particular currency, just as being listed on the NYSE does not make a stock inherently good or bad. A listing does, however, signal that a currency is potentially more trustworthy than an unlisted currency since being listed requires the currency to meet the requirements of the digital asset framework. Investors are more likely to trade a cryptocurrency if they believe the technology and network are fundamentally sound and secure, and that the currency complies with applicable laws, and there is sufficient supply and demand to make the asset viable.

Article Sources

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  1. Coinbase. "GDAX Digital Framework Assessment," Page 2-4. Accessed April 16, 2021.

  2. SEC. "Framework for 'Investment Contract' Analysis of Digital Assets," Page 12. Accessed April 16, 2021.

  3. Coinbase. "$COIN — It's Only the Beginning." Accessed April 16, 2021.

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