The classification of cryptocurrencies remains a much-discussed matter in the industry, with investors often questioning whether digital assets should be considered commodities or securities. Commodities and securities are two very different financial instruments, meaning there are essential differences in terms of margins, taxes, limit moves, and deliveries. Above all, they’re regulated by different agencies and operate in different markets. When it comes to cryptocurrencies, the argument often advanced is that all digital assets except Bitcoin are securities. More precisely, they fall under the jurisdiction of the Securities and Exchange Commission.
The Commodity Futures Trading Commission labeled Ethereum a commodity in court filings. A commodity is a good that can be traded on the market based on its current value. Even if it can be used for transactions, the Ethereum blockchain is more than a mere network for digital exchanges. It’s a decentralized computing network with added features, such as smart contracts. Still, if you want to use it for conducting transactions and receiving payments, track the current Ethereum price and market cap before you buy.
The Securities and Exchange Commission regards Ethereum to be a security according to the Securities Act of 1993 and the Securities Exchange Act of 1934, although it hasn’t taken an official position. Designating Ethereum as a security would have profound implications for the cryptocurrency industry as a whole.
To Get Started, Let’s Understand What Are Commodities and Securities
In their simplest form, commodities are raw materials or primary agricultural products that are traded on exchanges in wholesale quantities. Examples include energy resources (oil and gas), precious metals (gold and silver), and agricultural produce (corn or wheat). Commodity trading typically occurs in futures markets, where participants buy and sell for delivery on a specified future date. The Commodity Futures Trading Commission regulates commodity trading, but it doesn’t have regulatory authority over spot trading. According to the experts, it’s a good idea to hold at least some portion of your portfolio in commodities, as they’re not correlated with other financial assets.
By contrast, securities are financial instruments that hold monetary value that come in the form of stocks, bonds, or options. They supply an investment avenue for individuals and corporations alike, with the expected return taking the shape of interest, income, or appreciation of value. Any person who invests money in a security can expect to make a profit exclusively from the efforts of the promoter or a third party. Even if the term “security” is commonly associated with stocks, bonds, and similar instruments, the U.S. Supreme Court holds that the interpretation shouldn’t be limited to the literal words used.
Why It Matters Whether Ethereum Is A Commodity Or A Security
Categorizing cryptocurrencies as commodities or securities hinges on specific factors, of which mention can be made of purpose, functionality, and governance. Different authorities and jurisdictions look at and treat digital assets disparately. But why does it matter? Well, the entire landscape could dramatically change. If Ethereum is declared a security, issuers and exchanges must seek the necessary licenses from the Securities and Exchange Commission. It’s a demanding process, to say the least, so it’s necessary to carefully weigh the merits. Ethereum would have to comply with the rules enforced by the securities regulator, which would lead to more stringent reporting and create a less-than-ideal environment for price appreciation.
Ethereum can be considered a security due to its early distribution plan, not to mention that its infrastructure is maintained by a small group of contributors. The Merge illustrates a certain degree of centralization that impacts the functionality and price of Ethereum. What is more, Vitalik Buterin and the developers that control the blockchain stand to profit from its growth and the related appreciation of the native token. The risk of Ethereum being classified as a security is that exchanges will refuse to list it to avoid the risk of being penalized – in other words, the outcome will affect how it’s traded and the responsibilities of those involved.
It’s Hard to Predict What the Regulatory Landscape Will Look Like
All in all, the issue is quite complex and involves many interested parties, which is precisely why it’s difficult to pinpoint evolving regulations. Increased geopolitical turmoil and economic tension only add to the complexities and challenges. Many argue the Securities and Exchange Commission will have no choice but to declare Ethereum a security following a controversial new launch. To be more precise, Prometheus introduced custody services for Ethereum in an attempt to create a regulated path for cryptocurrency, an unpopular move among industry peers. The emergence of Prometheus’ custodial service might compel the securities regulator to put an end to the long-running Ethereum issue.
Until now, the Securities and Exchange Commission carefully avoided taking a position concerning Ethereum’s legal status while highlighting that countless other cryptocurrencies are securities. By choosing not to clarify the matter, the securities regulator endorses the claim that Ethereum is a commodity, so it can’t be registered. Gary Gensler, who serves as Chair, has found himself unable to answer what it is, at least on the surface level, despite ample time and countless opportunities to work it out. At any rate, the impact of declaring Ethereum a security would be devastating to investors, and the necessary resources to enforce that declaration might be beyond what the agency is willing to allocate.
Conclusion
The legal classification of Ethereum as a commodity or security has far-reaching implications for its oversight, taxation, and market potential. Generally speaking, commodities are subject to less draconian rules and regulations than securities: it’s not necessary to register with the authorities or disclose information to investors or the public. A decision will come to fruition sooner or later, so it’s best to keep your investment portfolio simpler and prioritize investing in Ethereum. It could turn out to be the most profitable strategy. Investments in cryptocurrency are complex, so never put money into Ethereum you can’t afford to lose.
To conclude, the outcome of the debate is still uncertain, so it will continue to spark discussion in the media and among industry leaders. If the Securities and Exchange Commission classifies Ethereum as a security, individuals and corporations will have a hard time buying and selling cryptocurrency. Equally, it will be more complicated to launch decentralized applications on the network.
