You are not alone if you like things explained to you like you are a five-year old, especially puzzling things like cryptocurrency, stablecoins, and tokenized deposits. Before crypto class begins, let us get our words straight: Cryptocurrency, stablecoins, and tokenized deposits are only three types of a broader umbrella category known as digital assets. Apologies for the narrow title, but “Digital Assets Kindergarten” just does not have the same ring to it.
Lesson 1: What Is Cryptocurrency?
Cryptocurrency is a type of money that exists only in digital form. Instead of being issued by a government or handled by a bank, it runs on a shared record-keeping system maintained by many, many, many independent computers (commonly referred to as “blockchain”). You can think of it as an online ledger that anyone can view, where balances and transfers are recorded. No single company or government owns this ledger. People can hold cryptocurrencies in digital “wallets,” which are like online accounts. When someone sends cryptocurrency to someone else, the transaction is recorded on the shared ledger. And once recorded, it cannot be changed.
Lesson 2: How The Ledger (“Blockchain”) Works
The ledger is a running list of who owns what. Countless independent computers keep copies of this list and agree on updates, which makes the system difficult to tamper with. When you send funds, your wallet creates a unique digital signature—similar to a secure stamp—proving you authorized the payment. After the network confirms the payment, the ledger updates your balance and the recipient’s balance. You do not need to understand the inner workings to use it, just as you do not need to understand the guts of a credit card network to use a card.
Lesson 3: How This Differs From A Bank
Banks sit in the middle of most traditional money movements. Your checking account balance is a promise from the bank that it will pay you your money, and transfers generally pass through bank-controlled systems. Cryptocurrencies remove that middle layer. Instead of asking a bank to move funds, you broadcast your payment to the shared ledger.
Lesson 4: What Is A Stablecoin?
Many cryptocurrencies change value a lot—up one day, down the next. A “stablecoin” is a type of cryptocurrency designed to hold a steady value, often tied to a familiar currency such as the U.S. dollar. The idea is simple: for every digital coin issued, the issuer must back it by setting aside an equivalent amount of reserves (e.g., U.S. dollars or short-term government securities). Stablecoins aim to combine the speed and direct transfer features of cryptocurrencies with the steady value people expect from cash. They are commonly used for quick transfers, online payments, and moving funds between crypto platforms without leaving the digital ecosystem.
Lesson 5: What Are Tokenized Deposits?
Tokenized deposits are bank deposits represented in a digital form on a secure computer network or ledger (a.k.a. a blockchain). In simple terms, imagine the dollars you hold in a checking account, but with a “digital token” that serves as a receipt or marker for that same dollar inside the bank’s systems. Each token corresponds to a real deposit liability of the bank. You are not buying a new kind of money; you are holding the same bank deposit, just recorded and moved in a modernized way.
Lesson 6: What Is The Difference?
Cryptocurrencies are independent digital assets with their own markets, risks, and uses. Stablecoins are a hybrid digital asset that is backed by real cash or securities. And lastly, tokenized deposits are simply bank deposits represented in digital form and moved using newer technology – they use traditional banking while borrowing some of the speed and efficiency of a blockchain-style system.
Class is dismissed!
This article is provided for informational purposes only—it does not constitute legal advice and does not create an attorney-client relationship between the firm and the reader. Readers should consult legal counsel before taking action relating to the subject matter of this article.
