Commodity vs. security has been a heated topic in the crypto space for a long time.
Suppose you also wonder whether your favorite crypto asset is a commodity or security. In that case, we’ll help you to figure that out.
The global crypto market capitalization is valued at over $1.3 trillion. In addition, the average daily cryptocurrency trading volume is around $40 billion. Considering this massive value in the crypto market, it is high time to categorize these digital assets based on their characteristics.
In traditional finance, assets fall under two categories: commodity and security. Moreover, these financial instruments have different regulations and tax implications.
Simply put, it’s important to understand whether your investment is a commodity or security. This article will help you to understand the differences, similarities, and regulatory aspects around crypto assets.
What is Commodity and Security?
First, let’s understand the basics, starting with the commodity. Stay tuned!
Commodity consists of goods or products you can buy, sell, or trade. The most popular examples of commodities include gold, silver, crude oil, coffee, and more.
In addition, commodities are often priced based on their demand on the market. Moreover, the regulations around the commodity market are minimal.
Security involves tradable financial instruments used to raise capital for governments or companies. Securities are commonly offered in the form of bonds and stocks.
Furthermore, securities act as an investment tool that provides investors with interest, capital appreciation, or dividends. For this reason, securities come with various regulations.
Now that you know about the commodity and security in general, let’s explore its concept in the crypto space. Stay along!
Crypto Assets as Commodities
Crypto project founders and investors believe that cryptocurrencies fall under the commodity category. Notably, they point out that cryptos like Bitcoin (BTC) can maintain their value and are immune to depreciation.
In addition, crypto assets are used as investments by investors to generate long-term returns on their deployed capital. Besides, traders also trade cryptos to earn short-term profits. This trading and investing possibility provides a commodity aspect for cryptos.
In traditional finance, The Howey Test is a question-based test that determines if an asset is an “investment contract” and, thereby, a security. This test includes three simple questions:
Does one invest money expecting future profits?
Does it involve investing money in a common enterprise?
Does the effort of a third party or a promoter lead to profits?
If the answer to all the above questions is “yes,” then that particular crypto asset can be considered a security. Otherwise, it falls under the commodity category.
Crypto Assets as Securities
While considering crypto assets as a security, it adds more regulations restricting the ease of developing a crypto project and its tokens. However, crypto as a security will attract more investors and create more demand in the market.
Moreover, as a security, financial institutions can easily provide various types of investment options to the public. For example, you can buy exchange-traded funds (ETFs) derived from your favorite cryptocurrencies like Bitcoin (BTC).
In addition, you can also invest in cryptocurrency mutual funds. For instance, you can choose mutual funds to distribute your investment in the top five cryptocurrencies.
Furthermore, crypto-based companies raise funds with the help of initial coin offerings (ICOs). This fundraising method resembles the initial public offerings (IPOs) that fall under the security category.
Author’s Note: Trading and investing in crypto assets are risky, and there is a possibility of significant price volatility. Therefore, do your own research (DYOR) and avoid fear of missing out (FOMO).
How are Commodities and Securities Similar in Crypto?
Even though there is a solid ongoing debate on commodity vs. security in the crypto space, both categories share various similarities. The prominent ones include:
#1. Investment Opportunities
Both commodities and securities can be considered as a crypto investment tool. For example, you can allocate your capital in both these categories, similar to investing in other traditional financial instruments.
In addition, you also have multiple options to choose the investment based on your risk appetite. For example, you can opt for less risky alternatives like stable coins like Tether (USDT) that mimic the price of the U.S. dollar.
#2. Allows Diversification
Crypto assets that fall under commodity and security provide a wide range of options for investment. As a result, you can diversify your crypto portfolio to reduce any negative impacts of a single asset.
Crypto commodity-based investors can diversify their portfolios by allocating different assets like Bitcoin (BTC) or Litecoin (LTC). Whereas crypto security-based investors can add security tokens for diversification.
#3. Tradable Assets
Both crypto commodities and security fall under the category of tradable assets. Simply put, you can buy, sell, and exchange these assets on supported platforms or marketplaces.
Furthermore, various platforms allow you to exchange between assets of a crypto commodity and security. Moreover, you can also use fiat currencies to buy both these crypto assets.
#4. Influenced by Market Conditions and Sentiments
Crypto commodities and securities are affected by the market conditions. During important economic events, both categories tend to have a negative or positive impact on demand.
In addition, investor sentiments also play a crucial role in the pricing of both commodities and securities. For example, poor crypto market performance can lead to large sell-offs, resulting in a massive price fall of the assets.
Now that we know the similarities between commodities and securities, let’s explore their significant differences.
Differences Between Commodities and Securities in Crypto
The major differences that I observed that differentiate between a crypto commodity and security consist of the following:
#1. Regulatory Standpoint
Regulations associated with a commodity are entirely different from that of a security. Besides, each country has different government bodies to regulate these two categories.
For example, if we take the case of the United States, the Commodity Futures Trading Commission (CFTC) is the regulatory agency for the commodity market. At the same time, the security market is regulated by the Securities and Exchange Commission (SEC).
#2. Purpose of Investment
Investing or trading in crypto commodities is often related to a speculative nature. For example, traders or investors deploy their capital, hoping for huge profits.
On the other hand, investing in crypto securities comes with specific regulations. For this reason, one can invest in a crypto project with future potential.
#3. Asset Liquidity
You can trade crypto commodities like Bitcoin (BTC) from numerous exchanges worldwide. In addition, you can buy or sell such assets within a few seconds at any time.
However, the trading liquidity of the crypto securities is comparatively less. Therefore, selling this type of asset might take more time than selling commodities.
#4. Risk Involvement
Crypto commodity-based assets come under the category of high-risk trading or investing. As a result, the price of such assets witness high price volatility during bad market conditions.
On the other hand, the regulatory aspect of crypto security is comparatively on the lower side. Moreover, you can also choose low-volatile security assets for a peaceful investment journey.
#5. Trading and Investing Mechanism
You can invest and trade in crypto commodities through various channels from the crypto space. For this reason, all you need is a crypto wallet that supports your assets.
In contrast, crypto securities have a limited number of marketplaces and platforms for trading and investing. Moreover, finding a potential seller may be difficult during bad crypto market conditions.
Why the Classification of Crypto as a Commodity or Security Matters?
Crypto industry executives, including founders and key members, always support that crypto assets belong to the commodity category. This standpoint reduces the regulatory aspect and the additional financial expenses that come alongside it.
Moreover, if crypto is considered a security, then the developers of crypto assets need to follow strict regulatory guidelines. Under those circumstances, the entry barrier for new crypto-based projects rises drastically.
In addition, if complex policies are implemented on crypto assets, it’ll negatively affect crypto adoption. Not just that, regulations also back out traditional technologies from adopting blockchain technology.
However, I also find it to be a positive aspect when it comes to restricting scams or fake projects. For example, strict procedures will be crucial in eliminating projects that plan to scam investors.
The crypto space has witnessed many scams, bankruptcies, and rug pulls in recent years that involved the loss of investor’s funds worth billions of dollars. A proper and structured regulation will add more trust to investors.
SEC always rejected considering cryptocurrencies like Bitcoin (BTC) as a security. For this reason, they viewed Bitcoin (BTC) as a commodity. For example, in 2022, the chairman of SEC, Gary Gensler, claimed that only Bitcoin (BTC) belongs to the commodity category.
Besides, the regulation for crypto assets varies based on the country’s rules and regulations. Therefore, it’s practically impossible to create a global regulation for crypto.
In addition, some countries have regulatory policies that are crypto-friendly. In contrast, some other countries have banned cryptocurrencies and related activities. Furthermore, numerous countries have unclear regulations for crypto assets.
For example, countries like Slovenia, Malta, Singapore, Estonia, etc, have a positive approach to cryptocurrencies and blockchain technology. On the other hand, countries like China, Bangladesh, Egypt, and Algeria have officially banned cryptocurrencies and related activities.
Is Your Crypto a Commodity or a Security?
Unfortunately, there’s not a clear framework that helps us to distinguish commodity vs. security. Whether your crypto falls in one of these categories evolves based on regulatory decisions.
I firmly believe that regulatory agencies like the SEC will eventually create a standard framework to identify crypto assets under security or commodity categories. Till then, all you can do is keep an eye on the crypto regulations of your country and act accordingly.