A cryptocurrency is defined as a 100% digital asset that can be bought, sold, or traded. Its value is based entirely on supply and demand. There are thousands of different types of cryptocurrency, you’ve probably heard of some of the bigger names – Bitcoin, Dogecoin, Ethereum…
How does it work?
Cryptocurrency is not issued or managed by a centralized bank or similar institution. It’s a ‘peer-to-peer’ system, made possible with the use of a blockchain. OK, so, what is a blockchain? A blockchain is a secure system that tracks all transactions – like a huge shared, digital receipt that’s updated every time something new happens.
The big question: is cryptocurrency a commodity?
Traditionally, a commodity is a basic unit of raw material – sugar, iron, gold etc. Cryptocurrencies do behave in a similar way. Like commodities, they are interchangeable – each token or ‘coin’ is identical. They are also decentralized – traded between peers. Commodities are regulated by the Commodity Futures Trading Commission (CFTC).
Securities include stocks, bonds, mutual funds etc. They are defined by the way that the original owner will see a profit or loss, in return for an exchange between two people. Cryptocurrency is like a security because they can be issued like stocks. They also share a similar process to an IPO with Initial Coin Offerings – the capital-raising process for cryptocurrency. Securities are generally released by a centralized party, and regulated by the Securities and Exchange Commission (SEC).
The classification argument
In practice, classification depends on the type of cryptocurrency. The CFTC and SEC generally consider Bitcoin and Ether as commodities – because they can be freely traded on traditional asset markets, as well as cryptocurrency exchanges.
But Gary Gensler (the Chair of the SEC) has recently said the majority of cryptocurrency should be classed as a security, providing the public and investors with more protection against fraud and attacks.
This was disputed by Minnesota Republican RepTom Emmer who said most cryptocurrency or related offerings are commodities – so the SEC is not involved.
Why does all this matter?
The future of cryptocurrency depends on its classification. If cryptocurrency is defined as a security, it falls under the jurisdiction of the SEC, and is subject to rules on price transparency, greater reporting demands, and market abuse oversight. Arguably this offers investors more protection, however, it can limit the freedom of the market.
If cryptocurrency is defined as a commodity, the restrictions are generally a lot looser, giving investors more freedom, and allowing entrepreneurs to define the system through more innovation – but with more risk.
For example: The recent announcement of a new product called Lend by cryptocurrency platform Coinbase, intended to allow users to earn interest on certain coins. This project has recently been put on hold, due to a threat of subpoena by the SEC, stating that this project would contain securities.
In summary
The disagreement over classification reveals tension over how cryptocurrency is regulated and to what extent people – investors – should be protected in what is a very new, very volatile market.
Cryptocurrency is not yet mainstream. Increased regulation could help to legitimize the currency. Perhaps it needs its own classification?
Cryptocurrency is evolving fast; we all need to stay ahead of the curve. If you have questions on how we can help your business deal with financial and accounting matters related to cryptocurrency, get in touch with us here.
In practice, classification depends on the type of cryptocurrency. The CFTC
CFTC
The Commodity Futures Trading Commission (CFTC) is an independent agency of the US government created in 1974 that regulates the U.S. derivatives markets, which includes futures, swaps, and certain kinds of options. Commodity Futures Trading Commission. Official seal.
https://en.wikipedia.org › wiki › Commodity_Futures_Trading...
and SEC generally consider Bitcoin and Ether as commodities – because they can be freely traded on traditional asset markets, as well as cryptocurrency exchanges.
Commodities typically have supply limitations, and each unit is interchangeable with other units of the same commodity. Securities, on the other hand, refer to fungible financial investment assets that can be traded. This includes stocks, bonds, funds, options and, more recently, cryptocurrencies.
They are both tokens, but the crucial difference lies in their purpose, intended use, and actual use. A cryptocurrency is designed to be used as currency, money, or payment method. A security token is intended to be used the same way a stock, bond, certificate, or other investment asset is used.
A crypto commodity is a tradeable and fungible token representing an underlying asset. The Commodity Futures Exchange Commission has defined cryptocurrency and related assets as commodities, thus claiming jurisdiction under specific use cases.
No one can access your funds unless they gain access to your crypto wallet's private key. In case you forget or lose your key then you cannot recover your funds. Further, the transactions are secured by the blockchain system along with the scattered network of computers that verify the transactions.
Due to this fact, the crypto market broadly advocates for the classification as commodities, as it would arguably provide a much-needed regulatory framework to restore trust in the crypto market but not overextend the regulation which is feared by many following the events in the last week.
The Securities and Exchange Commission's primary theory on whether a cryptoasset is a security appears to be based upon whether the blockchain project associated with a cryptoasset is, at any point in time, “sufficiently decentralized.”[2] If so, the cryptoasset is not a security.
The key difference between a commodity and a security is simply the nature of the assets bought and sold. Commodities are tangible goods or raw materials that can be traded or exchanged, while securities represent ownership or debt obligation in an entity like an organization.
The fundamental difference between a commodity and a security hinges on what is being bought and sold. Commodities are basic goods that can be traded or exchanged, while securities involve taking an ownership stake or providing credit to a common enterprise with the hopes of earning a profit.
If Ethereum is classed as a security, we'd see much stricter controls on how you can buy and sell Ethereum. One crypto attorney told CoinDesk it would be "devastating" for American investors. For example, centralized cryptocurrency exchanges are not registered with the SEC.
Key Takeaways. Fiat money is a government-issued currency that is not backed by a commodity such as gold. Fiat money gives central banks greater control over the economy because they can control how much money is printed. Most modern paper currencies, such as the U.S. dollar, are fiat currencies.
In late August 2023, a New York district court delighted the cryptocurrency community by calling Bitcoin (BTC) and ethereum (ETH) “crypto commodities.”
Maintaining Anonymity: Many users turn to cryptocurrencies for their promise of privacy. Without proper security measures, users' identities can be exposed, which can lead to significant risks, including financial loss and personal safety concerns.
The U.S. Securities and Exchange Commission takes the position that nearly all cryptocurrencies are securities, with bitcoin the only known exception. The classification of cryptocurrencies as securities has significant implications for their regulation.
Cryptocurrency is still relatively new as far as payment methods and currency go. Most of them are convertible, meaning they have a fiat value. This makes them a target for thieves. The techniques used in cryptocurrency blockchains make them virtually unhackable if the networks are powerful enough to outpace hackers.
The key difference between a commodity and a security is simply the nature of the assets bought and sold. Commodities are tangible goods or raw materials that can be traded or exchanged, while securities represent ownership or debt obligation in an entity like an organization.
Subsequently, CFTC extended this classification to Ethereum and other cryptocurrencies. Despite its digital nature, Ethereum exhibits attributes that align with the CFTC's definition of commodities, including fungibility, scarcity and market tradeability.
In the crypto sense, stablecoins are an example of a commodity. Stablecoins are pegged to one or more assets (fiat or commodities like gold) and are traded without the intention of profit gain.
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Introduction: My name is Roderick King, I am a cute, splendid, excited, perfect, gentle, funny, vivacious person who loves writing and wants to share my knowledge and understanding with you.
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