Understanding the debate between securities and cryptocurrency commodities By CriptoFácil

2023-09-29 21:10:15

© Reuters. Understanding the Debate Between Cryptocurrency Securities and Commodities

CriptoFácil – stricter regulations on cryptocurrencies to maintain stability in financial markets and protect investors. As cryptocurrencies are a relatively new asset based on emerging blockchain technology, it is a fertile scenario for people to invest. Still, this novelty is also the reason why cryptocurrencies are under debate regarding the classification of these assets as securities or commodities.

Determining which financial instrument cryptocurrencies fall under has implications for how and where they can be sold, who regulates them, and how issues can be addressed. This controversy may become more critical and evident now that Brazil is tightening laws in relation to these digital assets, such as with the enactment of Law 14,478/22. To better understand the debate, here’s what you need to know about securities, commodities and cryptocurrencies:

What are securities?

Securities typically represent ownership or investment in an underlying asset, company or project. Stocks, bonds and derivatives are considered securities. The value of a security reflects the changing performance of the entity or company, therefore its value is not intrinsic. Certain digital assets, such as security tokens or tokenized assets, can be classified as securities that represent ownership in a company or investment vehicle. However, this does not apply to all cryptocurrencies.

What are commodities?

Commodities are physical goods or raw materials that can be bought, sold or traded in the commodities market. This can include precious metals, energy and agricultural products. When trading commodities, you can speculate on the price of highly volatile instruments such as gold and oil without having to buy the assets themselves, regardless of whether the cost of the commodity is rising or falling. Because the commodities market can be volatile, commodity brokers help protect commodities and investors by keeping spreads tight, low and stable. Likewise, the cryptocurrency market is volatile, but changes in value depend on investor sentiment.

Why is classification important?

If cryptocurrencies are classified as securities or commodities, this could change how they are regulated and what rules cover their investments or trades. If cryptocurrencies are considered securities, they will be subject to more regulation and issuers, with exchanges needing licenses from the regulatory institutions involved. Meanwhile, the argument for cryptocurrencies as commodities is that some cryptocurrencies, such as , can be considered a “store of value” due to their finite supply. It is also argued that they are interchangeable on exchanges and that each currency has an identical value as typical commodities.

What is being done?

There is still a lot of ambiguity about the classification of cryptocurrencies, but the institutions involved are already making plans to eliminate the confusion. The Cryptocurrency Market Framework Project (DAMS) is an important project that will define the future of cryptocurrencies. It aims to establish a framework for regulatory authorities to decide whether specific cryptocurrencies are securities or commodities. If an asset is truly decentralized, it can avoid being classified as a security. This means that no centralized, coordinated group affects the value of the token. However, a token would have to undergo certification with the Securities and Exchange Commission (SEC) to prove its decentralization before being classified as a commodity under the proposed project.

While a consensus on the classification of cryptocurrencies as a whole has not yet been reached, steps are being taken to eliminate ambiguity and confusion, allowing digital assets to be regulated fairly. Making cryptocurrency developers, issuers, and exchanges follow necessary procedures will ensure that they are categorized correctly and become easier for regulators to monitor and manage. Cryptocurrencies are constantly evolving, and regulations may need to adapt to keep up.

Notice: This article has the functionality exclusively informative, does not constitute investment advice or an offer to invest. O CriptoFácil is not responsible for any content, products or services mentioned in this article.

By CriptoFácil