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Things like the XRP case, the Securities and Exchange Commission (SEC) lawsuits, and challenges of crypto regulation constantly used to surface in crypto news. All of these things are not easy to understand from the get-go, especially if you are not familiar with the lingo. Let’s try to unravel the legal jargon and get down to the essence of the debate in this article.
What Categories of Financial Instruments Does Crypto Usually Fall Under?
To begin with, we suggest you catch up with the terminology that is at the core of the debate. There are three definitions of publicly traded goods and assets which cause some confusion because the place of digital assets is not universally determined.
Commodities
What is a commodity? Commodities are basic goods that are interchangeable with other goods of the same type. It does not refer to products but rather raw materials because they are more uniform in quality between different producers.
They are not necessarily physical objects, as digital commodities such as bandwidth and cell phone minutes also fall in the same category. Applying the same logic, we could argue a digital asset is the same thing. Outside of the US, virtual currency is usually thought of as a commodity.
However, this is also not a flawless categorization because of what separates commodity vs an asset. Assets like money and financial instruments are not consumed in production and use.
Securities
What is a security in crypto? Whenever the question is brought up even in the crypto-related context, it means the same thing as in traditional finance.
Securities are legal representations or obligations that deal with cash flows from various activities, for example, the business and revenue of a company. As assets, they persist through their use, which is a major difference between security and commodity.
A shorter definition of securities is an investment contract. It comes from the Howey test that defines securities as “investments of money; in a common enterprise; with an expectation of profit; through actions of others”. If we define crypto assets by how people use them instead of viewing them for what they are, in some cases they can seem similar to investment contracts.
Is gold a security? After all, a major reason to invest in it is the expectation of profit in the future. However, gold is a classic example of a commodity because it can be used as raw material. It also doesn’t fit any criteria of the Howey test because the profit for selling gold for a higher price does not come until you sell it, while securities entitle holders to a share of the enterprise’s profits.
Currency
Currency is one of the forms in which money and value exist. For historical and political reasons, money is denominated in different currencies. Nevertheless, it is universally recognized that all currencies represent money as a medium of exchange and a store of value.
Whether crypto assets can really be called a currency is also something people argue about. For one, unlike fiat currency, crypto defies national borders.
Are Crypto Assets Commodities?
If crypto is a commodity, it indeed can be traded as a digital asset representing a piece of code or a hash in a blockchain. Interestingly enough, this is a point of view with which even crypto critics tentatively agree.
Before the current leadership, the Securities and Exchange Commission (SEC) considered crypto assets to be more like commodities such as gold or oil. One of the consequences of this stance was their being in the jurisdiction of the Commodity Futures Trading Commission (CFTC), among other things.
Not everyone is as open to the idea of pieces of data being the same as real-world goods. In the case of oil or sugar, even when it is not traded, you still have a good with universally recognized utility that usually can be turned into products. In the case of crypto assets, things are further complicated by the fact that inputs are part of a publicly accessible ledger; users verifiably own only their own addresses or accounts.
As if that was not enough, tokenization takes this complication even further. The crypto commodity list is growing longer as more real-world asset-focused (RWA) projects appear and gain prominence.
Are Cryptocurrencies Securities?
Contrary to the previous point of view, this is the stance that the previous SEC maintained with Gary Gensler as chairman. The current leadership is less adamant about this definition but for the purposes of this securities vs commodities debate, let’s see the arguments in favor of this stance.
Is cryptocurrency a security? Going back to the Howey Test, people who take this stance claim crypto securities meet at least three of the four criteria. It involves an investment of money, sure; into a common enterprise, debatable; with an expectation of profit, hard to argue. The fourth criterion of the Howey test, “from efforts of others” is the main point of contention.
The thing about this method is that it traces back to the 1940s. A lot of people maintain that such an antiquated method is outdated when talking about digital assets.
Are Crypto Assets Currencies?
It’s hard to imagine but even the naming convention “cryptocurrency” is controversial. Whether you believe crypto belongs to this category or not correlates strongly with whether you are a crypto critic or advocate.
The definition of currency draws upon the functions of money. Critics and advocates argue over whether Bitcoin or other assets meet these criteria or not. For example, those who think cryptos are not currencies claim it lacks such functions as a medium of exchange (not universally accepted as money) or store of value (as they are very volatile).
Cryptocurrency proponents cite the original principles upon which Bitcoin was built: being a peer-to-peer digital cash. They believe Bitcoin and other cryptos can be used to pay for goods and services and that its limited supply prevents it from losing value due to inflation.
Why Does It Even Matter Which Category Crypto Belongs To?
Why is this debate given so much attention in the cryptocurrency news, then? What happens if crypto is defined as a security? Especially considering that most of the news concerns the SEC of the US. A lot of jurisdictions outside of the US seem to have settled on defining crypto assets as commodities.
Crypto industry members were closely following the SEC vs. Ripple case because, in the US, the law relies on legal precedents rather than existing rules. This system makes it so that even if there is no comprehensive legal framework, based on one or several cases judges can reliably establish further actions. If XRP were ruled to be a security, it would need to adhere to federal securities laws of the US, which imply procedures such as registration, that XRP did not follow. Moreover, it would change the regulatory status and create a precedent for other crypto assets, and their founders then can be sued for violation of the Securities Act.
Such a decision would radically change the crypto industry in the US. It will not be destroyed completely because it is more or less established that Bitcoin, Ethereum, and stablecoins are not a part of this conversation. In addition, there are already crypto security tokens that sought registration voluntarily. Such crypto asset securities go against the cryptocurrency ethos because they require the holders to not be anonymous. Therefore, the question of how fungible crypto assets should be defined under cryptocurrency regulation is more of an ideological than legal one.
Crypto investors outside of the US watch the situation unfold through the news because it concerns them, too. A significant chunk of current leading crypto companies is registered in the US. Can you imagine what would have happened if they were suddenly required to follow strict American securities laws? For sure, investors there will have a higher degree of security because the companies will be held responsible. On the other hand, the market participants will need to give up all anonymity. It could lead to US-based crypto enthusiasts being cut off from the rest of the crypto world.
Conclusion
The debate of whether crypto is considered a commodity or security is still ongoing. Although it is easier to accept from the sidelines that this asset class is something new that the traditional system still hasn’t incorporated properly, lawmakers and judges often do not have the time to wait for clarity and define things with the terms they have right now. Which is why it is important to maintain dialogue and provide qualified input to create the framework that reflects the actual state of the industry.
We hope this article equipped you with a better understanding of what’s going on. If you feel like learning more about crypto markets and projects, continue to the ChangeHero blog! For daily updates, subscribe to our X (Twitter), Facebook, and Telegram.
Frequently Asked Questions
Is XRP a security or commodity?
In the SEC v. Ripple case, the commodity vs security question concerning XRP hinged on its initial distribution. The Commission alleged Ripple held a presale of XRP tokens while describing them as something that can be defined as securities. However, the judge ruled that those sales were not security offerings, essentially stating that XRP is not a security.
Is Bitcoin considered a security or commodity?
As the first and best-known cryptocurrency, Bitcoin has been defined from a legal perspective the earliest as a commodity rather than a security. If you wonder why Bitcoin (BTC) is not a security, it is because it does not constitute an investment contract with any entity. There was no presale of bitcoins and all BTC that is not bought from someone else is produced with mining.
Is Ethereum a security or commodity?
Unlike Bitcoin, Ethereum (ETH) had a presale and was launched mostly thanks to efforts of the Ethereum Foundation. Nevertheless, due to ether’s nature and production through crypto mining (no longer applicable), it is treated as a commodity.
Is crypto a security or currency?
Those who consider security vs cryptocurrency to be separate kinds of assets more often describe the latter as a digital commodity. However, there is also an opinion that cryptocurrencies are digital currencies, a special form of money. The answer would depend on the crypto asset.
Is crypto a security or property?
The legal definition of property is everything that a person or organisation owns. Therefore, both cryptocurrencies and securities can be property. Security and property are not mutually exclusive.
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