What is a Digital Asset and How Do They Work?

As more aspects of society move online, digital assets—or any uniquely identifiable, discoverable thing that is stored online and used to realize value—have become increasingly prevalent, taking the form of data, cryptocurrencies, documents, credentials, and photos, among others.

No matter what form they are, digital assets, with their use as a representative of value, a means of exchange, or a way to represent ownership or control over a particular asset, have become important to protect.

To do that properly requires a complete understanding of the concept. As cybersecurity experts with a dedicated Crypto and Digital Trust practice, we’re here to help. In this article, we’ll explore what a digital asset is—including specific examples—their use cases, risks they pose, and best practices for managing them so that, as they become more and more integrated into online life, you can take the right steps to keep yours secure.

What is a Digital Asset?

Digital assets are principally defined by the fact that they originate and can be exchanged within computer technology whose value is secured through public key cryptography.

A digital protection architecture that has been in existence for almost fifty years, public key encryption relies on the mathematic relationship between two digital numbers (keys)—one that is meant to remain highly secure (private key) and is used to take private and personal actions, and another intended to be highly public and available (public key) that is used to validate the source and authority of the use of the private key.

Such a high level of security and the increasing digitization of life have combined to pave the way for many new types of digital assets, including those that can be bought and sold, used as a form of currency, or used to promote a brand or business. Major examples include:

• Cryptocurrencies: E.g., digital currencies such as Bitcoin, Ethereum, and Litecoin that use blockchain technology to enable unchanging auditability of transactions.

• Digital Media: Things like images, videos, audio files, and other forms of digital content where authorship creates value that can be bought, sold, or licensed for various purposes, and whose ownership can be tracked using blockchain technology.

• Verifiable Credentials - A digital representation of information that is cryptographically secured, enabling the holder to prove certain claims about themselves without revealing unnecessary details.

• Tokens: Digital assets that represent ownership or access rights to a particular asset or service.

• Decentralized applications (DApps): Software applications that run on a decentralized network—like blockchain—rather than a centralized server.

• Non-fungible tokens (NFTs): A type of digital media used to represent ownership of digital art, collectibles, and other unique items.

• Digital identity: The establishment and storage of unique identifiers used to establish accountability and verification of the source of online transactions.

The Role of Blockchain

The rise in popularity of digital assets can be associated with the similar rise of blockchain. A cooperatively governed and highly redundant distributed ledger technology, blockchain enables secure and transparent transactions without the need for intermediaries such as banks or other financial institutions, as it can be used to create a tamper-proof record of ownership and transaction history.

Using cryptographic algorithms, blockchain helps ensure that various types of digital assets—such as cryptocurrencies, tokens, and smart contracts, among others—are not subject to fraud or manipulation upon transfer. Its redundancy amongst nodes that contain the entire ledger—meaning there is no single point of failure—makes it more resilient to cyberattacks and other security threats, and so digital assets are more protected against unauthorized access and tampering.

Use Cases for Digital Assets in Different Industries

As both concepts continue to evolve, blockchain technology will likely enable new business models and revenue streams by creating new types of digital assets and facilitating peer-to-peer transactions without the need for intermediaries. The path forward here is clear in several big areas:

• Financial Transactions: The use of digital assets like cryptocurrencies can facilitate faster transactions, and blockchain tech can simplify payment processes, including cross-border/cross-currency transactions.
• Healthcare Data Protection: Blockchain, and its distributed ledger technology, further secures the highly sensitive data that is patient medical records using complex codes to protect the identity of individuals while allowing patients and providers to share information quickly due to the decentralized nature of the assets.
• Government Applications: Given all the concern about voter fraud and manipulation, there’s a case to be made for casting votes through a decentralized blockchain that is inherently secure and keeps information unchanged yet easily trackable.
• Supply Chain Management: Increasing interdependence between organizations could benefit from blockchain and digital assets and their transparency, confidentiality of data, and fixed ledger of transactions.

Risks Associated with Digital Assets

Despite the argument that digital assets can provide new opportunities for businesses and individuals to invest, trade, and protect their assets in ways that were previously not possible, they do still present some risks:

• Lack of Regulation: Though several countries have already taken steps to better govern digital assets—more specifically, cryptocurrencies—the United States has yet to adopt formal, federal regulation.
• Cybersecurity Weaknesses: While blockchain’s architecture has inherent security, digital assets are still vulnerable to cyberattacks—such as hacking, phishing, and malware— at the endpoints (digital wallets and storage devices) which can lead to loss or theft.
• Lack of Governance: Until digital assets can be properly regulated, their oversight is in the hands of technologists who may or may not take on the fiduciary responsibility of protecting digital assets and their transactional records, the consequences of which can be seen in recent legal actions against FTX and Binance.
• Slow Adoption: Digital assets remain a relatively new concept, and the lack of a long and proven track record may keep the majority of consumers and markets away until a good history can be demonstrated, isolating current digital asset holders for the time being.

Best Practices for Managing Digital Assets

That being said, individuals and businesses that are invested—or want to invest in digital assets—can mitigate these risks by using these best practices:

• Keep thorough documentation: It’s important to keep detailed records of all transactions involving your digital assets, including dates, amounts, and parties involved, as this can help with reporting, compliance, and more.

• Use secure storage solutions: Again, digital assets and private keys are still vulnerable to hacking and theft, so it's important to ensure that they are stored securely—consider hardware secure wallets to store digital assets and private keys offline and away from potential hackers.

• Create a backup: Digital assets and private keys can be lost if they are not backed up properly, so have a backup strategy in place, such as storing copies of private keys in multiple locations or splitting access among multiple people.

• Conduct regular auditing: Conduct regular audits of your digital asset holdings to ensure that they are accurate and up-to-date, as this can help identify any discrepancies or potential issues before they become major problems.

• Train your employees: Provide education and training to employees and stakeholders on the proper handling and management of digital assets that includes best practices for security, compliance, and governance.

• Plan for contingencies: Develop procedures for responding to incidents, restoring data, and communicating with stakeholders in the event of a security breach or other unexpected event.

Get a Comprehensive Digital Asset Audit to Reduce Risks and Boost Value

While the ultimate future of digital assets is still uncertain, they already play an important role in our digital economy and opportunities for greater, innovative impact on various industries are possible. Should you want to invest in digital assets—you now have a basic understanding of how they work and how to ensure their security.

But as the landscape is still very much in flux, we would encourage you to do your research before investing or trading and once you do, stay informed about the changing regulations globally.

Should you have further questions about digital assets or other emerging technologies like Web 3.0, contact us today, as our dedicated Crypto and Digital Trust professionals would be happy to further demystify any of these concepts or explore how we can help secure your current assets.