In our previous article, we discussed how Ethereum could potentially become a world currency. A frequent question we hear though when talking about cryptocurrencies is the following: Are digital currencies, such as Bitcoin and Ethereum officially considered as a currency or a commodity? To answer this question, we will be looking at the definition of each, where they best fit and the potential impact of that classification on their price and potential future value.
The definition of Commodity and Currency
A Commodity – Derived from the Latin word commoditās for convenience, comfort. Commodities are goods or services for which the demand has no qualitative differentiation across a market. These are interchangeable goods capable of being substituted in place of one another regardless of who produced them. Their price is set as a function of the commodity’s whole market and they are traded in spot and derivative markets.
Commodities fall into 4 categories: Soft commodities (grown agricultural products) Hard commodities (extracted through mining) Energy, Livestock & meat.
A Currency – a generally accepted form of money issued by a government and circulated within an economy. Currencies include coins and paper notes, and are used as a medium of exchange for goods and services. They are the basis for trades.
Right now, different countries have different stances on Cryptocurrencies
Since Sept 2015 the U.S. Commodity Futures Trading Commission “CFTC” has been considering bitcoin and other virtual currencies a commodity covered by the commodity exchange act. The CFTC also considers Bitcoin a virtual currency, but not a foreign currency. The IRS considers Digital currencies a property.
This recent quote from Olga Skorobogatova, Deputy Governor of the central bank of Russia summarizes the Russian perspective on Digital currencies: “Regulators of all countries have concluded that it is necessary to have a national virtual currency. This is the future. Each country will decide the issue of a specific time and maturity independently,”. Cryptocurrencies may be recognized in Russia by 2018, according to Deputy Finance Minister Aleksey Moiseev and it looks like Ethereum is a favourite in that market.
Sheng Songcheng, adviser to the People’s Bank of China (PBOC) sees Virtual currencies as an asset, a “virtual good” and not a currency – He thinks the Chinese monetary authorities should study issuing a central bank virtual currency that they could regulate and run properly.
Although cryptocurrencies are not considered legal tender in Canada and only the Canadian dollar (bank notes and coins) is considered official currency in Canada, the country has definitely been a strong proponent of the use of Cryptocurrencies and the Blockchain Technology in particular. Canada is the home of many Blockchain start-ups, regularly hosts cryptocurrency conferences and the Big Five banks in the country are actively testing ways to improve on how financial transactions are being conducted using smart contracts. Canada, along with the United States, has one of the largest BTC ATM networks.
Recently, Japan issued a new law recognizing Bitcoin as a legal payment option and a viable store of value in the country, as of April 1st 2017.
“The key difference between these (Digital currencies) and local currencies is that the exchange rate between digital currencies and other currencies is not fixed. Digital currencies are not at present widely used as a medium of exchange. Instead, their popularity largely derives from their ability to serve as an asset class. As such they may have more conceptual similarities to commodities, such as gold, than money”. Money in the modern economy By the Bank of England.
Barclays’ CEO Ashok Vaswani recently shared that Barcley’s engaged discussions with UK regulators to explore the adoption of digital currencies. This quote from an interview with CNBC in the Money 20/20 fintech conference in Copenhagen is interesting as he mentions “”We have been talking to a couple of fintechs and have actually gone with the fintechs to the FCA to talk about how we could bring, the equivalent of bitcoin, not necessarily bitcoin, but cryptocurrencies into play” Could it be Ethereum? Time will tell but we have definitely seen interest in Ethereum’s disruptive underlying technology from major banks around the world.
Financial regulators and banks in general are cautious when it comes to being associated with cryptocurrencies but the raising interest from investors is forcing them to look into digital currencies such as Bitcoin and Ethereum and how to “Bring them into play”. The same approach is applicable for countries with various degrees depending on the type of government in place.
To answer our initial question, it looks like the general and cautious approach adopted by most governments is to consider Digital currencies as a Commodity at a minimum for the simple reason that there is a solid demand out there for Cryptocurrencies that can no longer be ignored. Although it is used as a virtual currency in many countries, Japan remains the country that has taken the boldest move by officially considering Bitcoin a store of value.
We believe that Ethereum in particular has the potential to become a world currency because of its digital nature and the solid underlaying technology that could change the way operations are handled in different sectors in ways we haven’t been able to achieve before. If that happens, we should see a significant increase in the price of Ethereum. This can only happen if the challenges that digital currencies in general are facing are overcome. High volatility and security remain the top two on the list. The good news is important steps are being taken to improve the encryption and scalability of Ethereum in particular.