How to value digital assets in Singapore?

The purpose of this article is to discuss the concept of digital assets and explains the valuation framework of digital assets in Singapore.

Digital assets are anything that exists digitally and is usually intangible in nature. In Singapore today, digital assets have become the dominant form of storing, sharing, and transmitting valuable assets that are central to economic, social and cultural activities. Blockchain in this regard, will be the wider digital infrastructure that supports the emergence of these new digital assets. These intangible digital assets are said to have no physical form, so have you ever thought of valuing a digital asset? The purpose of this article is to discuss the concept of digital assets and explains the valuation framework of digital assets in Singapore.

Digital asset valuation

In financial terms, valuation is the process of determining the current worth of an asset. In practice, various valuation techniques have evolved over time to measure and estimate the real worth of assets. In recent years, digital assets have been the center of attention since the advent of blockchain and the emergence of cryptocurrencies. This is because there are a number of cryptocurrencies that have emerged over the years, some as early as 2009. While digital assets in a business can be anything from a document or brand logo to digital currencies, be it Bitcoin or a piece of software, it is necessary to value them properly. Therefore, digital asset valuation is a way of estimating the value of these assets.

What are digital assets?

Digital assets are intangibles that have no physical form, though they have a value attached to them. They mainly consist of digital objects such as e-books, software, digital documents or any other asset that is stored in electronic form and has a value, be it monetary or otherwise. With the rise of cryptocurrencies and blockchain, digital assets have become the future of the digital economy. The shift from physical commodities to digital assets will likely drive change in the nature of business, commerce and finance. As a result, this will bring about significant change in the current business environment in terms of increasing efficiency, transparency, and utility in the marketplace.

Types of digital assets

There are different types of digital assets that are currently existing in the digital space today. Traditionally, brand logos, images, videos, documents, software, and e-books are the most common types of digital assets in businesses. However, with the invention of blockchain and the emergence of cryptocurrencies, the prominence of cryptocurrencies has risen as they decentralize the whole financial system. Among the various types of digital assets, digital currencies are the most dominant and are more relevant in business. Following are the examples of digital currencies that have emerged and are prevailing today:

Types of digital assets

  • Crypto assetsCrypto assets are digital tokens that are built on blockchain technology. They have the characteristics of real currencies, as they can be exchanged, transferred, and stored electronically. The existence of a crypto asset is tied to its own blockchain, which is secured by a consensus mechanism among the miners.
  • Stablecoins – The other type of cryptocurrency that has emerged is stablecoins. Stablecoins are cryptocurrencies that are pegged to other assets such as fiat currencies, commodities or other crypto assets. It is called stablecoin since the price tends to be relatively stable, with some amount of volatility.
  • NFTsNon-fungible tokens are digital tokens with unique attributes that are distinguishable from each other. They have ownership in relation to a specific asset. For instance, a non-fungible token can describe an item, such as artwork, photos, collectables, music, and so on.
  • CBDCsCentral bank digital currency (CBDC) is the digital form of a country’s fiat currency. It has all the characteristics of fiat money but is not physical and exists only in electronic form. The Monetary Authority of Singapore (MAS) is still working on establishing a CBDC in Singapore and has completed the project’s first phase.
  • Security tokens – Security tokens are digital assets that represent real-world assets such as shares in a company, bonds, or even commodities. It can be termed a financial investment that gives holders ownership or rights to the underlying asset. Thus, they are one of the most relevant types of digital assets for years.

Digital asset regulation in Singapore

Singapore is a country that has been a frontrunner in the adoption of digital assets and blockchain technology. The Monetary Authority of Singapore (MAS) has actively supervised and promoted the development of the financial industry. MAS basically works in a hybrid function with the central bank and financial regulators with a dual mandate to promote the development of the financial sector. MAS has maintained a balance between encouraging the technology, keeping it safe, as well as keeping up with the pace of innovations in relation to digital assets.

The Singapore Parliament passed the Payment Services (PS) Act in 2019, bringing cryptocurrency or exchange services under the scope of the MAS.  The PC Act establishes a regulatory licensing and operational framework in Singapore for payment systems and service providers, including digital payment token (DPT) services and cryptocurrency. DPT service providers are payment institutions, banks, other financial institutions, and PS Act applicants who provide DPT services.

Purpose of the Monetary Authority of Singapore for digital assets

Well, the Monetary Authority of Singapore (MAS) is the main regulator and supervisor of the financial system in Singapore. MAS has a clear mandate to encourage the development of innovation in the financial sector and to promote economic growth. The goal is to maintain an orderly and sustainable financial system, especially decentralized finance, and to offer regulatory clarity and consumer protections.

In order to ensure that digital assets are regulated in a safe, secure and transparent way, MAS has made several provisions covering a variety of digital assets. These digital asset regulations in Singapore are aligned with money laundering regulations, technology risk management, cybersecurity and consumer protection. Therefore, MAS in collaboration with other regulators and the financial sector, is taking a holistic approach to risk management and promoting innovation.

Types of tokens for valuation

As mentioned earlier, there are several types of digital assets. However, a few of them require valuation due to the characteristics, nature, value and cash flows of these digital assets. Here are some of the most prominent types of digital assets that need valuation:

Types of tokens for valuation

  • Security tokens – They are financial assets or securities that represent ownership or rights to an underlying asset. Bonds, shares, commodities, or options can be considered as security tokens. They have the ability to provide holders with ownership, cash flows from dividends, interest, profit distributions or voting rights. Thus, valuing these tokens is essential as they have the characteristics of traditional financial assets.
  • Utility or MAG tokens – They are the type of tokens that aid in project capitalization or financing for startups, businesses, or project development groups. They are used for specific purposes which are offered on or before the Initial Coin Offering (ICO). As a result, the valuation of utility or MAG tokens is important as they have the ability to acquire specific services.
  • Cryptocurrencies – Cryptocurrencies are defined as digital currencies that are based on cryptography methods and use blockchain technology. They have the ability to operate on their own without a central authority or issuing entity. However, digital asset valuation is necessary in order to assign a monetary value to cryptocurrencies.

How to value digital assets?

Now that you have a brief idea about digital assets and their types, you might be curious about how to value these digital assets. Based on the various factors, methods, approaches and techniques, digital assets can be valued. Careful analysis and research of a digital asset, including its features, liquidity, projected revenue, usage scenarios, and other key factors, can help better understand digital asset valuation.

Methods to value digital assets

There are various methods to value digital assets, however, the most common methods are as follows:

  • Income ApproachThis method takes future expected cash flows from the digital asset into consideration. It quantifies these cash flows in a consistent manner to arrive at a present value. It studies the potential of these digital assets to generate some income over a period of time and then uses discount factors to estimate these future cash flows. The present value of the digital asset is obtained by applying a discount rate to future cash flows and thus arrives at the digital asset’s value.
  • Cost Approach – This method is based on the comparative analysis of similar assets that are available for comparison. The utility token network participants will set prices in terms of the utility token for goods or services they are selling. As a basis, these prices can be evaluated with the costs incurred while purchasing the same quantity of goods or services using alternative methods and fiat currency. Thus, valuing the utility tokens can be done based on this approach.
  • Market ApproachThis method takes into account the liquidity and level of development of the digital asset. Relevant scenarios include a token with little or no liquidity and no directly observable price at the time of launch and a token with continuously updated prices in direct trading compared to fiat currency. It is essential to note that in-depth analysis and study of digital assets are required to arrive at a fair digital asset valuation.
  • Quality Theory of Money – QTM or Quality Theory of Money is another common method to value digital assets. Comparable to fiat currencies, utility tokens act as a medium of exchange or it is the only legal tender within their networks. The advantage of the little economy metaphor is that it enables you to view the cost of utility tokens from the perspective of the QTM. Based on the output, the value is determined.

Use discounts in digital asset valuations

As a result of the dynamics of digital assets, discounts are applied to obtain a realistic and fair digital asset valuation. The nature of the digital asset is such that the investor’s perspectives are adjusted using these discounts for better results. Below mentioned are some common discounts that are applied to digital asset valuation.

Types of discounts

There are mainly two types of discounts: liquidity discounts and blockage discounts. Each of the discounts is explained below:

  • Liquidity discount – Liquidity in basic terms refers to the ease with which an asset can be sold or purchased. When the liquidity is low, the digital asset valuation is reduced, and hence a discount is applied. The lack of liquidity results in more volatility and risk when compared to investments with high liquidity. Therefore, the valuation gets reduced when the liquidity is low.
  • Blockage discount – It is also referred to as the blockage factor. It is defined as a reduction in the digital asset valuation because a block of shares is sold. The number or amount of blocks may vary depending on various factors. Basically, when substantial numbers of tokens are held in the hands of a few individuals, the valuation is reduced due to blockage. Thus, it is used as a discount for valuing digital assets.

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