Will Bitcoin Evolve into a Digital Commodity or Remain a Currency?
The debate over whether Bitcoin (BTC) should be classified as a currency or a commodity is a hot one in both finance and technology circles. This discussion is not just academic; it has significant implications for how Bitcoin is regulated and its future role in the financial ecosystem.
The Current Classification by the IRS
As of now, the Internal Revenue Service (IRS) categorizes Bitcoin as a property, subject to capital gains taxation. This classification implies that Bitcoin is treated more like an investment or asset rather than a traditional currency. The IRS defines property as something owned, which can be a tangible or intangible entity with legal title to it. However, the term 'property' does not align perfectly with the concept of a commodity or money.
Characteristics of Bitcoin and Its Behavior
Analysts often compare Bitcoin to commodities like oil and gold because it can be bought and sold through cash markets, including various derivatives like futures. These similarities have led some to suggest that Bitcoin could be more accurately classified as a digital commodity.
Commodity vs. Security
Another possibility is that Bitcoin functions more like a security. Many cryptocurrencies are issued in Initial Coin Offerings (ICOs) or Initial Exchange Offerings (IEOs), similar to issuing stocks. These offerings provide shares in online projects, and Bitcoin fits this description since it grants access to a decentralized network or entitles the holder to a share of profits.
Regulatory Implications
How regulators choose to classify Bitcoin will have far-reaching consequences. For example, in the United States, federal watchdogs have noted the dual nature of Bitcoin, seeing elements of both securities and commodities. However, no specific rules have been established yet.
Differences in Regulation
Regulation of commodities is typically less stringent compared to the regulation of securities. Commodity markets operate with minimal regulatory oversight, while securities markets are subject to more onerous rules concerning price transparency, trade reporting, and market abuse.
Example of Regulation Impact
Benjamin Tsai, president of Wave Financial, a crypto investment manager, echoed this concern. He noted that complying with the regulatory processes for security offerings requires significant fees and legal work. "It’s a lot more of a pain in the butt," Tsai said.
The Role of Lending in Shaping Identity
The recent growth in Bitcoin lending markets offers valuable insights into the nature of Bitcoin. Lending markets involve using Bitcoin as collateral to borrow traditional fiat currencies, often with high interest rates due to low interest rates in the current market environment. This behavior mirrors that of commodities leasing.
For instance, the bitcoin lending market in New York-based Genesis Capital has seen rapid growth. Outstanding loans have increased from 100 million to around 545 million in late last year. The market interest rates for borrowing Bitcoin typically range between 4-5%, while rates on platforms for cash lending against Bitcoin can go as high as 8%.
Financial Instruments: Cryptocurrencies as Securities
The kinship between cryptocurrencies and financial instruments or securities stems from their issuance methods. Many cryptocurrencies are issued through ICOs to raise traditional capital for blockchain-related or other digital projects.
Cryptocurrencies serve as a medium to access new systems, software, or share in the profits generated by these projects. For example, Switzerland-based Aragon, a decentralized organization management platform, raised 25 million through ICOs in 2017, issuing tokens that granted voting rights on how the system is developed.
Regulators may treat different cryptocurrencies differently based on their unique characteristics. For instance, the United Kingdom last year adopted a flexible approach to regulate cryptocurrencies.
Conclusion
The classification of Bitcoin as a commodity or a currency is crucial for its future. The choice will determine its regulatory environment and its potential acceptance as a mainstream financial instrument. As the debate continues, the finance world awaits guidance from global regulators to clarify the path forward for Bitcoin and other digital assets.