Daniel Alvarez – Cryptocurrencies took the financial industry by storm in 2017, leaving behind many questions. The most important question is, for regulatory purposes, “what should cryptocurrencies be classified as?” Are they commodities, securities, or currency? The financial industry does not seem to have an answer to this. After all, some of the biggest banks question if cryptocurrencies are even legitimate instruments. Specifically, Jamie Dimon, CEO of JP Morgan, called cryptocurrencies a “fraud,” and that he’d fire any JPMorgan trader who trades bitcoin.
Fortunately for cryptocurrency investors, Jamie Dimon is not in charge of regulating or classifying cryptocurrencies. Cryptocurrencies can break down into three categories: commodities, securities, or currency. Commodities are defined as “a basic good used in commerce that is interchangeable with other commodities of the same type.” Securities are defined as “a fungible, negotiable financial instrument that holds some type of monetary value. It represents an ownership position in a publicly-traded corporation (via stock), a creditor relationship with a governmental body or a corporation (represented by owning that entity’s bond), or rights to ownership as represented by an option.” Currency is defined as “a generally accepted form of money, including coins and paper notes, which is issued by a government and circulated within an economy.”
Commodities are governed by the Commodity Futures Trading Commission (CFTC). According to the CFTC, this discussion does not need to be had because the CFTC classified cryptocurrencies as commodities in 2015. However, typical commodities, like wheat and gold, do not fluctuate in price as often as cryptocurrencies. The CFTC relies on the definition that a commodity can include ““all services, rights, and interests . . . in which contracts for future delivery are presently or in the future dealt in.” Under this definition, the CFTC seems to be correct in its classification, but complexities occur as the analysis continues. If cryptocurrencies are classified as commodities, it will subject all United States based cryptocurrency exchanges to the Dodd-Frank Wall Street Reform Act, which would lead to cryptocurrency exchanges to maintain certain amounts of funds at all times.
Securities are governed by the Securities and Exchange Commission (SEC). In July 2017, the SEC released a press release regarding Initial Coin Offerings, these are similar to initial public offerings but are for new cryptocurrencies rather than stocks. In the press release, the SEC questioned whether the cryptocurrencies are securities. However, the press release is more explanatory about what cryptocurrencies are and their profitability than instructive about cryptocurrencies classification. In December 2017, the SEC released another press release again brining into question the classification of cryptocurrencies, although claiming that cryptocurrencies do not appear to be securities. The press release was intended to keep consumers calm about their investments and to note that certain aspects of cryptocurrencies are regulated. This clashes directly with the CFTC’s firm stance that cryptocurrencies are commodities. If cryptocurrencies are deemed as securities, this would lead to the need for a potential license to sell cryptocurrencies in the United States and may limit who can sell cryptocurrencies in the United States.
Lastly, the argument that cryptocurrency is regular currency is a stretch. The Federal Reserve is in charge of printing United States backed currency. However, the Federal Reserve had been silent on cryptocurrencies like bitcoin because they are not backed by the United States government. However, rumors have speculated that the Federal Reserve is working on making its own cryptocurrency. If this were to happen, the United States backed cryptocurrency would clearly be a currency as it could potentially be used in daily transactions.
The real question becomes are cryptocurrencies commodities or securities. Despite the SEC’s reluctance to official classify them as securities, the common sense argument is that cryptocurrencies act more like securities than commodities. The recent swings in prices for bitcoin seem to show that they are similar to how stocks are in the market. Prices vary depending on consumer confidence. However, commodity stocks rarely are as volatile as cryptocurrencies. Despite some comparisons to the massive silver fluctuations in 1980 and 2011, cryptocurrencies seem to be fickler. The form and the actual operation of cryptocurrencies lead to the conclusion that they are securities. The SEC seems to be the proper regulatory agency, despite the CFTC classification.