4. How should BTC and ETH be characterized?
Above, after reviewing several legal cases related to cryptocurrencies, we have a clearer understanding of the logic and methodology of the U.S. courts in the regulation of cryptocurrencies. Below, in this part, this article will assess the commodity attributes of these two representative cryptocurrencies from a multidimensional perspective of economics, finance, and jurisprudence, and present our views on their legal positioning.
After analyzing relevant legal precedents, this paper argues that BTC and ETH, as decentralized digital assets, have the attributes of commodities. They can be bought and sold, have market value, and their prices are affected by supply and demand. At the same time, they also show certain monetary characteristics, such as portability and divisibility, but are more inclined to be regarded as commodities under the current legal framework. After analyzing relevant legal precedents, we believe that BTC and ETH, as representatives of cryptocurrencies, have the attributes of commodities. They can be bought and sold in the market, their prices are affected by supply and demand, and they have a certain value of use. However, their legal status remains controversial and requires further legal clarity and regulatory guidance.
4.1 Economic Assessment of Bitcoin as a Currency
While Bitcoin as a digital asset has the attributes of a currency in some respects, such as exchangeability and a certain store-of-value function, it suffers from a number of key limitations that make it difficult for it to be widely accepted and used fully as a currency in the traditional sense.
First, Bitcoin’s high price volatility makes it difficult to use as a stable store of value, and it is difficult for consumers and businesses to predict its purchasing power, which limits its use in everyday transactions. According to an analysis by Third Finance, the dramatic volatility of Bitcoin’s price is influenced by a variety of factors, including technological updates, policy changes, market sentiment, and macroeconomic trends. This volatility demonstrates Bitcoin’s instability as a currency in the short term, which poses a challenge to day-to-day transactions and store-of-value functions. Fidelity Research delves into the causes of Bitcoin’s volatility, noting that the fixed nature of Bitcoin’s supply is the root cause of its volatility. Since the supply of Bitcoin does not vary with the price, any movement in demand is directly reflected in the price, causing it to remain unstable in the long term. This further emphasizes the difference in stability between Bitcoin and traditional currencies.CryptoView.io states that the Bitcoin market is significantly affected by Fear, Uncertainty, and Doubt (FUD), which can sway investor behavior and, in turn, affect market dynamics. This suggests that Bitcoin’s function as a currency and its unit of account is limited by the instability of market sentiment.The Sohu article discusses the challenges and opportunities that digital currencies present to central banks, emphasizing that digital currencies diminish the ability of central banks to implement monetary policy. This reflects the tension between digital currencies such as Bitcoin and the traditional monetary system.
Second, the fixed supply design of Bitcoin, while avoiding the risk of inflation, may raise the issue of deflation. Deflation is the phenomenon whereby the purchasing power of money increases over time, which in the case of Bitcoin manifests itself in an expected rise in its value as the rate of new Bitcoin creation slows. According to economic theory, this sustained expectation of rising prices may discourage consumption and investment, as holders are more inclined to save than to spend. For example, consumers may delay purchases in the hope of purchasing goods at lower prices in the future, while businesses and individuals may be wary of investing, preferring to hold onto bitcoins in anticipation of an increase in their value. This economic environment could see a slowdown in economic activity, possible market imbalances, and a shift in wealth from debtors to creditors. As economist Milton Friedman has noted, deflation can lead to a recession because it reduces aggregate demand and increases unemployment. As such, Bitcoin’s fixed supply and potential deflationary effects constitute barriers to its use as a widely accepted form of currency, which limits its utility and stability in everyday economic activity.
In addition, the decentralized nature of bitcoin, while providing a degree of security and resistance to censorship, also makes it difficult to cope with economic volatility and crisis management as it lacks the backing of a centralized regulator.In the NBER Working Paper Series, David Yermack provides an in-depth analysis of whether or not bitcoin constitutes a true currency. According to the definition of economics, a true currency should function as a medium of exchange, a store of value, and a unit of account. However, Bitcoin does not perform well in these areas. yermack points out that Bitcoin’s consumer trading volume is extremely low and its price volatility is much higher than that of widely-used currencies, which creates significant short-term risk for users. Additionally, Bitcoin’s trading price has little correlation to other major currencies and gold, making Bitcoin virtually useless for risk management and hedging purposes.
Overall, despite the fact that Bitcoin was designed as a decentralized digital currency, its practical application as a medium of exchange is not widespread. Bitcoin’s consumer transaction volume is very limited compared to traditional currencies, which restricts its utility as a means of everyday trading. In addition, Bitcoin’s price volatility is extremely high, which directly affects its function as a store of value. The stability of the value of money is the cornerstone in economic activities, and the sharp fluctuations in the price of bitcoin bring great uncertainty and risk to the holders, which is not conducive to the long-term stability and development of economic activities. And Bitcoin’s function as a unit of account is similarly limited. Due to its price volatility, the use of Bitcoin as a unit of account may lead to instability in pricing, which in turn affects the reliability of economic decisions. Bitcoin’s high volatility, low trading volume, and low correlation with other assets suggest that it will be difficult to characterize as a currency in the near term. As an emerging asset class, Bitcoin may have a role to play in certain specific economic environments and use cases, such as as an investment vehicle or a medium of exchange within a particular community.
4.2 The View of Bitcoin as a Security
In finance, the definition of a security typically involves a tradable financial asset that represents a share of ownership or a liability of a company. Bitcoin and other cryptocurrencies, while similar to securities in some respects - in particular, investors buy them in the expectation that their value will rise and thus make a profit - they are fundamentally different from traditional securities.
First, Bitcoin lacks a centralized issuer, something that traditional securities such as stocks and bonds have. This decentralized nature makes Bitcoin fail to meet the basic legal definition of a security. Additionally, Bitcoin does not provide a share of ownership in a company, nor does it have standardized financial reporting, both of which are key characteristics of securities.
Academic research has further explored the question of whether cryptocurrencies should be considered securities.Tasca (2016) notes in his study that the market performance of cryptocurrencies differs significantly from that of traditional securities markets, particularly in terms of volatility and correlation patterns. These differences suggest that cryptocurrencies may not fully meet the definition of a security.
Regulators, such as the U.S. Securities and Exchange Commission (SEC), have also evaluated the securities attributes of cryptocurrencies.Gensler (2021) emphasizes the importance of regulating certain cryptocurrency projects, particularly those involving initial token offerings (ICOs).The SEC typically determines whether an asset is a security by using the Howey test, a test used to test for determining whether a particular transaction constitutes a securities offering. It consists of four elements: an investment of money, an investment in a common enterprise, an expectation of profitability, and profits derived primarily from the efforts of others. Its core concept is to protect the legitimate rights and interests of investors and to ensure that investors are provided with the necessary disclosures to make informed investment decisions. Specifically in the digital currency space, for example, a cryptocurrency may be considered a security if its development relies on the efforts of a company or centralized entity and the purchaser has a reasonable expectation of profit from the investment.The SEC also issued a framework for analyzing investment contracts for digital assets in 2019, which provides official guidance for determining whether a digital currency is a security.
However, many cryptocurrencies may fail the Howey test because their investors typically do not rely on the management efforts of a particular issuer.Liu (2018) suggests that the decentralized and lack of central control characteristics of cryptocurrencies are inconsistent with the traditional definition of a security. Meanwhile, Klerk (2018) notes that in some cases, cryptocurrencies may exhibit centralized characteristics, which may give them the attributes of a security.The SEC has made it clear that Bitcoin and Ether are not securities due to their decentralized nature.
In summary, while Bitcoin and certain cryptocurrencies have some characteristics of securities, their classification within the legal and regulatory framework remains controversial. Future regulatory guidance and market developments may shed further light on these issues.
4.3 Bitcoin as a Commodity Perspective
The U.S. Commodity Futures Trading Commission (CFTC) has classified Bitcoin as a commodity, a ruling based largely on Bitcoin’s trading characteristics in the marketplace. According to the CFTC, the price of Bitcoin, like other tradable commodities, is determined by market supply and demand.
In their study, Cheah and Fry (2015) state that the price dynamics of bitcoin are similar to traditional commodities in that its price fluctuations are directly influenced by market forces. This price behavior reveals the nature of bitcoin as a commodity, in which the expectations and emotions of market participants play an important role in price formation. The supply of Bitcoin is fixed and determined by its underlying algorithm, while demand is influenced by the level of interest and trust investors and users have in Bitcoin.
A key attribute of bitcoin as a commodity is its high degree of substitutability, i.e., each bitcoin is equivalent in value, which is consistent with the attributes of traditional commodities such as gold and oil. In addition, the bitcoin market is highly liquid, allowing for quick buying and selling, an important characteristic of commodity markets.
Bitcoin can also be used as a risk management tool, providing investors with the opportunity to diversify their portfolios despite its high volatility. This is similar to traditional commodities, which are also often used to hedge risk and diversify investments.
Classifying Bitcoin as a commodity also means that it is regulated by the CFTC, which provides a legal framework and market regulation for Bitcoin trading. As a commodity, Bitcoin’s trading rules and requirements are similar to those of traditional commodity futures and options markets, including trading transparency, margin requirements, and market manipulation precautions.
4.4 The Bitcoin as Data Perspective
In examining the Bitcoin as data perspective, we similarly find that this definition raises a number of controversies and challenges. While it is true that Bitcoin is built on blockchain technology and records detailed information about all transactions in the form of data, to view it as data alone fails to adequately capture the richness of its financial and legal dimensions.
First, categorizing Bitcoin as data raises significant challenges at the legal and regulatory levels. Different jurisdictions around the globe have different interpretations of Bitcoin’s legal status, which leads to regulatory inconsistencies. Bitcoin’s anonymity and global circulation characteristics also raise concerns about money laundering, fraud, and market manipulation, all of which require regulators to develop new regulatory strategies.
Second, Bitcoin’s attributes as data do not diminish its function as money. It not only carries economic value, but also has the attributes of a medium of exchange. However, the high volatility of its price raises questions about the viability of bitcoin as a stable medium of exchange. Economists and legal experts argue that Bitcoin lacks the stability and ubiquity needed to become a widely accepted currency.
Further, studies have viewed Bitcoin as a new type of data currency, emphasizing its recording and transactional nature on the blockchain (Caliskan, 20204). Bitcoin and other cryptocurrencies can be defined as data currencies because they are built on blockchain technology and represent a new type of digital asset. The value and transactions of such assets exist and take place in the form of data. The concept of Bitcoin and Ether as data currencies emphasizes their recording and transactional nature on the blockchain. The blockchain provides a decentralized ledger where all transaction records are open, transparent and tamper-proof. This characteristic makes Bitcoin not only a currency but also a string of data recorded on the blockchain with permanent data properties. Bitcoin’s application as a data currency is further extended by the introduction of smart contracts by Ether, which are automatically executed also in the form of data. The emergence of Bitcoin marks a new phase of data monetization, in which data not only stores information, but also takes on the properties of money, such as value exchange and wealth storage.
However, defining Bitcoin as a data currency presents both legal and regulatory challenges. On the one hand, existing legal and regulatory systems need to be adapted to this new type of digital asset; on the other hand, regulators need to develop new frameworks to deal with Bitcoin’s characteristics, including its transactional, tax, and security issues. In addition, Bitcoin’s popularity faces barriers of technical complexity and market acceptance. The average user may have difficulty understanding how the blockchain works, which limits the widespread acceptance of Bitcoin as a data currency. Although Bitcoin is accepted as a means of payment in some areas, its market acceptance remains limited globally.
In summary, the view of Bitcoin as data, while offering a new perspective, is challenging and controversial on a number of fronts, including legal, regulatory, technological, and economic. These factors limit the full implementation of the perspective and point to necessary directions for future research and discussion.
4.5 Summary
In conclusion, in the in-depth exploration of the attributes of Bitcoin (BTC) and Ethereum (ETH), we can clearly see their similarities with traditional commodities in terms of market behavior, fungibility, liquidity, and risk management. The study points out that Bitcoin’s price dynamics are influenced by market supply and demand, exhibiting speculative characteristics similar to traditional commodities. At the same time, Bitcoin’s high substitutability and market liquidity further strengthen its attributes as a commodity. In addition, as a risk management tool, Bitcoin offers investors the opportunity to diversify their portfolios despite its high price volatility. However, categorizing Bitcoin as a commodity also poses legal and regulatory challenges, especially given the divergent regulation of cryptocurrencies across countries. The U.S. Commodity Futures Trading Commission’s (CFTC) regulatory framework for bitcoin provides a legal foundation for the market, but it has also sparked discussion about regulatory clarity. Regulators need to find a balance between fostering innovation in the market and protecting consumer rights, while global regulatory harmonization is essential to address cross-border regulatory challenges.
Taken together, an assessment of the attributes of bitcoin and ethereum as commodities reveals their potential and challenges in the modern financial system, calling for a clearer and more harmonized international regulatory environment.
5. Potential Implications of BTC and ETH Being Recognized as Commodities
Having clarified the commodity attributes of BTC and ETH as cryptocurrencies, we need to further explore the potential impact of this characterization on tax laws, market regulation, and the cryptocurrency ecosystem as a whole. In the next sections, this paper will analyze the specific consequences of treating these two cryptocurrencies as commodities, including changes in tax treatment, market regulation, and the broader implications of these changes for investors, market participants, and the global financial regulatory landscape.
5.1 Tax Law Implications
The characterization of bitcoin (BTC) and ethereum (ETH) as commodities means that, for tax purposes, they will be subject to similar rules as other commodities such as stocks and bonds. According to the Internal Revenue Service (IRS), profits generated from cryptocurrency trading are considered capital gains or losses and are subject to capital gains tax. This could have the following implications for investors:
First, investors must report their cryptocurrency purchases and sales on their tax returns. This includes recording specific dates of purchases and sales, transaction prices, and other details to calculate capital gains or losses. U.S. tax law requires individuals to pay taxes on the appreciation of income from the transfer of bitcoin holdings as capital gains, with rates varying depending on the length of the holdings.
Second, if an investor holds a cryptocurrency for more than a year and then sells it, the profit is usually treated as a long-term capital gain and enjoys a relatively low tax rate; if it is held for less than a year, it is treated as a short-term capital gain and taxed at the same rate as ordinary income. This means that investors with long-term holdings enjoy relatively low tax rates.
Finally, due to the complexity of cryptocurrency trading, investors may need to invest more time and resources to ensure tax compliance. This may include hiring a tax advisor or using specialized software to accurately record and report tax information.
In addition, the tax treatment of cryptocurrencies varies significantly from country to country and region to region, which is particularly evident where cryptocurrencies are considered commodities. For example, the UK’s HM Revenue & Customs defines bitcoin as personal property and involves fewer tax liabilities, while Japan eliminated excise taxes on bitcoin and consolidated gains made from bitcoin transactions into other income. This difference requires investors to be aware of and comply with the tax regulations of their particular jurisdiction.
As the cryptocurrency market continues to evolve, so do tax laws and regulatory policies. The consolidation of Ether, i.e., the move from Proof of Work (PoW) to Proof of Stake (PoS) mechanisms, may affect the tax treatment of ETH. While there are currently no specific tax regulations or guidelines for pledge rewards, in some cases these rewards may be considered taxable events. This point exemplifies the complexity of the tax treatment of ETH when it is viewed as a commodity and the ever-changing regulatory environment. Investors will therefore need to keep a close eye on changes in tax law and may require professional advice to ensure they are tax compliant and adapt to the changing regulatory environment.
5.2 Regulatory Implications for Cryptocurrency Markets
The regulatory impact on the cryptocurrency market of treating BTC and ETH as commodities is multifaceted. First, it gives the U.S. Commodity Futures Trading Commission (CFTC) broad regulatory authority over the cryptocurrency market. As the primary commodity market regulator, the CFTC will be responsible for regulating the cryptocurrency market to prevent market manipulation and fraud and to ensure a fair and transparent market. Cryptocurrency exchanges may be required to comply with CFTC regulations, including registering as a Designated Contract Market (DCM) or Swap Execution Facility (SEF) and meeting related capital, recordkeeping, and risk management requirements.The CFTC’s regulatory framework is likely to encourage the development of new financial products and services by market participants while ensuring that these innovations take place under the protection of regulation and reduce systemic risk.
Under the Financial Innovation and Technology for the 21st Century Act (FIT-21 Act), the CFTC would serve as the primary regulator of the cryptocurrency industry, while the SEC’s jurisdiction would be relatively weakened. With the passage of the bill, the CFTC will be given more authority and funding to oversee the cryptocurrency spot market and “digital commodities,” particularly Bitcoin. In addition, the bill creates a customized disclosure and registration regime for digital asset companies, which may encourage market participants to develop new financial products and services while ensuring that these innovations take place under the protection of regulation and reduce systemic risk.
However, the global nature of cryptocurrencies also poses the challenge of cross-border regulatory harmonization. While the U.S. classification of goods may influence regulatory policy in other countries, it may also lead to regulatory arbitrage and inconsistency. In addition, the cryptocurrency market continues to face regulatory uncertainty, in part because regulators disagree on the definition and classification of cryptocurrencies.
Regulatory clarity can stimulate innovation, as firms can innovate within a clear framework of rules that drive the development of new products and services. However, there is a fine balance between regulation and over-regulation, and if regulation is too stringent, it can stifle innovation and lead to a flow of firms to jurisdictions that are more friendly to cryptocurrencies.
In summary, the characterization of BTC and ETH as commodities has far-reaching implications for the regulation of the cryptocurrency market in terms of the distribution of power among regulators, compliance requirements for market participants, and the balance between innovation and regulation. With the introduction and passage of the relevant bills, the regulatory framework for the cryptocurrency market is gradually taking shape, which will have a significant impact on market operation and innovation.
5.3 Impact on Financial Derivatives Trading
The legal characterization of cryptocurrencies is a key topic in the field of financial regulation, which not only determines the basic trading methods of cryptocurrencies and the compliance obligations of market participants, but also has a far-reaching impact on the development and innovation of the financial derivatives market. Derivatives markets rely on a clear legal framework for the underlying assets to ensure transparency of transactions, risk management and market efficiency. Therefore, the classification of cryptocurrencies as commodities or securities will have a direct impact on the trading rules, regulatory requirements and strategies of market participants in their derivatives. Such characterization may also affect investor confidence and participation in the derivatives market, which in turn may affect the stability and growth potential of the financial market as a whole.
If cryptocurrencies are categorized as commodities, they can be the underlying assets for derivatives such as futures contracts, options, swaps, and so on. In the U.S., the Commodity Futures Trading Commission (CFTC) regulates the commodity derivatives market to ensure transparency and fairness in trading and to prevent market manipulation and fraud. Among other things, futures contracts are standardized derivatives that allow buyers and sellers to agree to trade a specific quantity of an underlying asset at a fixed price on a specific date in the future. These contracts are traded on regulated exchanges and are similarly regulated by regulatory agencies such as the CFTC. Futures contracts allow market participants to speculate on future prices or hedge their risk. For example, bitcoin futures contracts allow investors to buy and sell bitcoin at a predetermined price at a future date, which helps manage the risk of price fluctuations. In addition, the derivatives market for commodities may include other complex financial instruments such as contracts for differences and credit default swaps.
It is evident that if cryptocurrencies are recognized as commodities, then the market may see more futures and options products with cryptocurrencies as the underlying asset. If it is recognized as a security, then the development of its derivatives may be limited because derivatives on securities usually do not involve futures contracts and only include stock options, stock index futures, etc., i.e., investors speculate on the future price of the underlying asset or for risk management. The trading of cryptocurrency derivatives understood as securities will be regulated by the SEC, potentially limiting certain types of financial innovation.
The legal characterization provides clear regulatory guidance for derivatives trading in cryptocurrencies, which helps market participants understand compliance requirements and reduce legal risks. The clarity of the regulatory framework also helps foster financial innovation as market participants can develop new financial products and services in a clear legal environment. The global nature of cryptocurrencies also requires regulators to coordinate at the international level to ensure global consistency and regulatory effectiveness in the derivatives market.
In summary, the legal characterization of cryptocurrencies has far-reaching implications for financial derivatives trading, including the viability of trading, the regulatory framework, the behavior of market participants, and the stability of global financial markets. As the cryptocurrency market develops, regulators will need to continually assess and adjust their regulatory strategies to accommodate the unique attributes and market behaviors of this emerging asset class.
6. Conclusion
The CFTC v. Ikkurty decision provides a new perspective on the legal status of cryptocurrencies and an important reference for future legal practice and regulatory policy.The CFTC v. Ikkurty decision reinforces the position of the U.S. courts on the legal positioning of cryptocurrencies, and clarifies the legal status of Bitcoin (BTC) and Ether (ETH) as commodities. The decision is not only binding on the parties in a particular case, but also provides legal support for the regulatory framework of the cryptocurrency market as a whole, with exemplary effects on the global regulation of cryptocurrencies.
Through the analysis of relevant legal precedents, we believe that BTC and ETH, as decentralized digital assets, have the attribute of commodities. Their trading characteristics in the market are consistent with the definition of commodities under the Commodity Exchange Act (CEA) and should be regulated by the CFTC. However, their monetary and securities attributes remain controversial and require further legal clarity and regulatory guidance.
U.S. courts and regulators are gradually providing a clearer legal framework for the cryptocurrency market.The decision in CFTC v. Ikkurty and the passage of the Financial Innovation and Technology for the 21st Century Act (FIT-21 Act) provide a new legal basis for cryptocurrency regulation, which is expected to unify the regulatory responsibilities of the SEC and CFTC and provide digital assets with a clearer legal environment. At the same time, it is also improving the crypto asset tax policy system and strengthening the tax collection and management of crypto assets. For example, through the Infrastructure Investment and Jobs Act (IIJA), it requires crypto asset holders to comply with tax filing requirements, and imposes strict regulations on crypto asset trading platforms, requiring the reporting of user information and the implementation of KYC and AML protocols.
The characterization of BTC and ETH as commodities has far-reaching implications for market participants, financial innovation, and the global financial regulatory landscape. Regulatory clarity can spur innovation and drive the development of new products and services. However, a balance needs to be found between regulation and over-regulation in order to avoid stifling innovation and leading to a flow of businesses to jurisdictions that are more friendly to cryptocurrencies.
As the cryptocurrency market continues to evolve, relevant laws and regulations will need to be updated and improved in the future to accommodate the specific needs of this emerging sector. It is recommended that regulators strengthen international cooperation and develop globally harmonized regulatory standards, while focusing on protecting consumer rights and market integrity. In addition, more attention and clear guidance from regulators and legislators are needed on issues such as tax treatment of cryptocurrencies and cross-border regulatory coordination.
