Are BTC and ETH commodities in the United States? CFTC v. Ikkurty

Author: TaxDAO-Tracy Tian, ​​Ray

4. How should BTC and ETH be characterized?  

After reviewing several legal cases related to cryptocurrencies, we have a clearer understanding of the logic and methods of the US courts in regulating cryptocurrencies. Next, in this section, this article will evaluate the commodity attributes of these two representative cryptocurrencies from the multi-dimensional perspectives of economics, finance, and law, and put forward our views on their legal positioning.  

After analyzing relevant legal precedents, this article believes that BTC and ETH, as decentralized digital assets, have the attributes of commodities. They can be bought and sold, have market value, and their prices are affected by supply and demand. At the same time, they also exhibit certain monetary characteristics, such as portability and divisibility, but under the current legal framework, they are more likely to be regarded as commodities. After analyzing relevant legal precedents, we believe that BTC and ETH, as representatives of cryptocurrencies, have the attributes of commodities. They can be bought and sold on the market, their prices are affected by supply and demand, and they have certain use value. However, their legal status is still controversial and requires further legal clarification and regulatory guidance.  

4.1 Economic Evaluation of Bitcoin as a Currency 

As a digital asset, although Bitcoin has the attributes of currency in some aspects, such as interchangeability and certain value storage functions, it has some key limitations, making it difficult for it to be widely accepted and used as a currency in the traditional sense.  

First, Bitcoin's high price volatility makes it difficult to use as a stable means of storing value, and consumers and businesses find it difficult to predict its purchasing power, which limits its use in daily transactions. According to the analysis of Third Financial Network, the sharp fluctuations in Bitcoin prices are affected by many factors, including technological updates, policy changes, market sentiment and macroeconomic trends. This volatility shows that Bitcoin is unstable as a currency in the short term, which poses a challenge to its daily transactions and value storage functions. Fidelity Research has explored the reasons for Bitcoin's volatility in depth and pointed out that the fixed nature of Bitcoin's supply is the root cause of its volatility. Since the supply of Bitcoin does not change with price changes, any changes in demand are directly reflected in the price, causing it to remain unstable in the long run. This further emphasizes the difference between Bitcoin and traditional currencies in terms of stability. CryptoView.io points out that the Bitcoin market is significantly affected by fear, uncertainty and doubt (FUD), which can influence investor behavior and thus market dynamics. This shows that Bitcoin's function as a currency, as a unit of account, is limited by the instability of market sentiment. Sohu's article discusses the challenges and opportunities that digital currencies bring to central banks, emphasizing that digital currencies weaken the ability of central banks to implement monetary policy. This reflects the tension between digital currencies such as Bitcoin and the traditional monetary system.  

Secondly, Bitcoin's fixed supply design, while avoiding the risk of inflation, may cause deflation. Deflation refers to the phenomenon that the purchasing power of money increases over time, which in the case of Bitcoin is manifested as the expected increase in its value as the rate at which new Bitcoins are produced slows. According to economic theory, this expectation of continued price increases may suppress consumption and investment because holders are more inclined to save rather than spend. For example, consumers may postpone purchases in the hope of purchasing goods at a lower price in the future; businesses and individuals may be cautious about investing and prefer to hold Bitcoin in the hope that its value will increase. In this economic environment, economic activity may slow down, markets may become imbalanced, and wealth may shift from debtors to creditors. As economist Milton Friedman pointed out, deflation can lead to a recession because it reduces aggregate demand and increases unemployment. Therefore, Bitcoin's fixed supply and potential deflationary effects constitute an obstacle to its widespread acceptance as a form of currency, which limits its practicality and stability in daily economic activities. In addition, while Bitcoin's decentralized nature provides a certain degree of security and censorship resistance, it also lacks the support of a central regulator and is difficult to cope with economic fluctuations and crisis management. In the NBER Working Paper Series, David Yermack conducted an in-depth analysis of whether Bitcoin constitutes a true currency. According to the economic definition, a true currency should have the functions of a medium of exchange, a store of value, and a unit of account. However, Bitcoin's performance in these aspects is not satisfactory. Yermack pointed out that Bitcoin's consumer transaction volume is extremely low, and its price volatility is much higher than that of widely used currencies, which poses a huge short-term risk to users. In addition, Bitcoin's trading price has almost no correlation with other major currencies and gold, making Bitcoin almost useless for risk management and hedging. Overall, although Bitcoin was designed as a decentralized digital currency, its actual application as a medium of exchange is not common. Bitcoin's consumer transaction volume is very limited compared to traditional currencies, which limits its practicality as a means of daily transactions. In addition, Bitcoin's price volatility is extremely high, which directly affects its function as a means of storing value. The stability of the value of currency is the cornerstone of economic activities, and the sharp fluctuations in Bitcoin prices have brought huge uncertainty and risks to holders, which is not conducive to the long-term stability and development of economic activities. Bitcoin's function as a unit of account is also limited. Due to its price volatility, using Bitcoin as a unit of account may lead to unstable pricing, which in turn affects the reliability of economic decisions. Bitcoin's high volatility, low trading volume, and low correlation with other assets all indicate that it is difficult to characterize it as a currency in the short term. As an emerging asset class, Bitcoin may play a role in certain specific economic environments and use cases, such as as an investment tool or a medium of exchange within a specific community.  

4.2 The View of Bitcoin as a Security 

In the financial world, the definition of a security usually involves a tradable financial asset that represents a share of ownership or debt in a company. Bitcoin and other cryptocurrencies, while similar to securities in some respects—particularly that investors buy them in the expectation that their value will rise and thus make a profit—are fundamentally different from traditional securities.  

First, Bitcoin lacks a central issuing authority, which is what traditional securities such as stocks and bonds have. This decentralized nature makes Bitcoin not meet the basic legal definition of a security. In addition, Bitcoin does not provide a share of corporate ownership and does not have standardized financial reports, both of which are key characteristics of securities.  

Academic research has further explored the question of whether cryptocurrencies should be considered securities. In his research, Tasca (2016) pointed out that the market performance of cryptocurrencies differs significantly from that of traditional securities markets, especially in terms of volatility and correlation patterns. These differences suggest that cryptocurrencies may not fully meet the definition of securities.  

Regulatory agencies, such as the U.S. Securities and Exchange Commission (SEC), have also evaluated the securities attributes of cryptocurrencies. Gensler (2021) emphasized the importance of regulating certain cryptocurrency projects, especially those involving initial coin offerings (ICOs). The SEC generally uses the Howey test to determine whether an asset is a security, which is a test standard used to determine whether a specific transaction constitutes a securities offering. It includes four elements: investment of money, investment in a common cause, expectation of profit, and profit mainly derived from the efforts of others. Its core concept is to protect the legitimate rights and interests of investors and ensure that investors can obtain the necessary information disclosure when investing in order to make wise investment decisions. Specifically in the field of digital currency, for example, if the development of a cryptocurrency depends on the efforts of a company or centralized entity and the purchaser has a reasonable expectation of profit from the investment, then the cryptocurrency may be considered a security. The SEC also released a framework for analyzing digital asset investment contracts in 2019, providing official guidance on whether digital currencies are securities. However, many cryptocurrencies may not pass the Howey test because their investors are generally not dependent on the management efforts of a particular issuer. Liu (2018) proposed that the decentralized and lack of central control characteristics of cryptocurrencies do not conform to the definition of traditional securities. Meanwhile, Klerk (2018) pointed out that in some cases, cryptocurrencies may exhibit centralized characteristics, which may give them the attributes of securities. The SEC has made it clear that Bitcoin and Ethereum are not securities due to their decentralized nature. In summary, while Bitcoin and certain cryptocurrencies have some characteristics of securities, their classification within the legal and regulatory framework remains controversial. Future regulatory guidance and market developments may further clarify these issues. 4.3 The view of Bitcoin as a commodity The U.S. Commodity Futures Trading Commission (CFTC) has classified Bitcoin as a commodity, a ruling based on the trading characteristics of Bitcoin in the market. According to the CFTC, the price of Bitcoin is determined by market supply and demand like other tradable commodities.  

Cheah and Fry (2015) pointed out in their research that the price dynamics of Bitcoin are similar to those of traditional commodities, and its price fluctuations are directly affected by market forces. This price behavior reveals the nature of Bitcoin as a commodity, in which the expectations and emotions of market participants play an important role in price formation. The supply of Bitcoin is fixed and determined by its underlying algorithm, while the demand is affected by the interest and trust of investors and users in Bitcoin.  

A key attribute of Bitcoin as a commodity is its high fungibility, meaning that each Bitcoin is equivalent in value, which is consistent with the attributes of traditional commodities such as gold and oil. In addition, the Bitcoin market has high liquidity, allowing for rapid buying and selling, which is an important feature of commodity markets.  

Bitcoin can also be used as a risk management tool, providing investors with the opportunity to diversify their portfolios despite its high volatility. This is similar to traditional commodities, which are also often used to hedge risks and diversify investments.  

Classifying Bitcoin as a commodity also means that it is regulated by the CFTC, which provides a legal framework and market supervision for Bitcoin trading. As a commodity, Bitcoin trading rules and requirements are similar to traditional commodity futures and options markets, including trading transparency, margin requirements and market manipulation prevention measures.  

4.4 The view of Bitcoin as data 

When examining the view of Bitcoin as data, we also found that this definition has caused a series of controversies and challenges. Although Bitcoin is indeed built on blockchain technology and records the details of all transactions in the form of data, if it is only regarded as data, it fails to fully capture its rich connotations at the financial and legal levels.  

First, the classification of Bitcoin as data raises significant challenges at the legal and regulatory levels. Different jurisdictions around the world have different interpretations of the legal status of Bitcoin, which has led to inconsistent regulation. Bitcoin's anonymity and global circulation characteristics have also raised concerns about money laundering, fraud and market manipulation, all of which require regulators to develop new regulatory strategies.  

Second, Bitcoin's attributes as data do not reduce its function as a currency. It not only carries economic value, but also has the attributes of a medium of exchange. However, its high price volatility has raised questions about the viability of Bitcoin as a stable medium of exchange. Economists and legal experts believe that Bitcoin lacks the stability and universality required to become a widely accepted currency. Further, some studies have viewed Bitcoin as a new type of data currency, emphasizing its record and transaction characteristics on the blockchain (Caliskan, 20204). Bitcoin and other cryptocurrencies can be defined as data currencies because they are built on blockchain technology and represent a new type of digital asset. The value and transactions of this asset exist and are conducted in the form of data. The concept of Bitcoin and Ethereum as data currencies emphasizes their record and transaction characteristics on the blockchain. The blockchain provides a decentralized ledger, and all transaction records are open, transparent and cannot be tampered with. This feature makes Bitcoin not only a currency, but also a string of data recorded on the blockchain, which has permanent data attributes. The introduction of smart contracts by Ethereum further expanded the scope of Bitcoin's application as a data currency. These automatically executed contracts also exist in the form of data. The emergence of Bitcoin marks a new stage in the monetization of data, in which data not only stores information, but also has the attributes of currency, such as value exchange and wealth storage. However, defining Bitcoin as a data currency presents both legal and regulatory challenges. On the one hand, the existing legal and regulatory systems need to adapt to this new type of digital asset; on the other hand, regulators need to develop new frameworks to deal with the characteristics of Bitcoin, including its trading, taxation and security issues. In addition, the popularization of Bitcoin also faces obstacles in terms of technical complexity and market acceptance. Ordinary users may find it difficult to understand how blockchain works, which limits the widespread acceptance of Bitcoin as a data currency. Although Bitcoin is accepted as a means of payment in some areas, its market acceptance is still limited worldwide.  

To summarize, the view of Bitcoin as data, while providing a new perspective, is subject to challenges and controversy in multiple areas, including legal, regulatory, technical, and economic aspects. These factors limit the full implementation of this view and point out necessary directions for future research and discussion.  

4.5 Summary 

In summary, in the in-depth discussion of the properties of Bitcoin (BTC) and Ethereum (ETH), we can clearly see their similarities with traditional commodities in terms of market behavior, substitutability, liquidity, and risk management. The study pointed out that the price dynamics of Bitcoin are affected by the market supply and demand relationship, showing speculative characteristics similar to traditional commodities. At the same time, Bitcoin's high substitutability and market liquidity further strengthen its attributes as a commodity. In addition, as a risk management tool, Bitcoin provides investors with an opportunity to diversify their portfolios, despite its high price volatility. However, classifying Bitcoin as a commodity also brings legal and regulatory challenges, especially considering the divergence of national regulations on cryptocurrencies. The regulatory framework of the Commodity Futures Trading Commission (CFTC) for Bitcoin provides a legal basis for the market, but it also triggers discussions on regulatory clarity. Regulators need to find a balance between promoting market innovation and protecting consumer rights, while global regulatory coordination is essential to address cross-border regulatory challenges. Taken together, the assessment of the attributes of Bitcoin and Ethereum as commodities reveals their potential and challenges in the modern financial system, calling for a clearer and more unified international regulatory environment.  

5. Potential impact of BTC and ETH being identified as commodities 

After clarifying the commodity attributes of BTC and ETH as cryptocurrencies, we need to further explore the potential impact of this characterization on tax laws, market supervision, and the entire cryptocurrency ecosystem. In the following section, this article will analyze the specific consequences of treating these two cryptocurrencies as commodities, including changes in tax treatment, market supervision, and the broad impact of these changes on investors, market participants, and the global financial regulatory landscape. 5.1 Tax Impact Classifying Bitcoin (BTC) and Ethereum (ETH) as commodities means that they will follow similar rules to other commodities such as stocks and bonds under tax law. According to the U.S. Internal Revenue Service (IRS), profits from cryptocurrency trading are considered capital gains or losses and are subject to capital gains tax. This may have the following impacts on investors: First, investors must report their cryptocurrency purchases and sales when filing their tax returns. This includes recording the specific dates of purchases and sales, transaction prices and other details to calculate capital gains or losses. US tax law stipulates that individuals who hold and transfer bitcoins are subject to individual tax on capital gains, and the tax rate varies depending on the length of time they hold them.  

Second, if investors hold cryptocurrencies for more than one year and then sell them, their profits are generally considered long-term capital gains and enjoy a relatively low tax rate; if they are held for less than one year, they are considered short-term capital gains and are taxed at the same rate as ordinary income. This means that long-term investors enjoy a relatively low tax rate.  

Finally, due to the complexity of cryptocurrency transactions, investors may need to invest more time and resources to ensure tax compliance. This may include hiring a tax advisor or using professional software to accurately record and report tax information.  

In addition, there are significant differences in the tax treatment of cryptocurrencies in different countries and regions, especially in cases where cryptocurrencies are regarded as commodities. For example, HMRC defines Bitcoin as personal property, which involves less tax obligations, while Japan has abolished consumption tax on Bitcoin and includes gains from Bitcoin transactions in other income for comprehensive taxation. This difference requires investors to understand and comply with the tax laws of their specific jurisdictions.  

As the cryptocurrency market continues to develop, tax laws and regulatory policies are also evolving. Ethereum's merger, i.e. the move from Proof of Work (PoW) to Proof of Stake (PoS) mechanism, may affect the tax treatment of ETH. Although there are currently no specific tax regulations or guidelines for staking rewards, these rewards may be considered taxable events in certain circumstances. This point reflects the complexity and changing regulatory environment of the tax treatment of ETH when it is treated as a commodity. Therefore, investors need to pay close attention to changes in tax laws and may need professional advice to ensure their tax compliance and adapt to the changing regulatory environment.  

5.2 Regulatory impact on the cryptocurrency market 

Regarding BTC and ETH as commodities has a multi-faceted regulatory impact on the cryptocurrency market. First, this gives the U.S. Commodity Futures Trading Commission (CFTC) broad regulatory power over the cryptocurrency market. As the main commodity market regulator, the CFTC will be responsible for regulating the cryptocurrency market to prevent market manipulation and fraud and ensure market fairness and transparency. Cryptocurrency exchanges may need to comply with CFTC regulations, including registering as a designated contract market (DCM) or swap execution facility (SEF) and meeting related capital, recordkeeping and risk management requirements. The CFTC's regulatory framework may encourage market participants to develop new financial products and services while ensuring that these innovations are carried out under the protection of regulation and reduce systemic risks. Under the Financial Innovation and Technology Act of the 21st Century (FIT-21 Act), the CFTC will serve as the primary regulator of the cryptocurrency industry, while the SEC's jurisdiction will be relatively weakened. After the bill is passed, the CFTC will have more power and funds to oversee the cryptocurrency spot market and "digital commodities", especially Bitcoin. In addition, the bill also creates a tailored disclosure and registration system for digital asset companies, which may encourage market participants to develop new financial products and services while ensuring that these innovations are carried out under the protection of regulation and reduce systemic risks.  

However, the global nature of cryptocurrencies also brings challenges to cross-border regulatory coordination. Commodity classification in the United States may influence regulatory policies in other countries, but it may also lead to regulatory arbitrage and inconsistency. In addition, the cryptocurrency market still faces regulatory uncertainty, partly due to differences among regulators on the definition and classification of cryptocurrencies.  

Regulatory clarity can stimulate innovation because companies can innovate within a clear framework of rules, driving the development of new products and services. But there is a delicate balance between regulation and over-regulation. If regulation is too strict, it may stifle innovation and cause companies to flee to jurisdictions that are more friendly to cryptocurrencies.  

To sum up, the characterization of BTC and ETH as commodities has far-reaching implications for the regulation of the cryptocurrency market, involving the power allocation of regulators, the compliance requirements of market participants, and the balance between innovation and regulation. With the introduction and passage of relevant bills, the regulatory framework of the cryptocurrency market is gradually taking shape, which will have an important impact on market operations and innovation. 5.3 Impact on Financial Derivatives Trading The legal characterization of cryptocurrencies is a key issue in the field of financial regulation. It not only determines the basic trading methods of cryptocurrencies and the compliance obligations of market participants, but also has a profound impact on the development and innovation of the financial derivatives market. The derivatives market relies on a clear legal framework for the underlying assets to ensure transaction transparency, risk management and market efficiency. Therefore, the classification of cryptocurrencies as commodities or securities will directly affect the trading rules, regulatory requirements and strategies of market participants for their derivatives. This characterization may also affect investor confidence and participation in the derivatives market, and thus the stability and growth potential of the entire financial market. If cryptocurrencies are classified as commodities, they can become the underlying assets of derivatives such as futures contracts, options, swaps, etc. In the United States, the Commodity Futures Trading Commission (CFTC) regulates the commodity derivatives market to ensure transparency and fairness in transactions and prevent market manipulation and fraud. Among them, a futures contract is a standardized derivative that allows buyers and sellers to agree to trade a specific amount of an underlying asset at a fixed price on a specific date in the future. These contracts are traded on regulated exchanges and are also regulated by regulators such as the CFTC. Futures contracts allow market participants to speculate on future prices or hedge risks. For example, Bitcoin futures contracts allow investors to buy and sell Bitcoin at a predetermined price on a future date, which helps manage the risk of price fluctuations. In addition, commodity derivatives markets may also include other complex financial instruments such as contracts for difference and credit default swaps. It can be seen that if cryptocurrencies are identified as commodities, the market may see more futures and options products based on cryptocurrencies. If they are identified as securities, the development of their derivatives may be restricted, because securities derivatives usually do not involve futures contracts, but only include stock options, stock index futures, etc., that is, investors speculate on the future price of the underlying assets or manage risks. Cryptocurrency derivatives transactions understood as securities will be regulated by the SEC, which may restrict certain types of financial innovation.  

Legal characterization provides clear regulatory guidance for cryptocurrency derivatives trading, helping market participants understand compliance requirements and reduce legal risks. The clarity of the regulatory framework also helps promote financial innovation, as market participants can develop new financial products and services in a clear legal environment. The global nature of cryptocurrencies also requires regulators to coordinate at the international level to ensure global consistency in the derivatives market and effective regulation.  

In summary, the legal characterization of cryptocurrencies has a far-reaching impact on financial derivatives trading, including the feasibility of trading, the regulatory framework, the behavior of market participants, and the stability of global financial markets. As the cryptocurrency market develops, regulators need to continuously evaluate and adjust their regulatory strategies to adapt to the unique attributes and market behavior of this emerging asset class.  

6. Conclusion 

The decision in CFTC v. Ikkurty provides a new perspective on the legal status of cryptocurrencies and an important reference for future legal practices and regulatory policies. The decision in CFTC v. Ikkurty strengthens the position of US courts on the legal status of cryptocurrencies and clarifies the legal status of Bitcoin (BTC) and Ethereum (ETH) as commodities. This ruling is not only binding on the parties in a specific case, but also provides legal support for the regulatory framework of the entire cryptocurrency market, and has a demonstrative effect on global cryptocurrency regulation.  

Through the analysis of relevant legal cases, we believe that BTC and ETH, as decentralized digital assets, have commodity attributes. Their trading characteristics in the market meet the definition of commodities in the Commodity Exchange Act (CEA) and should be regulated by the CFTC. However, their currency attributes and securities attributes are still controversial, requiring further legal clarification and regulatory guidance.  

U.S. courts and regulators are gradually providing a clearer legal framework for the cryptocurrency market. The ruling of CFTC v. Ikkurty and the passage of the Financial Innovation and Technology Act of the 21st Century (FIT-21 Act) provide a new legal basis for the regulation of cryptocurrencies, which is expected to unify the regulatory responsibilities of the SEC and CFTC and provide a clearer legal environment for the innovation and trading of digital assets. At the same time, it is also constantly improving the tax policy system for crypto assets and strengthening the tax collection and management of crypto assets. For example, the Infrastructure Investment and Jobs Act (IIJA) requires crypto asset holders to comply with tax reporting requirements, and imposes strict management on crypto asset trading platforms, requiring the reporting of user information, and implementing KYC and AML protocols. The characterization of BTC and ETH as commodities has far-reaching implications for market participants, financial innovation, and the global financial regulatory landscape. Regulatory clarity can stimulate innovation and promote the development of new products and services. However, a balance needs to be found between regulation and over-regulation to avoid stifling innovation and causing businesses to flee to jurisdictions that are more friendly to cryptocurrencies.  

As the cryptocurrency market continues to develop, relevant laws and regulations will need to be continuously updated and improved in the future to meet the special needs of this emerging field. It is recommended that regulators strengthen international cooperation and formulate global unified regulatory standards while paying attention to protecting consumer rights and market integrity. In addition, regulators and legislatures are also required to pay more attention and provide clear guidance on issues such as the tax treatment of cryptocurrencies and cross-border regulatory coordination.

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