US Regulators Debate Whether Bitcoin is Commodity or Security

The Commodities Futures Trading Commission just released a primer on virtual currencies. This guide covers the basics of virtual currencies, the risks associated with them and CFTC's role in regulating them.

Daniel Gorfine, CFTC's Chief Innovation Officer, said at the release of the primer.

“As people worldwide try to understand and wrap their heads around the virtual currency ecosystem, we thought it timely and important for our first primer to help explain the space, identify how developments involve the CFTC, and highlight risks that investors or users of virtual currencies should carefully consider.”

The primer highlights that the definition of commodity in the Commodities Exchanges Act (CEA) is broad and covers physical commodities (like grain), natural resources (like gold) and currency or interest rates. Moreover, the CTFC has oversight over derivative contracts and its jurisdiction is triggered when virtual currencies are used in derivative contracts.

Situational Decision

There has been much debate about whether virtual currencies should be classified as a commodity or a security. As early as 2015, the CFTC had opined that Bitcoin was a commodity and would be subject to its jurisdiction. The SEC has recently asserted its own authority, taking action against ICO operators recently and finding that some ICO tokens may have security-like features. The CFTC primer clarifies that the actual structure of the token would decide whether the token is classified as a security or derivative contract with an underlying commodity.

“There is no inconsistency between the SEC’s analysis and the CFTC’s determination that virtual currencies are commodities and that virtual tokens may be commodities or derivatives contracts depending on the particular facts and circumstances.”

Market Crashes, but Recovers

The price of Bitcoin crashed by $500 to just under $5,100 following the release of this report, but has since recovered almost all of its losses. Regulatory action of any kind generally induces short-term panic in Bitcoin traders, but the price typically recovers quickly. Bitcoin has over the past few months bounced back after China banned ICOs and shut down exchanges, the SEC declared that ICOs may constitute securities offerings and South Korea completely banned ICOs. This might be the surest indication that the market believes that the ability of governments to exercise control over Bitcoin is limited.