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Confusion reigns: are cryptocurrencies commodities or securities?

Jackson, Olly.  ; London (Mar 14, 2018).

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The decision to classify digital money as commodities is pushing exchanges closer to convention

A US district court decision that cryptocurrencies can be regulated as commodities has left exchanges in no doubt that they cannot continue to exist separately from conventional investment platforms. Importantly, it’s pushed some digital currencies officially into the Commodity Futures Trading Commission’s (CFTC) jurisdiction.

The case gave the green light to the CFTC that it could go forward and investigate Coin Drop Markets and New York resident Patrick McDonnell on fraud charges involving the trade of virtual currencies bitcoin and litecoin. The CFTC said that the company fraudulently offered customers cryptocurrency trading advice because they paid for advice they never received. The regulator also said the company was not registered with them. Investors will not need to do anything differently as a result of the judgment but increasing regulatory oversight could see a rise in background checks from exchanges and retail investors potentially excluded from initial coin offerings (ICOs) in the long term.

Cryptocurrencies can be divided into two groups. Digital tokens, which have their own blockchain and a new underlying technology attached to them, are considered securities under US rules. The Securities and Exchange Commission (SEC) said that these fund certain projects and are not just used exclusively as a method of payment. Examples of these include ether, on its own ethereum blockchain, and ripple. Virtual currencies - or those sometimes called alt coins - including bitcoin and those that do not have their own underlying technology, are deemed to be commodities and therefore within the CFTC’s remit to investigate for fraud and manipulation.

At the end of last year, US exchanges Cboe and CME launched bitcoin derivatives, which are regulated by the CFTC. This was the hook the regulator used to argue that it should...