JHANILE SMITH—BitCoin has attracted the wallets of many savvy investors and captivated the minds of people who are mystified by the “virtual currency” concept. Over the last half-decade, there has been an ongoing debate about whether BitCoin should be regarded as a security, currency, commodity, or classified as something completely new. However, this debate has come to an end. On September 17, 2015, the Commodity Futures Trading Commission (CFTC) announced that BitCoin and other crypto-currencies are no different than oil, grain, or gold. Hence—BitCoins are commodities.
BitCoin is a virtual currency that is created through a process called “mining,” which involves users providing computer power to process BitCoin transactions. The BitCoin mining industry is separate from the BitCoin exchange facilities where Bitcoin can be bought and sold. At the most basic level, the total number of BitCoins that will ever be created is 21 million As it currently stands, there are approximately 15 million BitCoins in circulation around the world.
What makes this particular cypto-currency attractive to investors and consumers alike is its anonymity and decentralization. All transactions are recorded in a public ledger that does not associate any particular transaction with a specific user. Instead, there’s a unique identifier that in turn is associated with the BitCoin user, and users can have as many identifying numbers as they want.
However, this raises issues about fraud, theft, and other security questions. The fraud element is demonstrated in the fact that millions of dollars worth of BitCoins have been stolen or lost, and it is practically impossible to recover all (or any) of that amount. BitCoins are difficult to trace because transactions are happening so quickly. Governmental agencies, such as the SEC, FINRA, and the NASAA (North American Securities Administration), have issued warnings to investors about the security risks associated with acquiring BitCoins.
BitCoin as a Commodity
First, the producer of BitCoins does not dictate the quality of the cryptocurrency. Goods that are not commodities, such as clothes, electronic devices, and vehicles, are generally valued based on whomever or whatever produces them. However, BitCoins’ status as a “commodity” means that there is little differentiation between the virtual currency, regardless of whether your acquiring or trading BitCoin through Bitstamp, Bitfinex, Coinbase, or any other exchange.
Additionally, BitCoin now falls under the purview of the Commodity Exchange Act (CEA) and other regulations by the Commodity Futures Trading Commission (CFTC). This means that exchanges engaged in BitCoin trading and swapping are required to be registered with Commission and are thereby held to the same standard as other traditional businesses that fall under the CEA’s purview. Consequently, violators are subject to the CFTC’s authority to reprimand and punish those who do not comply with the applicable rules.
It is likely that investors and BitCoin “experts” will challenge the CFTC’s purported jurisdiction over this virtual currency’s regime. Opponents of the “commodity” nomenclature are sticking to the view that BitCoin is a decentralized currency that functions no differently than other government currencies in circulation. However, it is unlikely that such a challenge will succeed. Since the very beginning, people have called for BitCoin regulation; and now, the United States is on its way to establishing a cohesive regulatory framework that may alleviate the fraud and other security risks associated with the exchange of virtual currencies.