Cryptocurrencies: A Commodity or Security?

crypto security or commodity

Ambiguities concerning the categorization and legality of cryptocurrencies allow this market to thrive when taken at a general level.

One of the biggest unanswered questions lies in how lawmakers and legislators choose to treat cryptocurrencies and similar blockchain-related applications once they possess a significant degree of monetary value.

As it currently stands, certain cryptocurrencies and their founders have been brought to trial for crimes of fraud. At times, the categorization of virtual currency as either commodity or security appears arbitrary in the sense that lawsuits will defer to whichever category allows for the cleanest prosecution of alleged fraud. Reflecting on existing legal precedents concerning blockchain technology represents a key step in the maturation and legitimization of markets such as crypto games.

Cryptocurrencies as Securities

To start off, let’s consider what a security usually describes. When most people think of securities, they think of assets such as stock in a company as “investment security.” This is the most common context of the term. The legal definition of security essentially boils down to this idea of documented debt that can be assigned a specific value and traded.

However, if we look a bit further into the legal history of the term, it is apparent that the definition can extend on the basis of context to include typically non-standard objects or instruments. For instance, a Supreme Court case SEC v. W.J. Howey Co. resulted in the ruling that units of a citrus grove combined with a contract to service those groves could be deemed as an investment security. The broad definition afforded by this case sets a precedent to discourage possible securities fraud.

The American Bar Association notes with respect to the above case that: “The Court specifically defined the term ‘investment contract’ to mean ‘a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or third party…’ ” Essentially, the idea that cryptocurrencies might be labeled as investment securities is not so unrealistic when considering that much more esoteric objects and agreements have been ruled as such in the past.

cryptocurrency ethereum bitcoin exchange

Unsurprisingly, a recent ruling made by Judge Raymond Dearie of New York saw the conviction of businessman Maksim Zaslavskiy for two ICOs, REcoin and Diamond, on charges of securities fraud. A key factor in the determination of Zaslavskiy’s cryptocurrencies as securities manifested in the precedent set by Howey in that his investors expected profits from their financial contributions. This, along with the fact that Zaslavskiy’s claims that REcoin and Diamond had respective backing in real estate and diamond were shown as false.

Amusingly, the court seems to dismiss Zaslavskiy’s initial claims that labeling a cryptocurrency as a “currency” precludes it from being a security. The point that cryptocurrencies could be traded appeared to be a central theme in Zaslavskiy’s attempt at repudiating the idea that his agreements with investors to fund his ICO were not classifiable as securities.

Cryptocurrencies as Commodities

The notion of a commodity is distinct from that of a security on the basis of interchangeability and of purchases or investments made on the future value of something (which may not exist at the time of that purchase). This difference finds further emphasis in the idea that two distinct regulatory bodies, the SEC and the CFTC, are respectively responsible for securities and commodities under different laws.

U.S. District Judge for Massachusetts, Rya Zobel, decided recently to move forward with the CTFC’s claim against My Big Coin Pay Inc. and its cryptocurrency, My Big Coin (MBC), by deeming that the characterization of MBC as a commodity was satisfactory. The above case by the CTFC argues a similar point that commodities are not limited by the type and can be extended to include things that fulfill the function of a commodity without being explicitly termed as such.

Notably, the CTFC compares the argument made by the founders of MBC that the cryptocurrency cannot be a commodity because contracts for future delivery do not exist for MBC to similar arguments made in cases concerning natural gas as a commodity. These cases also claimed that the lack of futures contracts for natural gas refutes the notion that natural gas itself is a commodity, an argument historically rejected by courts.

The fact that MBC was funded $6 million on the basis that committed investors would receive 1% interest per year characterizes speculative behavior on the future value of some object. Of course, the lavish purchases of owners Randall Crater and Mark Gillespie after the receipt of such funding do their image and credibility no favors.

How These Legal Precedents Impact Cryptobetting Ventures

rouletteBitcoin casinos have sprung into the limelight as some of the more exciting investment opportunities following the liabilities associated with ICOs. However, these ventures should consider some of the important lessons resulting from lawsuits against ICOs. The main lesson being that the SEC and CFTC can extend definitions pertinent to securities and commodities should a company involved with blockchain act maliciously or in a manner that defrauds its investors.

Many of these newer ventures may not explicitly raise funding through methods such as an ICO. Further, these ventures will often have a much more solid business model that explains how funds will be invested, appropriated, and returned. Yet, accounting for the idea that laws previously applicable to traditional gambling may simply be extended to cover gambling with cryptocurrencies is important.

For instance, drawing the line between gambling and bitcoin gambling involves attempts to sidestep legislation such as the Federal Wire Act of 1961 by segregating the nature of a cryptocurrency from actual currency. However, based on the cases above, it is not hard to imagine that courts may easily reject the distinction of traditional currency and cryptocurrency on the grounds that both instruments function to reliably transfer value.

It is prudent to consider the legal purview when designing business practices in relation to blockchain technologies, something that many optimistic and naïve trailblazers often forget.