Bitcoin a currency or commodity? Regulators grapple with classification

A commodity? Come to think of it, it does behave a lot like oil and gold — it can be bought and sold in cash markets or via derivatives such as futures.

What about a security? Many cryptocurrencies are, in a way.

They’re issued like stocks in “initial coin offerings” and used to represent shares in online projects.

The debate may appear abstract, with little bearing on the hard-boiled world of finance, but it is attracting increasing interest from economists and lawyers who say it could have major implications for the future of cryptocurrencies.

How bitcoin and other digital coins are defined could shape how they are regulated around the world. In turn, the rules they are subject to could determine whether they make the leap from a niche to a mainstream asset.

So how will regulators treat them?

In the United States, federal watchdogs say they see elements of both securities and commodities, but like most major economies have not come up with a set of rules. The European Union, however, will outline a framework this year, which could see crypto wedged into existing regulations, or a whole new set of rules created.

For market players, how bitcoin and its kin are regulated will have serious ramifications.

Commodity markets operate with relatively little regulatory oversight. Securities, on the other hand, are typically subject to more onerous rules on price transparency, trade reporting and market abuse.

“When we’re going through the security process, we spend a lot of fees and lawyers to make sure we’re in compliance,” said Benjamin Tsai, president of Wave Financial, an investment manager in Los Angeles overseeing $40 million in crypto.

“It’s a lot more of a pain in the butt.” Some of the cryptocurrency identity crisis lies in the fact that bitcoin was originally conceived as a means of payment, but now rarely bears the hallmarks of dollars, euros or pounds.

It’s of little use as a store of value because of its volatility, and is hampered as a means of exchange by its slow network and high transfer costs.

A booming bitcoin lending market is offering clues to its character.

Bitcoin lending offers lines of credit to crypto firms earning money in cryptocurrencies, such as payment processors or miners, looking to secure traditional money for covering expenses. Also, traders who don’t want to sell their bitcoin holdings use them as collateral to borrow cash for use in algorithmic or high-frequency trading.

For those lending money, relatively high yields are an attractive proposition in an era of rock-bottom rates.