Is it a currency? A commodity? Bitcoin has an identity crisis

So bitcoin’s a currency, right? Well, yes, it can be used to buy, sell and price goods much like dollars and euros. A commodity? Come to think of it, it does behave a lot like oil and gold – it can be bought and sold in cash markets or via derivatives such as futures. What about a security? Many cryptocurrencies are, in a way. They’re issued like stocks in “initial coin offerings” and used to represent shares in online projects.

The debate may appear abstract, with little bearing on the hard-boiled world of finance, but it is attracting increasing interest from economists and lawyers who say it could have major implications for the future of cryptocurrencies. How bitcoin and other digital coins are defined could shape how they are regulated around the world. In turn, the rules they are subject to could determine whether they make the leap from a niche to a mainstream asset.

So how will regulators treat them? In the United States, federal watchdogs say they see elements of both securities and commodities, but like most major economies have not come up with a set of rules. The European Union, however, will outline a framework this year, which could see crypto wedged into existing regulations, or a whole new set of rules created. For market players, how bitcoin and its kin are regulated will have serious ramifications.

Some of the cryptocurrency identity crisis lies in the fact that bitcoin was originally conceived as a means of payment, but now rarely bears the hallmarks of dollars, euros or pounds. It’s of little use as a store of value because of its volatility, and is hampered as a means of exchange by its slow network and high transfer costs. A booming bitcoin lending market is offering clues to its character.

The bitcoin lending market has grown quietly as an opaque corner of the cryptocurrency sector, which itself is notorious for its lack of transparency. While there’s little data with which to gauge the size of the lending market, it is widely seen to have expanded rapidly over the past year.

New York-based Genesis Capital, one of the biggest lenders in the market, said its outstanding loans soared late last year to around $545 million compared with $100 million a year earlier. Implied interest rates in these markets – the price of borrowing bitcoin – stand at around 4-5%, Genesis CEO Michael Moro said. On platforms for people to lend cash against bitcoin, rates are as high as 8%.

Cryptocurrencies’ kinship to securities arises largely from their issuance and function in initial coin offerings, or ICOs, where they are used to raise traditional money. ICOs are often held by companies seeking to raise funds for blockchain-related or other online projects. They raise capital by issuing digital coins, which grant holders access to the new system or software or a share in profits generated.

For instance, Switzerland-based Aragon – a management platform for decentralised organizations – raised about $25 million in 2017 issuing tokens that gave voting rights on how the system is developed. Regulators may choose to treat different cryptocurrencies differently, depending on their specific characteristics, an approach taken by Britain last year. Some players say any designation of cryptocurrencies as financial instruments akin to securities may be positive, with burdensome oversight balanced by the potential to allow funds to market cryptocurrencies to a wider pool of investors.

Is it a currency? A commodity? Bitcoin has an identity crisis, Reuters, Mar 3