You may have read a news story last year that went something like this: Government Agency X declares that Bitcoin is Y! Ever since agencies started looking at these technologies more closely, sometime around 2013, there have certainly been a bunch of these declarations: “Bitcoin is a commodity” (per a 2015 CFTC ruling), “bitcoin is property” (per 2014 IRS guidance), “bitcoin is virtual currency” (per 2013 FinCEN guidance), “bitcoin is money used for money transmission.” (per various state money transmission regulators), “bitcoin is not money used for money transmission” (per a Florida court). Don’t these different agency definitions conflict? Why can’t the government make up its mind? What is bitcoin, really?
Part of the metaphysical complexity surrounding this technology stems from the simple fact that cryptocurrencies like Bitcoin are truly innovative. That is to say, they present an arrangement of technological components that is so novel as to defy categorization as any traditional asset, commodity, security, or currency.
What is cryptocurrency really?
At root, units of a cryptocurrency are scarce items that can be exchanged and may have value despite the fact that they have no institutional issuer or legally-promised redemption. In this sense, cryptocurrencies are somewhat like valuable commodities (e.g. gold or platinum). However, unlike precious metals, cryptocurrencies are entirely non-tangible. That is not to say, though, that they exist only in the minds or promises of men and women. In a literal sense, a bitcoin is a unique answer to a math problem and proof that you solved that problem or else had the unique record of the solution transferred to your control. There are a finite number of solutions to the math problem as it has been devised, and finding those solutions takes genuine effort. This too can be analogized to a precious metal: there is a finite amount of gold to be found and effort is required to find it.
The decision to value these finite solutions and therefore make the effort to uncover them can also be analogized to gold. Men and women need not seek gold. The value placed on gold by society is largely a sort of mutually shared desire or—less charitably—illusion. We could, instead, seek platinum or silver for use as a medium of exchange, store of value, or decorative object. Similarly, those interested in cryptocurrencies could seek answers to alternative math puzzles. A particular cryptocurrency, say Bitcoin, could even change its underlying math puzzle. However, such a change would be more like the collective actions of gold miners choosing to instead mine silver, and less like a single government choosing a different asset, or no asset, to back its paper currency.
Compounding the complexity of this analysis is the fact that Bitcoin’s underlying blockchain—the shared ledger that lists all transactions on the network—can be used as an irreversible public broadcast channel for any recordkeeping or recordkeeping-related purpose. The original and still primary use of the Bitcoin blockchain is moving scarce tokens, or to loosely quote François Velde of the Chicago Federal Reserve, “Bitcoin is a system for securely and verifiably transferring bitcoins.” Blockchains, however, can and are beginning to be used for securely and verifiably transferring other financial assets (by, e.g., Nasdaq), identity credentials (by e.g. Blockstack), automobile loans (by e.g. Visa), document notarizations (by e.g. Proof of Existence), machine-to-machine messages on the Internet of Things (by e.g. IBM), and more.
And even if the Bitcoin blockchain is being used for these alternative purposes, some amount of bitcoin will always be involved in order to write to the ledger, even if it is a nominal amount. Within these various uses will lie some obviously regulated activities, such as platforms for trading securities, but also many generally unregulated activities, such as trading and transferring tickets to a concert or keeping records of online video views and charging for access.
Agency definitions of cryptocurrency
But regardless of the particular analogies used to explain the technology or the various systems powered by the technology, regulators will continually look at how a cryptocurrency is employed, what work it helps a user or a customer accomplish, and they will thus classify these activities as within or without their regulatory purview. The “how it is employed” question will always be more significant to any regulatory policy than the abstract and metaphysical “what is it” question.
This is what is called activities-based regulation. Agencies are not regulating cryptocurrency. They are, in every case, regulating an activity they have always regulated in a situation where the activity is suddenly being performed using cryptocurrency.
So if a bitcoin exchange and hosted wallet provider is using bitcoin to help customers move money to their families overseas, then you can bet a consumer protection regulator will treat it as a money remitter (and declare that the it being remitted is money). If another exchange is allowing customers to trade bitcoin swaps or derivatives, you can bet a financial regulator may treat it as a commodities exchange or swap execution facility (and declare that the it underlying the derivatives is a commodity). These two different agency definitions–although very different–do not conflict with each other in the law.
It goes on: all of these businesses and users will need to pay taxes, so the IRS will need to figure out how to treat bitcoin holdings, fitting it into an existing statutory category, “property,” that makes sense to them. And for those issuing speculative investment tokens on an open blockchain network (say Ethereum or the Bitcoin-based Rootstock), the SEC will need to decide if the sales are investment contracts that need to be registered as securities. And just as financial institutions that move large amounts of currency are required to report on their customers under existing laws, so too will bitcoin intermediaries be told to do the same, and in the process an agency like FinCEN may declare that bitcoin is a currency substitute that they call a “virtual currency.”
Bottom line: It generally doesn’t really matter if one regulator calls Bitcoin a commodity and another calls it money. These seemingly contradictory definitions, in and of themselves, don’t really hamper the development of cryptocurrencies. Now, this doesn’t mean we don’t have to worry about bad policy. In every case of government regulation we must be vigilant and work to ensure that the rules make sense for the technology, that there are constitutional and reasonable limits on the reach of government, and that a light-touch approach preserving the freedom to innovate prevails. But the particular determinations made by any agency—bitcoin is this! Ethereum tokens are that!—are not in and of themselves cause for concern, even when they may seem super definitive or strangely contradictory.