So Bitcoin is a currency, right? Well yes, it can be used to buy, sell, and appraise goods, such as dollars and euros.
Is it a raw material? If you think about it, it behaves a lot like oil and gold: it can be bought and sold in financial markets or through derivatives like futures.
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Can it be a title? Many cryptocurrencies are, in some way. They are issued as shares in “initial coin offerings” and often represent securities in online projects.
The debate may seem abstract, something alien to the world of finance, but it is drawing increasing interest from economists and lawyers who say it could have big implications for the future of cryptocurrencies.
The definition made of Bitcoin and other digital units could influence their regulation worldwide . In turn, the rules they abide by could determine whether they make the leap from niche asset to traditional asset.
How will regulators treat you?
In the United States, federal supervisory bodies say there are elements of both securities and raw materials, but – like the authorities of most economies – they have not yet developed their rules.
The European Union will present a guideline this year, which could include crypto in existing regulations or create new rules.
For market players, the way Bitcoin and its peers are regulated will have important ramifications.
Commodity markets operate with relatively little regulatory oversight. Assets, on the other hand, are often subject to stricter rules on price transparency, transaction reporting, and market abuse.
Clues about his character
Part of the identity crisis of cryptocurrencies lies in the fact that Bitcoin was originally conceived as a means of payment, but now it does not look much like the dollar, the euro or the British pound.
It has little value as a store of value due to its volatility and it does not work well as an exchange method due to its slow network and high transfer costs.
The rise of the Bitcoin loan market is offering clues about its character.
It offers lines of credit to crypto firms that make money in cryptocurrencies, such as payment processors or miners, who seek to secure traditional money to cover expenses. Also, traders who don’t want to sell their Bitcoins holdings use them as collateral to borrow cash and use it in algorithmic or high-frequency trading.
For those who lend money, relatively high yields are an attractive proposition in an era of record lows.
Key characteristics of this market, such as market-driven price discovery and motivation to seek liquidity, are similar to commodity lending, according to market players and economists.
“(The analogy with) commodity markets is very pertinent,” said Deeksha Gupta, an assistant professor of finance at Carnegie Mellon University in Pittsburgh and an industry researcher. “One of the main similarities is that they are also managed by people seeking liquidity.”
The Bitcoin loan market has quietly grown as an opaque corner of the cryptocurrency industry, notorious for its lack of transparency. Although there is little data to measure the credit market, it is generally assumed that it has expanded rapidly in the last year.
New York-based Genesis Capital, one of the largest lenders in the market, said its outstanding loans rose late last year to about $ 545 million, compared to $ 100 million a year earlier.
Implicit interest rates in these markets – the price of borrowing Bitcoins – is 4-5%, according to Genesis CEO Michael Moro. On platforms for people to lend money against Bitcoin, the rate reaches 8%.
The resemblance of cryptocurrencies to securities is mainly due to their issuance and function in initial coin offerings (ICOs), where they are used to raise traditional money.
ICOs are typically conducted by firms seeking to raise funds related to blockchain or for projects on the internet. They raise capital by issuing digital currencies, which guarantee their holders access to the new system or software or a share of the profits generated.
For example, Switzerland’s Aragon – a management platform for decentralized organizations – raised some US $ 25 million in 2017 by issuing “tokens” that gave voting rights on the development of the system.
Regulators could decide to treat each cryptocurrency differently, depending on its specific characteristics, something the UK already did last year.