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Inner Blog Is Crypto a Commodity or a Security?

Is Crypto a Commodity or a Security?

18 May, 2023

The ongoing debate of whether crypto is a commodity or a security is one that seems to have no end due to the vast use case scenarios of crypto and the market thereof.  However, to ensure regulatory clarity and consistency, a decision needs to be made. Currently, it is speculated that classifications are likely to be made based on the specific characteristics of each token, but this solution only seems to introduce more regulatory red tape. 

Securities and commodities are subject to separate regulatory bodies. Moreover, both elements represent 2 very different coin functionalities. Determining whether a cryptocurrency falls under either category carries significant implications regarding its sale, listing, and potential legal consequences for the issuer.

This article aims to explain the differences between securities and commodities while delving into the ongoing discussion surrounding the appropriate classification of cryptocurrencies.

What Is a Commodity? 

In the traditional sense, a commodity is a raw material or agricultural product that can be bought, sold, or traded, for example, gold, oil or wheat.  

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. 

What Is a Security?  

Securities are more abstract than commodities. A security is a financial instrument with monetary value typically sold and bought on a stock exchange. Examples include stocks, bonds, and debts like loans or ownership rights. Moreover, investors in securities expect profits from these investments over a period of time. 

It can be argued that non-fungible tokens (NFTs) are securities, as many buyers believe over time, they will profit from their purchases.  

Why Does the Classification of Crypto Matter?

The potential outcome of classifying cryptocurrencies as securities could contribute to greater legitimacy within the industry. Although it could also result in heightened regulation and increased costs for investors, as acquiring these licenses is often challenging, leading the crypto industry to invest significant efforts into ensuring compliance with securities laws.  On the other hand, considering alternatives like categorising cryptocurrencies as commodities may present its own risks, posing increased challenges for investors.

Presently the US Securities and Exchange Commission (SEC) insists that the burden of categorisation falls on developers, who must demonstrate that their assets are not functioning as securities. Examples of commodity-type virtual assets include coins that are decentralised and operate on a  proof-of-work consensus. If coin developers are more inclined to participate in the coin’s development and growth without relying on third parties to generate profits, the coin does not fall in line with the Howey Test, therefore, is not a security. 

So, Is Crypto a Commodity or a Security? 

Many argue for bitcoin to be labelled as a commodity and all other crypto types to be labelled as securities based on the founding principles of the currencies.  Satoshi envisioned bitcoin as a currency to disrupt the traditional banking system and provide an alternative for the unbanked; the objective was not to profit from the coin or the Bitcoin blockchain. Additionally, bitcoin is entirely decentralised and is interchangeable on exchanges as each bitcoin is of equal worth, much like traditional commodities of the same grade. 

For a period, ether fans also claimed its commodity status. But since switching to the proof-of-stake modal, the blockchain’s decentralisation has been questioned, and the modal aligns the coin more closely to a security than a commodity.  In the US, ether (ETH) is in classification limbo, as SEC Chair Gary Gensler has yet to confirm where ether falls. Many other coin types were created by companies to turn a profit over time or be sold as shares to the company, conforming to the US Howey Test standard.

I am of the firm belief that everything other than bitcoin is, in fact, a security. Bitcoin is the only true commodity virtual asset. Take any of the latest launched cryptocurrencies: all of them raise money by selling coins, and then an army of social media bots goes to work to advertise the coin, hoping it will increase in value. A perfect match for the Howey test.

It seems only time (and regulators) will tell how crypto assets will be classified and what regulation regime(s) crypto businesses will need to follow. 

Written by:
Harm Aarts
Senior Software Engineer
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