KTT Global Advisors – CFO & Finance for Growing Tech Startups

Cryptocurrency: Security? Commodity? Currency? Pan-Gendered Asset?

I am not an attorney, nor an economist.  So what follows is my opinion.  Let’s dive right in.  From a US standpoint, we have the following definitions:

  • Security. If you have been in the crypto space for longer than seven minutes, you can recite the Howey test backwards. For those who have been involved for fewer than seven minutes, the gist of it is that the Supreme Court decided a ways back that when people use their money to make an investment in a “common enterprise” (like a business), with the expectation that the investment it is going to increase in value based on the work of someone else, it’s a security. So a stock is a security. Bonds issued by companies and governments are securities. That share in the Wyoming banana farm that your uncle sold you, is most likely a security. Security issuance and trading is regulated by the SEC based on the Securities Acts of 1933 and 1934, or the “33 act” or the “34 act” if you want to sound cool.

  • Commodity. Most of us have a feel for what a commodity is. It’s something that is basically the same whoever produces it. It doesn’t need to be a physical good, like gold, but can be can be something intangible like bandwidth or even interest rate contracts. The CFTC regulates trading of commodities, which is done primarily through derivative contracts (e.g. futures).

  • Currency. The most common definition of a currency is a “medium of exchange”, meaning that you can sell something you have, get currency, and use it to buy something you need, without that currency changing too much in value. Good examples of a currency are what is known as “fiat” currency, which are notes issued by governments as “legal tender” (like US dollars). The term “fiat” conjures up the image of a moderately-built Italian car, but is more directly linked to the Latin word loosely translated as “this has no intrinsic value but we say it does”.

So in which bucket does cryptocurrency fall?  Sadly, “it depends”.  Taken generally, one could argue that cryptocurrencies are commodities, especially those with little practical use and no differentiating features other than a name.  A typical ERC-20 token could be considered a commodity.  But that would not explain all cryptos, as some have unique features, either technically or by way of their use, that categorize them otherwise.  Certainly any coin/token that either directly or indirectly promises an increase in value, would be considered a security.  Or any cryptocurrency whose primary feature is the generation of dividends.  But what about a currency?  Some cryptos like bitcoin are trying to achieve that status, and may some day when technical issues are solved.But let’s be honest – people are buying these things these days not to do transactions, not because they have some current utility as a way of utilizing a platform, but because they hope they will increase in value.Given that, at this point they’re all f*&%ing securities.

But that begs the burning question, if you were a company issuing a cryptocurrency, how would you categorize it on your balance sheet?  hmmmmmm, what an interesting question……

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