There were two back to back articles on Coindesk this evening when I went to check the latest news in the blockchain world. One article was entitled Bitcoin is a Commodity, Not a Currency, and the other was entitled NYU’s Dean of Valuations Says Bitcoin is a Currency, Not an Asset. I was intrigued by the juxtaposition of the two schools of thought, read both articles, and then did a quick Google search to learn more, which brought up a Forbes article entitled Bitcoin is an Asset, Not a Currency.
Obviously, there’s an issue here. After reading only three short articles, I feel like I have whiplash from going back and forth about what to classify cryptocurrencies as.
So let’s take a closer look at the arguments, and try to piece together a coherent answer. To start, there are four general types of investments: 1. Commodities, 2. Collectibles, 3. Currencies, and 4. Assets.
At least we can agree that Bitcoin and cryptocurrencies are not collectibles!
According to the St. Louis Fed, money must display the three following key characteristics:
- Money is a store of value
- Money is a unit of account
- Money is a medium of exchange
Those who want to argue that Bitcoin is not a currency generally present this description of “money” and equate it to a reasonable description of “currency” by assuming that currency and money refer to the same thing. They then make the argument that Bitcoin cannot be classified as a currency because it is doesn’t hold consistent value, which defeats its purpose as a unit of account. It’s also a clumsy medium of exchange due to lag in processing transactions as a result of the arduous Proof of Work block verification system.
Some fight back and say that currency and money are not the same thing, and that while money certainly holds value, currency is not limited to such a definition and merely acts as the medium of exchange that represents some amount of value held in money. Gold and silver, which both hold intrinsic value, represent viable candidates for “money,” but as long as Bitcoin can be used to represent and exchange value otherwise held in money, then Bitcoin can be classified as a currency.
I’m more inclined to agree with the second argument here, suggesting that Bitcoin and any type of cryptocurrency is indeed a form of currency due to its function as an exchange of value. But before making a final judgement, we still need to consider whether or not it better fits under the umbrella of an asset or commodity!
For the sake of building a basic argument, I will use the definitions of asset and commodity as provided by Investopedia, which state that an asset is, “a resource with economic value that an individual, corporation or country owns or controls with the expectation that it will provide future benefit,” and a commodity is “a basic good used in commerce that is interchangeable with other commodities of the same type.”
These definitions allow us to see that Bitcoin could potentially qualify as an asset if it is purchased and held for the sake of returning future economic benefit to its holder. The argument is a little harder to make for commodity given the fact that Bitcoin is not necessarily a “basic good used in commerce,” although it is certainly interchangeable with “other commodities of the same type” i.e. other Bitcoins.
In fact, these definitions and the general applicability of each of them to Bitcoin allow us to see that there is so much disagreement about proper classifications as a result of the variety of different ways that cryptocurrencies are used. And indeed, depending on how you intend to use Bitcoin — whether you buy it for the sake of using it as a medium of exchange, or as an “asset” that you hope will bring future economic benefit, or as a commodity acting as a basic input of whatever commerce you’re engaged in — cryptocurrencies can be classified under many different umbrellas. It is nearly impossible to say which is most accurate given the multitude of different ways cryptocurrencies are used every day around the world.
But why does all of this matter?
The short answer is regulation. The degree to which a government can regulate cryptocurrencies depends on how they decide to classify them. For example, the argument set forth about Bitcoin being a commodity was advanced by the head of South Korea’s central bank in an effort to afford the South Korean government the ability to regulate Bitcoin as a commodity instead of a currency. Commodities are subject to much stricter regulation and oversight by national governments than “foreign” currencies like Bitcoin. The same applies to classifying Bitcoin as an asset — doing so opens up a world of new regulatory opportunities such as those that the SEC imposes on trading stocks and other types of financial assets in the United States.
So what do you think? Are cryptocurrencies currencies, assets, commodities, or none of the above? Does it matter which cryptocurrency we’re talking about? Is it possible that Ether may be more appropriately labeled as a currency or commodity while Bitcoin is an asset? Comment below!