Crypto, is it a Currency, Commodity or Security?

With Bitcoin turning ten years old we’re still debating whether it is a currency, commodity or security? Actually, we’re talking about this whole family of digital tokens which are granted as a reward for doing some unit of digital work. The legal status of crypto was brought up again earlier this week as the popular communications platform Telegram was seeking to issue a new token called a Gram. The Securities and Exchange Commission (SEC) has alleged that Telegram’s token will be classified as a security, and as such, they secured a court order blocking the issuance of the Gram last month.

In response, Telegram is seeking the court’s assistance to legally define the status of the Gram token. In their filing Telegram stated that the Plaintiff, the SEC’s,  “claims are without merit as Telegram‘s private placement to highly sophisticated, accredited investors was conducted pursuant to valid exemptions to registration under the federal securities laws and Grams will not be securities when they are created at the time of launch on the TON Blockchain,” the filing reads. Furthermore the “[…] Plaintiff has engaged in improper ‘regulation by enforcement’ in this nascent area of the law, failed to provide clear guidance and fair notice of its views as to what conduct constitutes a violation of the federal securities laws, and has now adopted an ad hoc legal position that is contrary to judicial precedent and the publicly expressed views of its own high-ranking officials,” it adds.

The Telegram team had “voluntarily engaged” with the SEC prior to their filing in an effort to be on the proper side of the governing laws and regulations. Unfortunately, the SEC failed to assist Telegram and only engaged when they moved to enforce their newly established position. Telegram has since suspended the launch of the Gram. Perhaps when Securities is in the name of your agency you default to viewing new nebulous tokens as securities thereby expanding your domain of control and further establishing your relevance in the new rapidly expanding crypto market.  

We often seek to classify Bitcoin as a currency, but honestly, it fails even the most basic test. A currency is a “generally accepted medium of exchange for goods or services” and I’m sorry, but Bitcoin isn’t “generally accepted” even after a decade of use, perhaps one day, but not today. I’ve bought mining hardware with Bitcoin, and there have been some trendy businesses willing to accept it, but it is by no means generally accepted. Wikipedia does view Bitcoin and some of its popular cousins like Ethereum, Litecoin, and Monero as “Alternative Currencies”, but honestly, they are used as commodities. Wikipedia defines a commodity as a “marketable item produced to satisfy wants or needs.” That sounds more like crypto, furthermore, the “price of a commodity good is typically determined as a function of its market as a whole.” In crypto, there are three ways to turn a profit. You can mine blocks for the reward, receive transaction fees or trade. There are variations in the origin of mining revenue from how the effort is applied, proof of work, proof of stake, and perhaps others, but in general, it is a reward for maintaining the blockchain and the network.

A hobbyist can still squeeze out a few bucks a day mining alternative currency, while Bitcoin and Ethereum mining are for the really big boys, the institutional miners. Outside of these big institutional miners these days most of us make money in crypto by trading it. Dozens of applications have cropped up for our Smart Phones to enable us to trade crypto 24/365. How many of us have stagnate limit orders to sell off some overpriced crypto we picked up in the run last week? All of this will change again when China releases its digital currency in the coming months or when Facebook issues Libra next year. This week “Facebook Pay” was rolled out as the next step to condition Facebook users into paying for goods and services within the platform. As nearly two billion users become familiar with using the platform as a method of payment then it will be trivial for Facebook to slot in Libra and over time phase out PayPal and other more traditional methods of payment. As Libra becomes accepted as a “generally accepted” medium of payment crypto will have made the jump from commodity to currency.  

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