When is cryptocurrency regulated as a commodity rather than as a security? We ask Christopher Giancarlo, the former head of the Commodity Futures Trading Commission ("CFTC"), the nation's commodities regulator to explain. According to Giancarlo, cryptocurrencies are not all created equally. The former CFTC chairman explains that all crypto is essentially computer code. As a result, when determining when and whether a cryptocurrency is a commodity, the government must examine what function they serve.
Giancarlo, who was at the CFTC when they made the initial determination to treat Bitcoin as a commodity, explains the reasoning behind the decision. He describes the calculations that go into determining whether a crypto is a commodity. Like traditional commodities, such as raw materials or primary agricultural products, Bitcoin and Ethereum are mined (or "staked" in the case of Ethereum) around the world by multiple disparate parties. Also, as with traditional commodities, crypto commodities must be fungible. One Bitcoin, for example, is worth no more or less than another Bitcoin. A cryptocurrency's classification as a commodity (rather than a security or something else entirely) determines which organization, if any, regulates the crypto and which rules or principles must be followed. As of the date of publication, the CFTC or its leadership have labeled Bitcoin and Ethereum as commodities.
Christopher Giancarlo served as the 13th Chairman of the United States Commodity Futures Trading Commission. He is Senior Counsel to the international law firm, Willkie Farr & Gallagher.
CFTC – The Commodity Futures Trading Commission
The Coinflip Case – In the Matter of Coinflip, Inc., d/b/a Derivabit, and Francisco Riordan (2015)
Regulating Cryptocurrency – a 1hr interview with former CFTC Chairman Christopher Giancarlo
An interview with former chairman of the Commodity Futures Trading Commission (“CFTC”), Christopher GIancarlo.
Joel Cohen (host): What is cryptocurrency? What are your thoughts, when does a cryptocurrency become a commodity?
When is a crypto a commodity?
Christopher Giancarlo: That's a great question. The way I think about it is less from the point of view of a temporal transition from previous to being a commodity to becoming a commodity. I think of it more as what function does a crypto serve and that function, does it serve as a commodity? So what do we normally, think of Commodities.. Think about oil or wheat or corn or minerals. There is no individual issue where they may be mined or drawn from the earth or formed but rather, they're formed by many at many different points by many different enterprises and then put into circulation in the public as opposed to being the exclusive effort of a group of enterprising associated persons as you might with a corporation. And they're fungible, one is the same as all the others. So the analysis that we did at the CFTC, which is the institution that our Congress, with public support, set up to oversee commodity markets, so the analysis that we did for Bitcoin and Ethereum is, how are they more a commodity-like instrument, like an interest rate or a gold mineral rather than a security from a corporate issuer, an enterprise issuer. So it's, how does this algorithm function?
Bitcoin and Ethereum Are Regulated as Commodities
Christopher Giancarlo: So what Bitcoin is, is inherently a protocol that allows the recording of value – what Ethereum is. Now, can some of those protocols also be used for the purpose of capital formation? Yes, they can, and if so there is a role for the SEC because it's the agency that Congress set up to oversee markets for capital formation. Can some of those protocols be used to establish a commodity-like instrument? Yes, in the case of Bitcoin, in which case there's a role for the CFTC.
Host: So because with cryptocurrencies like Bitcoin or Ethereum, one is treated equally to another. The way that they're made doesn't make their value different nor does the person who mined it make the value different. Are those all factors that went into the analysis?
Christopher Giancarlo: Yes, yes, and I think the analysis has shown itself to be sound. I think there are thousands if not hundreds of thousands of either individual actors or collective actors producing this commodity which is very similar to what happens in most of the mineral and other commodities that are traditionally determined to be so. As opposed to say a security, which is issued by a single enterprise in order to fund their enterprise.
Host: I believe and correct me if I'm wrong you played a pivotal role in designating some cryptocurrencies like Bitcoin a commodity. Is that right, and if so what led to that decision?
The Establishment of Bitcoin as a Commodity
Christopher Giancarlo: It is right. I joined the CFTC in June of 2014, and with my support, Chairman Massad, the chairman of the agency at the time, testified before Congress in December of 2014 positing that Bitcoin was a commodity and therefore subject to CFDC jurisdiction. In 2015, again, with my support the CFTC in a case called the Coinflip case, declared Bitcoin, as a matter of law, to be a commodity and subject to the CFTC. And then under my leadership as chairman of the agency in 2015, we greenlighted the first U.S regulated market for Bitcoin Futures under the exclusive jurisdiction of the CFTC. So I played a role in the designation of that asset and also did some of the early work that eventually led to Ethereum being determined to be a commodity and therefore under CFTC jurisdiction. But I've never moved away from my fundamental position that what all crypto is, is algorithms. They have different functions and if they function in a way that is similar to a commodity, then they're subject to CFTC jurisdiction.