What Is A Security?

At its most basic definition, a security is a form of ownership in an entity. Whether it be a stock, treasury stock, evidence of indebtedness, bond, option, or any other financial instrument that represents an ownership stake in a company or a debt obligation, a security represents ownership. Securities are typically regulated by government agencies such as the Securities and Exchange Commission (SEC) and others. These institutions and agencies have the authority to enforce securities laws.

When it comes to crypto, the question of whether it is a security or not is not clear cut. First and foremost, not all cryptocurrencies are the same. Some may genuinely be securities while others may in fact be commodities. Some cryptocurrencies, such as Bitcoin, are decentralized and hold no underlying assets or income streams. This would suggest that Bitcoin is not a security. Other cryptocurrencies, such as those that are issued through initial coin offerings are more closely tied to the success of a specific company, which would suggest that they are more likely to be securities.

What Is A Commodity?

A commodity, on the other hand, is a basic good used in commerce that is interchangeable with other goods. A commodity can be any raw material or primary agricultural product that can be bought and sold, such as gold or oil. Commodities are typically regulated by government agencies such as the Commodity Futures Trading Commission. These institutions and agencies have the authority to enforce commodities laws. Because many cryptocurrencies hold value that is derived from their perceived usefulness, as well as scarcity — Bitcoin will eventually be capped at 21 million coins, for example — and because crypto is decentralized and not issued by any government or bank, some believe that crypto should fall under the commodities category.

As it pertains to cryptocurrency, some regulators, such as the CFTC, have classified it as a commodity giving them the authority to regulate the movement of cryptocurrencies. This classification has broad implications for the trading and exchanges of cryptocurrency as well as crypto’s compliance with commodity laws.

What Does the Government Think?

Some cryptocurrencies hold properties of both securities and commodities, making the debate even more complex.

Former and current SEC executives as well as current and former Fed executives have taken varying positions, and typically have classified each cryptocurrency different, as opposed to saying that all crypto is one or the other: crypto that is decentralized may be commodities, while crypto released in ICOs may in fact be securities.

In general, the same rules applied to the CFTC, though the CFTC seems to lean harder in the direction that crypto is a commodity, and that crypto regulation should necessarily fall under its jurisdiction.

While the IRS may not have a stake in the game as it pertains to regulation, the agency in 2014 weighed in by saying that digital assets including Bitcoin should be treated as property for federal tax purposes. This would have broader implications vis-á-vis crypto mining as taxable income. Whether crypto mining becomes taxable income or not, 0 Percent is actively working in this space either way!

This debate is far from decided, and the issue will likely remain gray — as opposed to black and white — for quite a while. In the end, crypto may fall under one or the other category, or an entirely new category, or under no category at all and remain totally unregulated. Time will tell.