December 11, 2023 - 12 min read
Some cryptocurrencies are classified as commodities in certain countries, including the United States. For example, in the U.S., Bitcoin and Ethereum are currently regulated by the U.S. CFTC (Commodities Futures Trading Commission) as commodities, like gold and silver. In contrast, a “crypto commodity” is a different type of asset than a traditional cryptocurrency. A crypto commodity is generally considered a token representing a real-world or virtual commodity, asset, utility, or contract. However, it’s important to note that not all popular cryptocurrencies are commodities.
For example, some cryptocurrencies have been classified as securities, and the legal classification of some cryptocurrencies is currently unclear. This can often happen in cases where laws have not yet been drafted or in situations where there is ongoing legal action.
One famous example is the ongoing litigation between the U.S. Securities and Exchange Commission (SEC) and Ripple Labs, which created the popular Ripple (XRP) cryptocurrency. The SEC has consistently argued that Ripple Labs has violated U.S. federal laws by selling unlicensed securities. While Ripple did achieve a partial legal victory when, in July 2023, a judge ruled that XRP is not a security, the judge did not classify XRP as a commodity or currency, leaving the cryptocurrency’s legal status unclear.
However, in September 2023, the SEC formally appealed the judge’s ruling, and the organization appears to be putting significant resources into attempting to win the case. A win for the SEC could lead to more cryptos being classified as securities rather than commodities or currencies. This, in turn, could lead to a significant damper on the crypto market, especially in the United States.
Before discussing why Bitcoin and Ethereum are currently regulated as commodities by the CFTC, let’s first take a quick look at the legal definition of a commodity and what makes it different than a security (or a currency, for that matter).
Traditionally, assets like gold, silver, oil, or wheat are considered commodities. These assets all have a few things in common, including:
Howey Test diagram. Source: SEC/Crypto News.
In contrast, securities, which, in the United States, are currently defined by the Howey Test, have a different set of core characteristics, including:
Therefore, for an asset or contract to qualify as a security, there must be:
For example, Bitcoin is generated by thousands of miners distributed worldwide. There is no centralized company or organization behind Bitcoin. Therefore, it is not a “common enterprise.” The price of Bitcoin is not primarily determined by the efforts of one or a few entities and is instead determined by market supply or demand. As previously mentioned, Bitcoin is fungible, so each is precisely the same as every other.
Ethereum, while now a proof-of-stake network, has many of the same qualities as Bitcoin, including hundreds of thousands of node operators distributed worldwide. While there is an Ethereum Foundation that helps advocate for Ethereum developers, it currently owns less than 0.3% of all ETH in circulation, meaning that it has almost no influence over the network, and, in general, the efforts of the Ethereum Foundation do not have a discernable impact on the price of ETH.
Bitcoin hashrate pie chart, showing AntPool and Foundry USA as representing more than 51% of Bitcoin’s total hashate (Jan. 2023). Source: CryptoSlate.
Of course, there are some points of centralization when it comes to Bitcoin and ETH, particularly when it comes to mining pools. For example, as of early 2023, only two mining pools were responsible for around 50% of Bitcoin’s hashrate. This means there is a very small possibility that these pools could collude to attack the Bitcoin network. However, it should be noted that these pools themselves are not monolithic; instead, they consist of thousands of individual miners who have pooled their resources. Therefore, if it appeared these networks were manipulating the Bitcoin network, it’s highly likely that many miners would leave these pools, significantly reducing their hashrate and, therefore, making it impossible for them to conduct a 51% attack successfully.
According to former CFTC Chairman Christoper Giancarlo, the CFTC took early and proactive action to classify Bitcoin as a commodity. In December 2014, then CFTC Chairman Timothy Massad testified before the U.S. Congress that Bitcoin was a commodity and should, therefore, be under CFTC jurisdiction.
“In 2015, again, with my support the CFTC in a case called the Coinflip case, declared Bitcoin, as a matter of law, to be a commodity and subject to the CFTC. And then under my leadership as chairman of the agency in 2015, we greenlighted the first U.S regulated market for Bitcoin Futures under the exclusive jurisdiction of the CFTC.”
This action later led to CFTC rules that would also put Ethereum under the organization’s regulatory jurisdiction.
While they may sound like the same thing, a “crypto commodity” and a crypto classified as a commodity are two distinct types of assets. While a cryptocurrency only has to demonstrate a high level of decentralization to be (potentially) legally classified as a commodity, a crypto commodity is a cryptocurrency or token “representing a commodity, utility, asset, or contract in the real or virtual world.”
This means that assets like gold-backed stablecoins like Paxos Gold (PAXG), Tether Gold (XAUT), and Gold Coin (GLC) could potentially be classified as crypto commodities, as they are backed by, and can generally be exchanged for real-world gold. In addition, it’s also possible that stablecoins like Tether (USDT) or and USD Coin (USDC) could be classified as crypto commodities, as they represent a contract in which the stablecoin can be exchanged for real U.S. dollars on a 1:1 basis.
Other types of asset-backed tokens, such as tokens that are backed by real estate, oil, or other assets, and even tokens that are backed by other cryptocurrencies, such as wrapped Bitcoin (WBTC), which can be exchanged on a 1:1 basis for BTC, could also classify as crypto commodities.
While most of this article has discussed the legal status of cryptocurrency inside the U.S., it might also be useful to look at crypto’s legal classification in other countries. So far, the U.S. has been the only country to regulate certain cryptos as commodities. In contrast, in the U.K., they are classified as “cryptoassets,” a new type of asset that is neither a commodity, a security, or a currency.
By creating a new legal framework around crypto, the U.K. government hopes to enjoy the innovation and economic growth generated by the crypto and blockchain economy while preventing the darker side of the industry– including helping stop crypto-related crime, scams, Ponzi schemes, especially when these issues could hurt the broader economy.
Which Cryptocurrencies Are The Most Likely To Be Classified As Securities Instead Of Commodities?
In June 2023, the SEC announced that it would consider 68 cryptocurrencies as securities, representing a market cap of over $100 billion. But what traits most likely impact the SEC’s decision to label a crypto as a security?
Generally, any cryptocurrencies that pass the Howey Test are more likely to be classified as securities rather than commodities. As discussed earlier in this article, the Howey Test defines a security as an ‘investment of money in a common enterprise, with the expectation of profit to be derived from the efforts of others.’ Therefore, projects with the following characteristics are the most likely to be classified as securities:
Further list from SEC lawsuit of other 7 cryptos involved in the ligitation and the SEC’s arguments as to why they are securities.
It seems like a simple question: if cryptocurrencies are intended to replace traditional currency, why can’t they simply be classified as currencies rather than commodities or securities? Well, the answer is complex, but the core reason is that, in most countries, there isn’t a functional legal framework to classify any assets as currencies that are not issued by a country’s central bank.
However, this doesn’t mean that there’s never been a legal framework– for example, in the 19th century, a variety of private U.S. banks actually offered their own currencies, some backed by gold or silver, others simply backed by trust in the bank itself. While this gave consumers many choices regarding currencies, many of these banks failed, making their currencies worthless and leaving many bereft of their life savings. These issues eventually led to more centralization and promotion of the U.S. dollar, and eventually, banks were prohibited from issuing private currencies in the United States.
1870s $5 note issued by the First National Gold Bank of San Francisco during America’s free banking era. Source: CoinDesk.
Despite this, there have been other examples in which private currencies have had a significantly more positive impact on a country’s financial, economic, and monetary systems. For example, “free banking,” a system in which private banks were allowed to issue their own currencies with very little regulation, existed in Scotland between 1716 and 1845, resulting in an exceptionally stable and effective monetary system.
More than 60 countries have experimented with free banking systems over the last one thousand years. While results have been mixed, it’s clear that, if implemented correctly, such a system might produce superior results than our current system of fiat central banking.
However, much of our political, economic, and social systems currently revolve around the influence of the Federal Reserve and other central banks, so it is highly unlikely that free banking systems will be implemented anytime soon, and, as a result, crypto is unlikely to be regulated or defined as a currency in the near future.
Two of the most popular NFT collections: Bored Ape Yacht Club and CryptoPunks: Source: The New Stack.
While the legal status of cryptocurrencies, especially smaller cap assets, is in limbo– in most countries, the status and classification of NFTs is even more unclear. An NFT could be a commodity, a security, or neither. “Simple” NFTs– such as PFP art NFTs like the Bored Ape Yacht Club or CryptoPunks, are likely to be neither a commodity nor a security.
However, asset-backed NFTs, like asset-backed cryptocurrencies, might be classified as securities or commodities. If the NFT is backed by commodities or assets like real estate or collectibles, which do not typically rise in price due to the efforts of others (and therefore do not pass the Howey test), these NFTs would likely be classified as commodities. In contrast, NFTs representing some type of share or stock (or even a bond) in an actively managed business might be classified as securities.
However, there are many complexities and details to consider here. For instance, an NFT representing the ownership of a house might be a commodity– but an NFT representing ownership in a real estate development company building an apartment complex is more likely to be classified as a security.
Royalty-sharing NFTs, which provide a share of the sales price to the original creator each time an NFT is sold or traded, also exist in a potential gray area regarding legal classification. For instance, if a rapper issues a profit-sharing NFT that will provide users a particular share of the profits from their concert tour, that might be a security, as the financial gains experienced by the NFT holders would be considered the “efforts of a single enterprise,” and might therefore pass the Howey Test. In contrast, a royalty-sharing NFT issued by the same rapper that simply gives the rapper a portion of the sales proceeds each time the NFT is resold might be classified as a commodity (or might not be classified at all).
Commodities trading at the Chicago Mercantile Exchange (CME), the world’s largest commodities trading exchange. Source: Enjoy Illinois.
Most of this article discusses the classification of cryptocurrencies as commodities or securities. Blockchain technology, which provides the technical infrastructure for all cryptocurrencies, might also have a powerful impact on traditional commodities markets.
According to a recent report by S&P Global, blockchain technology, when applied to commodities markets, has a variety of potential benefits. These include cutting trading and transaction costs, enabling better wholesale peer-to-peer trading without the extensive use of third parties, helping enable more efficient derivatives trading, and potentially cutting down on fraud, particularly trade-based money laundering.
Currently, pilot projects are in process worldwide, with Singapore being one of the most prominent global hubs for blockchain commodities projects.
Depending on where you are, who you talk to, and which cryptocurrency you’re discussing, cryptocurrencies may be classified as commodities, securities, or neither. The CFTC’s (Commodities Futures Trading Commission’s) classification of Bitcoin and ETH as commodities has enabled new and traditional institutions to trade crypto futures on the world’s largest government-regulated commodities exchange.
This has greatly boosted the crypto market, adding significant liquidity to BTC and ETH while helping crypto and blockchain technology become significantly more commonplace (and mainstream) in the finance industry.
However, the SEC’s legal battles against Binance, Ripple, and other entities are already putting a significant damper on the crypto market– and while it looks like Ripple may win its’ case, a loss could seriously impact crypto trading in the United States. It could even force exchanges like Coinbase to delist dozens, if not hundreds, of popular cryptocurrencies, which might devastate the broader crypto industry.
It should be noted, however, that the relationship between crypto and commodities goes further than just government asset classifications. Specifically, new “Crypto commodities,” cryptocurrencies or tokens representing ownership shares in real-life commodities (like gold-backed cryptos) or even other cryptocurrencies (i.e., wrapped BTC), are becoming increasingly popular.
Finally, blockchain technology, though not necessarily cryptocurrency itself, is also expected to have an increasing impact on traditional commodities trading by reducing transaction fees, increasing transaction speeds, improving security, and preventing fraud.
As governments continue various cryptocurrency classification schemes, crypto commodities continue to evolve, and traditional commodities trading engages further with blockchain technology, we expect commodities to have an increasing impact on the crypto and blockchain industry in the near future.
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