Securities and Commodities – definition. What do these two words mean when applied to the world of cryptos, and what impact do they have on them?
Securities and Commodities – definition? Understanding whether a cryptocurrency is classified as a security or a commodity is crucial for compliance with relevant laws and regulations. It influences how these digital assets can be issued, traded, and managed within the financial system. The classification can impact everything from investor protection to market integrity and the development of new financial products and services.
In the context of DeFi news, it’s often talked about, so it’s important to know its true meaning and consequences.
We’re hearing more and more about cryptos being either commodities or securities, but what’s the difference between the two? And what impact does it have on crypto if it’s defined as a securitie at the nexus of a commoditie.
Securities and Commodities – definition and impact:
The fundamental difference between a commodity and a security lies in what is being bought and sold:
Commodities:
A commodity is a tangible product, often a raw material that can be used to make other goods.
Hard commodities include energy goods like oil and gas, as well as metals like gold and silver.
Soft commodities are generally agricultural goods like grains, livestock, and cotton.
Traders can buy and sell commodities on the spot market or through derivatives such as futures and options.
Commodities tend to have a low or negative correlation with other assets like stocks and bonds, making them useful for diversification and as a hedge against inflation.
Securities:
A security represents ownership or debt obligation in an entity, such as a company or government.
Stocks and bonds are common examples of securities.
Companies issuing securities must provide detailed, transparent information to investors.
Securities receive stricter regulatory oversight than commodities.
Investors trade securities on stock exchanges or over-the-counter markets.
The classification of cryptocurrencies as commodities or securities remains a subject of debate, with implications for their future.
In summary, commodities are basic goods that can be traded or exchanged, while securities involve taking an ownership stake or providing credit in a common enterprise. The distinction becomes murkier when it comes to digital assets like cryptocurrencies.
The advent of cryptocurrency has introduced new dimensions to the concepts of securities and commodities. Cryptocurrencies and digital assets can exhibit characteristics of both securities and commodities, depending on their use, structure, and regulatory interpretation.
Cryptocurrencies as Securities
A cryptocurrency may be classified as a security if it meets the criteria outlined in the Howey Test, a legal standard established by the U.S. Supreme Court to determine whether a transaction qualifies as an investment contract.
According to the Howey Test, an asset is considered a security if:
- It is an investment of money.
- There is an expectation of profits from the investment.
- The investment of money is in a common enterprise.
- Any profit comes from the efforts of a promoter or third party.
If a cryptocurrency meets these criteria, it is subject to securities regulation. This means the issuing entity must comply with registration, disclosure, and other requirements set by securities regulators like the U.S. Securities and Exchange Commission (SEC). Examples of cryptocurrencies that have been deemed securities include certain initial coin offerings (ICOs) where tokens are sold to investors with the promise of future profits.
Crypto-currencies as commodities
Crypto-currencies can also be classified as commodities, particularly when they serve as a medium of exchange, store of value or unit of account with no expectation of profit derived from the efforts of others. In the United States, the Commodity Futures Trading Commission (CFTC) has classified major crypto-currencies such as bitcoin and ethereum as commodities. This means they are subject to the regulations governing commodity trading, including those relating to futures and derivatives.
In a nutshell:
Securities: Crypto-currencies are considered securities when they involve investment contracts with an expectation of profit from the efforts of others. These tokens are subject to securities laws and SEC regulatory oversight.
Commodities: Crypto-currencies are considered commodities when they serve as digital assets primarily used for exchange, store of value or similar purposes with no specific expectation of profit from the efforts of third parties. They are regulated by commodity trading laws and overseen by agencies such as the CFTC.
Regulatory landscape
The regulatory environment for crypto-currencies continues to evolve, with countries taking different approaches to classification and regulation. In the USA, the SEC and CFTC play an important role in determining the status of different digital assets, while other jurisdictions may have their own regulatory frameworks.
Conclusion
Knowing whether a crypto-currency is classified as a security or commodity is essential for compliance with applicable laws and regulations. This influences how these digital assets can be issued, traded and managed within the financial system. Classification can have an impact on everything from investor protection and market integrity, to the development of new financial products and services.
