The definition of a commodity is imperfect and ambiguous – there is no bright line test. Generally, commodities are basic goods that can be bought and sold at prices that are heavily influenced by supply and demand. In commerce, commodities are interchangeable with other goods of the same type. For example, a piece of corn is interchangeable with another piece of corn in the market with no regard to who produced the corn.
Commodities can be anything. They are generally natural resources, but recent innovation has expanded the classification of commodities to include new developments that represent the same characteristics, such as computer memory and more recently, bitcoin.
Pursuant to the U.S. Commodity Exchange Act (CEA), a commodity is defined broadly by a list of enumerated products. For example, a commodity is defined as being wheat, cotton, rice, or corn but not onions or motion picture box office receipts – it can get confusing. The CEA does not include bitcoin or other virtual currencies in its enumerated definition of commodity. So, why is bitcoin classified as a commodity?
In 2015, the U.S. Commodities Trading Future Commission (CFTC) defined bitcoin and other virtual currencies as commodities under the U.S. Commodity Exchange Act. The CFTC’s definitional decision came to light in a settlement order, which stated, “[T]he definition of a “commodity” is broad […] Bitcoin and other virtual currencies are encompassed in the definition and properly defined as commodities.”
As stated, determining if something is a commodity does not require an elemental test or clear-cut definition as used by the Securities and Exchange Commission (SEC) for securities determination (i.e., the Howey Test). Moreover, securities are commodities but not all commodities are securities. In a separate enforcement action, a U.S. federal court found that the CEA’s text supports the CFTC’s position that virtual currencies are commodities, as the CEA defines “commodity” generally and categorically, “not by type, grade, quality, brand, producer, manufacturer, or form.”
Therefore, the CFTC defined bitcoin as a commodity because it looks and acts like a commodity. It’s an illustrative example of functional regulation. Never mind the colloquial reference to “digital gold” (gold being a commodity), bitcoin and other cryptocurrencies behave like commodities. Bitcoin is interchangeable, meaning each coin is identical. Bitcoin’s price is also driven by supply and demand and is not dependent or influenced by a producer or “centralized entity.” Bitcoin is categorically a commodity.
Whether other virtual currencies are to be considered commodities is to be determined. To date, the CFTC has made a declarative judgment that bitcoin and ether are commodities and Congress is working to solidify that declaration through statute (see the S. 4760, Digital Commodities Consumer Protection Act).
Likely, many other virtual currencies should be classified as commodities, while others will inevitably meet the SEC’s test and be deemed securities. It will be up to the regulators to provide that judgment and clarity. Stay tuned!
FAQs
Bitcoin is interchangeable, meaning each coin is identical. Bitcoin's price is also driven by supply and demand and is not dependent or influenced by a producer or “centralized entity.” Bitcoin is categorically a commodity.
Is Bitcoin a digital commodity? ›
Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. Is Bitcoin a commodity? Yes, virtual currencies, such as Bitcoin, have been determined to be commodities under the Commodity Exchange Act (CEA).
Is BTC a commodity or a security? ›
Meanwhile, the Commodity Futures Trading Commission (CFTC) has openly come out to say that BTC is a commodity on its website.
What makes cryptocurrency a commodity? ›
Key Takeaways. 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.
How is Bitcoin designed just for a digital economy? ›
Bitcoin Explained:
Imagine a digital ledger, publicly accessible and constantly updated, recording every Bitcoin transaction ever made. This is the essence of Bitcoin's blockchain technology. Transactions are secured through cryptography, eliminating the need for a central bank or intermediary.
Is Bitcoin a physical or digital? ›
Bitcoin, often described as a cryptocurrency, a virtual currency or a digital currency - is a type of money that is completely virtual - there are no physical coins or notes.
Is Bitcoin real or digital? ›
Bitcoin as a form of digital currency isn't hard to understand. For example, if you own a bitcoin, you can use your cryptocurrency wallet to send smaller portions of that bitcoin as payment for goods or services. By contrast, the way Bitcoin actually works is very complex.
When did Bitcoin become a commodity? ›
In 2015, the CFTC came forward and defined Bitcoin and other virtual currencies as commodities under the U.S. Commodity Exchange Act (the CEA).
Why does the SEC think Bitcoin is not a security? ›
He explained that if a cryptocurrency is decentralized enough it creates a situation “where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts.” Expounding upon this analysis, Hinman noted that the disclosure regime of securities regulation as ...
Is Bitcoin a digital security? ›
The U.S. Securities and Exchange Commission takes the position that nearly all cryptocurrencies are securities, with bitcoin the only known exception.
Bitcoin, a digital or virtual asset, presents a stark contrast to traditional physical commodities. As a decentralized currency operating on blockchain technology, Bitcoin is not subject to control by any single entity, unlike commodities which can be regulated by governments and central banks.
Is Bitcoin a digital currency? ›
Founded in 2009, Bitcoin was the first cryptocurrency and is still the most commonly traded. The currency was developed by Satoshi Nakamoto – widely believed to be a pseudonym for an individual or group of people whose precise identity remains unknown.
Which cryptos are classified as commodities? ›
Cryptocurrencies, like Bitcoin and Ethereum, possess traits akin to Commodities. They're tradable assets, lack legal tender status, and operate in decentralised networks. Regulators, such as the US CFTC, classify certain Cryptocurrencies as Commodities due to their market functions and fungibility.
Why is Bitcoin mined if digital? ›
Validating transaction information, maintaining the integrity of the blockchain, and opening new blocks are mining's purposes, while the Bitcoin reward is the incentive to mine. Bitcoin mining is necessary to maintain the ledger of transactions upon which Bitcoin is based.
Why is Bitcoin digital property? ›
Decentralization: Unlike traditional property, governed and recorded by central authorities, Bitcoin operates on a decentralized network. This decentralization eliminates the need for intermediaries, offering a direct ownership model that challenges traditional asset management and control structures.
Why is Bitcoin a digital asset? ›
Cryptocurrency is a form of digital currency that, unlike conventional money, only exist within a virtual space. Cryptocurrencies are mostly decentralised, managed by a peer-to-peer system without a central issuing or regulating authority.
What is a digital commodity? ›
The best-known example of a digital commodity is cryptocurrencies. The digital sale of physical assets, such as gas and oil, is also an example of a digital commodity. Digital commodities also refer to digital assets such as digital works of art (NFTs), digital cards, digital brands, and digital real estate.
Is Bitcoin is a digital currency? ›
Founded in 2009, Bitcoin was the first cryptocurrency and is still the most commonly traded. The currency was developed by Satoshi Nakamoto – widely believed to be a pseudonym for an individual or group of people whose precise identity remains unknown.
Is Bitcoin a digital property? ›
Bitcoin, with its decentralized nature and cryptographic foundation, epitomizes the evolution of property. Its design ensures that ownership is indisputable, and transactions are secure, mirroring the legal protections afforded to physical property but in a digital context.
Is Bitcoin a digital asset? ›
Digital assets may include virtually anything of value that is not tangible in nature, including bitcoin, ethereum, and other cryptocurrencies, as well as software code, digital music, and film clips; non-fungible tokens (NFTs); or other valuable data and code held in digital form.
