Defining Bitcoin: Currency, Commodity or Investment?
By Roger Tym, Partner, Hogan Lovells
Defining bitcoin
bitcoin, n.: a digital currency in which transactions can be performed without the need for a central bank. (Oxford English Dictionary)
Defining bitcoin should be simple. It’s a currency right? Isn’t it? Although the Oxford English Dictionary seems to have made up its mind, the global regulators can’t seem to agree.
Currency, Commodity or Investment?
In October 2015, the European Union Court of Justice (ECJ) ruled that for value added tax (VAT) purposes bitcoin must be treated as a currency and not a commodity. This didn’t come as a surprise following Belgium’s Federal Finance department pre-empting this with a statement noting digital currencies were exempt from VAT in 2014; Switzerland confirming this previously too and the Advocate General urging the ECJ in July 2015 to opt against applying a tax to bitcoin sales and purchases. So we’re all agreed? Not quite…
…Across the pond, the US Commodity Futures Trading Commission (CFTC) has confirmed that bitcoin and other digital currencies should be considered as commodities. Furthermore, by coming under the remit of the CFTC, virtual currencies will not qualify as securities. The order suggests a virtual currency is “a unit of account, and/or a store of value, but [with no] legal tender status in any jurisdiction.” The decision means that a business which operates a market for bitcoin derivatives in the US must comply with CFTC regulations. The ECJ and CFTC decisions would appear, at first glance, as conflicting interpretations.
But definitions of “commodity” — “a good sold freely to the public, traded in bulk” — against “currency” — “an item (coin or note) that circulates as a medium of exchange” — might not be at odds, but rather overlap. Proponents of bitcoin as an investment would cite how the value of bitcoin over the last few years has fluctuated greatly; since 2013 1 bitcoin has gone from an average of $125 to a current price of $432, albeit with a high at $979 in the mean time. A price range which is suggestive of a volatility too expansive to truly exist as a currency but with real potential for a speculator. However, currencies too can fluctuate wildly and are tradeable.
Perhaps then bitcoin is best defined as a hybrid; a commodity-esque cryptocurrency with an evolving legal framework. The necessity to have it defined is likely a testament to how bitcoin developed: in a decentralised, anonymous framework, with no central structure offering this solution. Do we have an answer then? Currently, bitcoin is more like an investment, but it still exists as a currency, and if you’re a regulator: State-side, bitcoin is a store of value: a commodity; and in Europe, it is a currency.
If only it was that simple. Such a distinction oversimplifies how the nascent cryptocurrency has divided regulators within regions. Returning to Europe, last month, Estonia’s Supreme Court asked two civil ministries and the financial regulator to truly explore how statute should apply to bitcoin (irrespective of the VAT ruling). Meanwhile, New York state has started to tackle the regulatory question by introducing the BitLicence and charter. So the CFTC ruling itself may only have limited application; even if bitcoin is viewed as a commodity in the US by the CFTC, the decision may only generate concern for unregistered bitcoin derivative users.
Bitcoin may still exhibit price spikes and troughs, but in recent times it has been more widely used as a means of paying for goods. Governments like Jersey and the Isle of Man have adopted bitcoin (not just blockchain) and Ecuador was the first state to issue its own virtual currency (similar to, but not, bitcoin).
So…Bitcoin doesn’t sit comfortably in any definition. A lawyer’s answer perhaps, but we’ll just need to see what happens next in terms of uptake and regulation to be able to truly define, and understand, bitcoin.
