Ethereum – Commodity or Security: What’s the Difference?

Bob Mason
Updated: May 9, 2018, 10:42 UTC

The cryptomarkets have been a market in waiting of late as governments and regulators debate under which category the respective cryptocurrencies should be classified, whether they should be categorized as a currency, a security, or a commodity.

Ethereum – Commodity or Security: What’s the Difference?

While some cryptocurrencies have been considered to be true cryptocurrencies, where they are considered to be viable alternatives to fiat money, others are considered to be equivalent to a security or a commodity.

The resulting impact of a classification for a particular cryptocurrency can be material in the way that it is traded and, in the cryptomarkets’ nascency, on investor appetite for the different cryptocurrencies available to trade and under which regulations, if any, cryptocurrency exchanges are required to adhere.

For Ethereum, the debate has revolved around whether Ethereum’s cryptocurrency, Ether, should be classified as a commodity or a security.

Through late December and the 1st quarter of this year, the cryptomarket has seen heightened volatility with some sizeable losses as regulators look to impose some level of oversight and impose rigid regulations on the respective exchanges.

The very classification of each cryptocurrency will ultimately decide the degree of regulatory oversight exchanges and individual cryptocurrencies would be exposed to and, as we saw through the 1st quarter, such a proposition has been unwelcomed by cryptocurrency investors who have enjoyed anonymity since the beginning.

How can the Decision Change Ethereum’s Future?

For Ethereum, the day is certainly coming where regulators will classify Ether, either as a security or a commodity, or some hybrid with newly approved rules and regulations.

For now, the debate is whether it should be a commodity or a security.

While regulations differ across jurisdictions, ultimately the ramifications will likely be consistent, with classification as a security the worse possible outcome for exchanges and investors, while quite possibly being the preferred outcome for regulators and governments who have long been looking to take control of what has been akin to a runaway train.

At the start of the week, news of a planned meeting between the U.S SEC and CFTC, which turned out to be fake, led to a tumble across the cryptomarkets.

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Why the price drop?

From an exchange perspective, the classification as a security would mean that exchanges trading Ether, and other cryptocurrencies classified as securities, would need to register with the U.S Securities and Exchange Commission or equivalent or face quite punitive fines. With exchanges looking to elude the grasps of governments and regulators the world over, in the interest of maintaining existing client bases and revenue streams, the easiest solution for an exchange would be to simply remove Ether from their trading platforms.

The price impact on Ethereum and any others that are classified as securities, which could ultimately lead to their exclusion from crypto exchanges, would be significant. Removal from exchanges makes their availability become significantly more limited, leading investors to look elsewhere for more liquid cryptocurrencies and to be able to buy and sell without falling under the scrutiny of governments and the SEC in particular.

From an investor perspective, investing into cryptocurrencies through exchanges that eventually fall under the purview of securities regulators would mean a removal of the very anonymity that has drawn many investors into the market from the beginning.

The introduction of KYC and anti-money laundering policies would require some, but not all investors, to disclose information that could ultimately lead to the seizure of assets and so forth. While the debate can go on over how much dirty money is flowing through the system, there’s undoubtedly enough to make a dent in the event of withdrawal.

Exchanges that do decide to continue to support cryptocurrencies that become classified as securities will also need to material increase costs through the introduction of the very policies and procedures required by regulators such as the SEC. While for some it may be considered an opportunity to draw in clean money and take advantage of the widening investor base, for others it may be an unjustifiable cost burden, another reason to pull the cryptos that get classified as a security.

As far as Ethereum investors and the broader market are concerned, falling under the Commodity Futures Trading Commission would be a far more favourable outcome, the commodity spot market considered to be a far less regulated environment than under the SEC, the CFTC being more focused on incorporating limits on margins, ensuring transparency while looking to manage insider trading in the spot market.

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About the Author

Bob Masonauthor

With over 20 years of experience in the finance industry, Bob has been managing regional teams across Europe and Asia and focusing on analytics across both corporate and financial institutions. Currently he is covering developments relating to the financial markets, including currencies, commodities, alternative asset classes, and global equities.

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