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.
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.
For example, cryptocurrencies like Bitcoin and Ethereum may be classified as commodities because they were designed to act as a store of value or because of their decentralized nature.
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.
While they are both assets that traders can buy and sell, securities receive stricter regulatory oversight than commodities. Companies that issue securities like stocks and bonds must provide investors with detailed, transparent information, while commodities are subject to less stringent reporting requirements.
Stocks, or shares, represent ownership in a company, while cryptocurrencies are digital or virtual currencies, which use cryptography for security. Both asset classes can be bought, sold, and traded on various platforms and are subject to market supply and demand, influencing their price.
What is the difference between a Security and a Commodity? This distinction affects Crypto tokens regulatory oversight, market dynamics, and trading strategies. Securities are subject to strict regulations, while Commodities, including Cryptocurrencies, are less regulated and more volatile.
“It's not an either/or—almost everything is a commodity unless it's an onion or a movie ticket,” she told me. “Something can be a commodity and a security at the same time.” In other words, for the CFTC to have jurisdiction over a company like Binance, it has to classify the assets in question as commodities.
Bitcoin does not meet this criteria because it does not have any issuer or promoter who controls its supply or value. It is also decentralized and distributed among its users who validate transactions and secure the network through proof-of-work mining.
How do we determine whether a crypto asset is, in substance, a security? The answer: Generally, we must apply the so-called “Howey test,” on a case by case basis, to determine whether a particular crypto asset is a security. Under the three-part “Howey test”—which is named after a U.S. Supreme Court case, SEC v.
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.
Crude oil ranks as one of the most traded commodities in the world. Commodity traders who had taken long positions on crude oil last year made a lot of money.
For example, cryptocurrencies like Bitcoin and Ethereum may be classified as commodities because they were designed to act as a store of value or because of their decentralized nature.
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.
It depends on your investment goals. Cryptocurrency could be a good investment for investors looking for low barriers to entry and autonomy over their digital assets. Since stocks are backed by centuries of market exposure and research, beginner investors may feel more confident investing in them.
Even though it might seem as though you use cryptocurrency for your personal use, it is considered a capital asset by the IRS. When reporting gains on the sale of most capital assets the income will be treated as ordinary income or capital gains, depending on your holding period for the asset.
Bitcoin does not meet this criteria because it does not have any issuer or promoter who controls its supply or value. It is also decentralized and distributed among its users who validate transactions and secure the network through proof-of-work mining.
Cryptocurrencies are a form of digital money and do not have physical substance. Therefore, the most appropriate classification is as an intangible asset.
As obvious as it may sound, another reason why ETH may not be classified as a security is because it currently is not so. CFTC has allowed ETH futures trading and has explicitly stated ETH as a commodity. This reinforces the argument against ETH being classified as a security.
Introduction: My name is Barbera Armstrong, I am a lovely, delightful, cooperative, funny, enchanting, vivacious, tender person who loves writing and wants to share my knowledge and understanding with you.
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