DEFINITION of 'Digital Asset Framework'

Digital asset framework is 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.

BREAKING DOWN 'Digital Asset Framework'

The rapid rise in the popularity and profit potential of cryptocurrencies has led to an increasing number of currencies being created. 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 and GDAX, 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.

When a new currency is listed on a large exchange, several things happen. The listing 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, larger volumes of trades make the exchanges more profitable.

Rather than list all available currencies, and thus garner more fees, larger exchanges are selective. This is primarily for legal and regulatory reasons, with the exchanges having stricter security policies. To help the wider cryptocurrency community understand how a new currency is listed, exchanges provide a Digital Asset Framework.

A Digital Asset Framework is an overview of what is required for a currency to be listed. The framework typically covers several key areas: technology and security, governance, scalability, regulations, liquidity, and economy. Section content outlines a specific issue that is of concern to the exchange – for example, that currency developers respond quickly to code vulnerabilities – why the issue matters, and an example. Generally speaking, exchanges are looking for currencies that are governed well, secure, legally compliant, scalable, and backed by a competent development team.

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 any organization 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 is fundamentally sound and secure, that the currency complies with applicable laws, and that there is sufficient supply and demand to make the asset viable.

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