Regulators have “massively” misunderstood cryptocurrencies and urgently need to alter course, an expert in international banking law has said. Tokens shouldn’t be treated as money, nor should Bitcoin (BTC) have futures contracts.
Professor Emilios Avgouleas, who is loosely affiliated with IOHK, the lead developer for the Cardano (ADA) project, holds the Chair in International Banking Law and Finance at the University of Edinburgh. He fears that unless the sector gets serious about accurately defining cryptocurrencies, regulators could destroy it.
Speaking to Crypto Briefing earlier this month, Avgouleas explained that regulators have failed in trying to use existing legal frameworks to govern utility tokens. Although he believes some tokens could legitimately be classed as securities, none – and especially Bitcoin – could meet the current legal definition for a commodity.
“A commodity needs to be a tangible entity”, argued Avgouleas. “Bitcoin, for instance, doesn’t have any physical representation and therefore isn’t a commodity. The idea that you can have a Bitcoin future is a massive misunderstanding.”
“To my mind, they [CME and Cboe] were as wrong as it gets”, he added.
Bitcoin legal status
It’s been just over a year since the CME Group launched their own BTC futures contracts. On the news, bitcoin swung up to its highest ever valuation, at just below $20,000 per coin. At today’s price of roughly $4,200, that represents an 80% drop in value in just over a year.
Futures contracts are essentially agreements made to exchange a commodity – including bitcoin – at a certain time and at a certain price. Originally designed as a means to create artificially stable prices in agriculture, they are now used by speculators to effectively place bets on what an asset’s future value will be.
A U.S. judge ruled that bitcoin could be regulated as a commodity in early March. This came three months after the Cboe – another derivatives platform – introduced its first bitcoin futures. Both CME and Cboe issue futures contracts for other commodities that have a physical entity, including wheat, oil and precious metals such as gold and silver.
The regulation debate in America has centered on whether cryptocurrencies, especially those sold in the ICO boom last year, should be classed as securities. The Securities and Exchange Commission (SEC) warned projects midway through last year that it would treat all new ICOs as securities sales. In November it issued its first order for two projects, Airfox and Paragon, to reimburse investors.
Things are likely to become even more complicated however as, at the end of last week, two Congressmen unveiled a new bill which outlined plans to exclude cryptocurrencies from a securities classification.
Is Bitcoin a commodity?
People buy utility tokens like Ether (ETH) or ADA, because they offer access to specific services that would otherwise remain unavailable; like paying ‘gas’ fees for decentralized applications. They are not bought on the understanding of future returns in a company or project. Avgouleas believes that Bitcoin shares the same characteristics as these utility tokens.
Therefore in his view, they should not be classed as commodities. Ignoring a key aspect of what makes a commodity – a tangible object – not only warps legal terminology, it adds extra regulatory uncertainty which makes it harder for cryptocurrencies to be used in the mainstream. “Crypto needs to operate without friction,” Avgouleas said. “But this creates friction, and it could easily kill the technology.”
Cryptocurrencies have unique characteristics that make them difficult to classify as security or a commodity. Avgouleas argues regulators need to recognize this; utility tokens need to become their own unique asset class with its own legal framework; providing institutional investors with the certainty needed to participate.
He said: “Those who wish, for legitimate reasons, to invest in that asset class [cryptocurrencies] can do so with the knowledge that it’s a special type of financial-like product with its own unique benefits and risks”.
The author is invested in digital assets, including BTC and ETH which are mentioned in this article.