Commodities vs. securities: A third option for crypto regulation makes sense

One of the main topics that dominated the crypto market so far this year is the topic of regulation. The numerous black swan events that occurred last year highlighted the need for crypto regulation.

Many industry participants agree that cryptocurrency regulation is the right path for the industry mainly for consumer protection.

Coinbase CEO Brian Armstrong was among the executives who expressed their opinions about the industry and regulation. As far as regulation is concerned, Armstrong noted that Coinbase sought out money transmission licenses from the beginning.

"Crypto is the most important technology that can help update the financial system," says @coinbase CEO @brian_armstrong. "The rest of the world is trying to draw crypto companies in. The U.S. really risks falling behind." pic.twitter.com/acfajzL1hI

— Squawk Box (@SquawkCNBC) March 1, 2023

Armstrong’s statement underscores just one of the numerous regulatory facets of the crypto industry. The companies are easy to regulate but there is a gray area when it comes to regulating cryptocurrencies.

Existing regulatory frameworks have dictated that cryptocurrencies can either be categorized as commodities or securities.

The unpopular opinion

Categorizing cryptocurrencies based on the rules set in place for the traditional financial system might not necessarily be the best way to go. The reasons for this point of view cut across multiple factors including definition and underlying technology.

There have been attempts to classify cryptocurrencies and tokens based on consensus mechanisms or the method of distribution.

Bitcoin and Ethereum were both considered commodities because of the proof of work consensus mechanism. However, Ethereum transitioned to Proof-of-stake in 2022. But does that really make it security?

By definition, a commodity is a useful and fungible economic resource that has value. Commodities are usually tangible. Most commodities exist within the physical realm, hence they can be touched.

This is not the case for Bitcoin which relies on a decentralized digital medium. Mining is the main reason why Bitcoin is categorized as a commodity.

Securities are generally any type of tradable financial instrument that have attached value and can be traded. The wild card for cryptocurrencies is that they are decentralized, hence making it difficult for regulatory control.

In addition, they operate on the global market hence traversing multiple jurisdictions. As such, enforcing traditional regulatory measures may not be the most efficient way forward,

Why a different path might be necessary

From a technological point of view, cryptocurrencies are much better off with an entirely different rule set. The traditional regulations may contribute to some extent.

But the key theme here is that they are within the digital domain. This is the first time that the world has a technology that overcomes the double spending problem. One that is capable of facilitating the evolution of the internet into a more powerful tool.

The decentralized nature of most cryptocurrencies makes it more difficult to implement traditional regulations.

On the other hand, it makes more sense to implement regulations that will keep corporates and other market participants in check.

Perhaps the best approach is to have an entirely new system of regulations in place.  A system that allows the crypto market to blossom while boosting consumer protection.