A federal regulatory agency declared Thursday that Bitcoin and other virtual currencies are properly defined as commodities that must be regulated, a decision that is being welcomed by the fledgling digital currency industry.
The Commodity Futures Trading Commission announced Thursday that it had taken action against a company that had been acting as a Bitcoin options market without complying with federal rules.
The company, the San Francisco-based Coinflip, was effectively running a commodities exchange without complying with the Commodity Exchange Act, the CFTC said, defining Bitcoin as a commodity.
The CFTC is the federal agency tasked with overseeing derivatives, which are financial instruments that are based on the price of an underlying good. Originally, the agency oversaw futures contracts for grains and other commodities that businesses like farms and ranches used to hedge against bad weather and other circumstances, but its mandate has grown along with the use of derivatives throughout finance.
“It is no surprise that the CFTC would exercise its jurisdiction over futures and options trading of Bitcoin, as it does with any other commodity such as precious metals, foreign currency, oil or soybeans,” Perianne Boring, president of the Chamber of Digital Commerce, said in a statement to the Washington Examiner.
Noting that one company, LedgerX, was recently approved as a Bitcoin options trading platform, Boring said that “a well functioning and appropriately regulated futures and options market in Bitcoin is an important step in the overall development of the Bitcoin ecosystem and that the CFTC is the appropriate regulator for such activity.”
Bitcoin, a decentralized, peer-to-peer digital currency, has long been thought by many analysts and some of its supporters as the equivalent of a digital currency. The total number of bitcoins that can be produced is limited, making it like gold or other commodities that have been used as currency.
Houman Shadab, an expert on financial law and regulation at New York Law School, said that the CFTC treating Bitcoin as a commodity “is not surprising. It’s something parties have long already taken for granted.”
Any Bitcoin companies running derivatives exchanges will need to register with the CFTC or face regulatory action, Shadab said.
Because of the novelty of Bitcoin and other cryptocurrencies, firms working with them face an uneven and uncertain regulatory framework. Many of Bitcoin’s early proponents also viewed virtual currencies as a mechanism for avoiding the burdens of certain regulations on the financial system, making the regulatory process more sensitive.
CFTC director of enforcement Aitan Goelman said Thursday that 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 CFTC decision only sets policy for the CFTC, said Shadab, who is also a fellow at the Coin Center, a think tank involved in virtual currencies. “Every agency looks at Bitcoin from their own point of view,” he explaining, noting that the Internal Revenue Service treats it as property for the purposes of taxes, while the Treasury’s Financial Crimes Enforcement Network views it as a currency for the purposes of preventing money laundering.
