Ever since cryptocurrencies became more mainstream, government agencies, investors and the projects themselves have debated whether they are commodities or securities. Because of the unique and evolving nature of cryptocurrency, it’s been a challenge to get real answers from any authorities on the classification. However, a series of recent statements and judicial rulings have helped to clarify whether cryptocurrency is a commodity or a security.
Why Classification Matters
Traditional commodities and securities play an important role in the world economy to grow businesses and accumulate wealth. Both commodities and securities in the United States are regulated by different agencies, and are therefore subject to different laws.
Commodities and securities laws are in place for many reasons—such as investor protection, tax purposes, and discouraging illegal activity. Defining the asset class for cryptocurrencies gives guidelines for how companies and investors behave when entering into transactions. In the past, differing views on completely digital cryptocurrencies have made it harder for the different entities to comply, or even know whether they had to.
Definitions of Commodities and Securities
In traditional investing, a commodity is a type of good that is used in trade and commerce. Historic and current examples include shells, gems, livestock, oil, and gold. In the United States, commodities are regulated by the Commodity Futures Trading Commission (CFTC).
A security is an investing instrument that provides the investor with ownership rights and any distributed profits. Examples include treasury bills, stocks, bonds, and mutual funds. In the United States, securities are regulated by the Securities and Exchange Commission (SEC).
Recent Rulings and Official Statements
In several rulings and official statements by government entities recently, more clarifications make it apparent that most aspects of cryptocurrencies are not securities but commodities. As early as 2015, the CFTC has claimed cryptocurrencies as commodities and engaged in rulings as such, holding digital currency companies to the same standards as traditional companies that also deal in commodities.
In accordance with the CFTC’s claim on cryptocurrency, the leading authority at the SEC also ruled that most aspects of cryptocurrency are not securities and therefore don’t come under their securities laws.
In March 2018, a district judge ruled that cryptocurrencies were indeed commodities and therefore under regulation by the CFTC. The idea is that virtual currencies are equal to goods that are exchanged on an open market and meet the definition of a commodity. With the ruling, the position of cryptocurrencies as commodities is strengthened considerably.
An Exception for ICOs
There is one significant area where cryptocurrency does fall under the definition of securities and therefore under regulatory control of the SEC. This happens with Initial Coin Offerings, or ICOs. The SEC has recently focused on this aspect of cryptocurrency, especially ICOs that are fraudulent. The coins offered during the initial sale of coins give purchasers the expectation of a return on the asset. In these situations, cryptocurrency transactions would fall under any relevant securities laws and regulations as controlled by the SEC.
In recent months, the SEC is also taking a closer look at any companies that are providing digital wallet services. Because these services hold or store digital assets, they may need to follow certain registration requirements that comply with security laws.
The Future of Cryptocurrency Regulation
The future is not necessarily clear about whether various transactions within the cryptocurrency world are always commodities or securities. The interest that multiple entities have in cryptocurrency opportunities, from investors to companies, will certainly lead to new and unusual situations that require constant corrections to ensure that they are all subject to the same rules. Compliance is important for the health and productivity of all involved.