On September 18th 2015, the Commodity Futures Trading Commission (CFTC) has decreed Bitcoin a commodity, while other US agencies defined it as a property and as a currency. Who is right?
In 2009, a Japanese hacker (or a group of hackers), dubbed Satoshi Nakamoto, created Bitcoin, the world's first decentralized digital currency.
Not being backed by any government or legal entity, it does not need the intervention of a central authority for its supply, for transactions and any other issue. Indeed, users are entirely responsible for its features. While Bitcoin functioning, virtues and vices and many more issues will be analysed more in detail in future articles, the aim of this article is to shed light upon the essence of Bitcoin. In simple words, what is Bitcoin?
The classification of this asset within the traditional schemes is not straightforward and several entities have tried to define Bitcoin in different ways.
September 18th, 2015 - The latest Bitcoin definition was given by the Commodity Futures Trading Commission (CFTC) just few months ago, which decreed it a commodity.
In a statement, the CTFC's Director of Enforcement, Aitan Goelman, commented:
"While there is a lot of excitement surrounding Bitcoin and other virtual currencies, innovation does not excuse those acting in this space from following the same rules applicable to all participants in the commodity derivatives markets."
The Bitcoin community is not really satisfied about this classification and somebody blames the high number of US regulators and their willingness to have more power. Mike Hearn, software developer specializing in Bitcoin, weighted in:
"There are so many regulators in the U.S., and they all want more jurisdiction, which leads to a constant stream of bizarre rulings."
Indeed, according to the Webster's Dictionary, a commodity (i.e.: crude oil, corn, wheat) is "any useful thing," and/or "anything bought and sold; any article of commerce." May it be suitable for Bitcoin as well?
March 25th, 2015 - Another definition of Bitcoin is offered by the US Internal Revenue Service (NYSE:IRS), who faced with a choice of treating Bitcoin like currency or property, chose property. This decision is said to be due to tax purposes and it could reduce the volume of transactions conducted with the virtual currency. In a few words, the IRS ruling means Bitcoin investors are treated like stock investors.
August 7th, 2013 - After a Texas man was accused about an enormous Bitcoin fraud, a Federal judge ruled out that Bitcoin is "a currency or form of money". Indeed, it can be exchanged for other currencies like Euro or Pound Sterling and it can be used for transactions, as a medium of exchange.
Who is right? The Commodity Futures Trading Commission? The Internal Revenue Service? Or the Federal judge? It is hard to say. However, I think that a good experiment consists in hypothesising that Bitcoin is a currency and trying to test if the classical definition of money would be suitable.
In 1967, the economist John Hicks stated "money is what money does. Money is defined by its functions". Even though it seems to be a tautological definition, it is dramatically helpful to answer our question. In fact, starting from John Hick's explanation, economists make distinction among three money primary functions: means of payment, store of value and unit of account.
Is it meaningful to apply those three functions to Bitcoin? Let's try.
Medium of exchange - Bitcoin is undoubtedly a medium of exchange, as it may be compared to cash. According to Plassaras (2013), Bitcoin is "a universal currency, meaning that it can operate outside the system that uses digital currencies thereby avoiding the transaction costs associated with currency exchange".
Unit of account - This aspect refers to the fact that money functions as a numeraire to compare prices of different goods. To achieve this function, a currency must provide an almost intuitive measure of relative worth. As far as the Bitcoin is concerned, it may be easily considered valuable given the difficulty in producing it and its rarity.
Store of value - Finally, this aspect is the most problematic and the reason lies on the fact that the Bitcoin is not a government-backed currency. In fact, currencies acquire legitimacy and stability because they are backed by governments and the lack of a regulator for Bitcoin may raise some concerns. However, analysts believe that this virtual currency is a rather stable store of value, able enough to operate effectively. Indeed, although its high volatility, the fact of not being backed by any government is considered a vantage. This is due to the inflation purposes or other political and social reasons that may influence the value of a currency.
Is the puzzle solved?
From the analysis above, it seems that the puzzle would be solved. However, to the most sceptical, I would like to suggest that the closest definition is probably the easiest one, namely Bitcoin is a digital currency, neither a digital commodity nor a property. Everybody would agree that it is a very special currency, but at the end it is still a currency. The idea of a commodity is misleading, since it is impossible to buy goods and services with crude oil or wheat, but it is possible with Bitcoin. The reason for that is in the different nature of these assets: crude oil and wheat are commodities, whereas Bitcoin is a currency.