It’s official: bitcoin is a commodity, as far as US financial regulators are concerned.
For the first time, the US Commodity Futures Trading Commission (CFTC) has asserted its authority to regulate the trade of derivatives based on digital currencies, such as futures contracts, swaps, and options. The CFTC ruling on September 17 formally recognizes virtual currencies like bitcoin as commodities, and brings them further under the regulatory framework of the US financial system.
The move follows the IRS ruling last year that recognized virtual currencies, such as bitcoin and litecoin, as property, rather than currency, for income-tax purposes. All US-based financial entities that offer or trade derivative contracts based on commodities, such as gold or oil, fall under the authority of the CFTC.
In its first regulatory action regarding virtual currencies, the CFTC filed and settled charges against Coinflip Inc., a San Francisco-based bitcoin trading platform, for illegally operating a facility that traded or processed swaps without registering as a “Swap Execution Facility” or “Designated Contract Market.”
“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,” CFTC Director of Enforcement Aitan Goelman said.
Proponents of the move argue that virtual currency exchanges and market makers should follow the same rules and regulations as any other financial entity dealing with more straight-forward commodities.
They claim increased authority to prosecute fraud and malfeasance in the cryptocurrency markets will allow for more accountability and consumer protection, preventing situations like the 2014 Mt. Gox meltdown which resulted in customers losing 850,000 bitcoins worth approximately US$450 million.
On the other hand, opponents claim that as virtual currencies become further regulated, they may lose many of the features that have made them so appealing.
Tax requirements already threaten the coveted partial anonymity of cryptocurrency wallets, and while transaction costs are practically nil at the moment, increased oversight and regulatory compliance may increase the cost of conducting business.