Bitcoin is a currency, right? Well, yes, it can be used to buy, sell, and price goods, just like the US dollar and the euro.
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commodity? Think of Bitcoin, which behaves like oil and gold and can be bought and sold in the spot market or through derivatives such as futures.
What about securities? In a sense, many cryptocurrencies. They are issued like stocks in the Initial Coin Offering (ICO) and are used to represent stocks in network projects.
This debate about what Bitcoin is may seem abstract and have little impact on this buoyant financial world, but it has attracted increasing interest from economists and lawyers who say the issue may Significant future impact.
The way Bitcoin and other digital currencies are defined may affect how they are regulated globally. In turn, the rules they follow can determine whether they have jumped from niche markets to mainstream assets.
So how will regulators treat them?
In the United States, federal regulators say they see elements of securities and commodities in digital assets such as Bitcoin, but, like most major economies, have not proposed a set of regulatory rules. However, the EU will outline a framework this year that may incorporate cryptocurrencies into existing regulations or create a whole new set of rules.
For market participants, how to regulate Bitcoin and its peers will have serious consequences.
Commodity markets operate with less regulatory oversight. On the other hand, securities are often subject to more stringent rules such as price transparency, transaction reporting and market abuse.
"When we complete the security process, we spend a lot of money and lawyers to make sure we comply with regulations," said Benjamin Tsai, president of Los Angeles investment manager Wave Financial.
"We are really like pin-ups."
Some of the crises of cryptocurrency identity lie in the fact that bitcoin was originally considered as a means of payment, but now rarely bears the characteristics of a dollar, euro or pound.
Due to its volatility, it has hardly been used as a value store, and its slow network speed and high transfer costs have prevented it from being used as a means of exchange.
The booming Bitcoin lending market is providing clues to its characteristics.
Bitcoin lending provides a credit line for cryptocurrency companies (such as payment processors or miners) who want to pay by using traditional currencies. In addition, traders who do not want to sell the bitcoin they hold also use it as collateral for cash for algorithmic or high-frequency trading.
For those who lend money, relatively high yields are an attractive proposition in the age of lowest interest rates.
Market participants and economists believe that key characteristics of the market, such as market-led price discovery and motivation to seek liquidity, are similar to commodity leasing.
"Bitcoin's commodity market (analog) is very suitable," said Deeksha Gupta, an assistant professor of finance at Carnegie Mellon University.
"One of the biggest similarities between the two is that they are also driven by people who want mobility."
As an opaque corner of the cryptocurrency space, the Bitcoin lending market has quietly grown, and the sector itself is notorious for its lack of transparency. Although there is not much data to measure the size of the loan market, it has been widely believed that it has expanded rapidly in the past year.
New York-based Genesis Capital, one of the largest lenders in the market, said its outstanding loans soared to about $ 545 million at the end of last year, compared to $ 100 million in the same period last year.
Genesis CEO Michael Moro said the implied interest rate (the price of borrowing bitcoin) in these markets is about 4-5%. On platforms where people borrow money with Bitcoin Cash, interest rates are as high as 8%.
The relationship between cryptocurrencies and securities mainly stems from their issuance and functions in the initial token offering or ICO, where they are used to raise traditional funds.
ICOs are usually held by companies seeking to raise funds for blockchain-related or other online projects. They raise funds by issuing digital coins so that holders can use the new system or software or share the profits generated.
For example, Switzerland-based Aragon, a decentralized organization (DAO) management platform, raised approximately $ 25 million in 2017, issued tokens, and gave voting rights to the way the system was developed.
Regulators may treat cryptocurrencies differently based on their specific characteristics, a method the UK took last year.
Some participants have stated that designating cryptocurrencies as securities-like financial instruments can be positive, while cumbersome oversight is balanced with the potential to allow funds to market cryptocurrencies to a wider range of investors.
Nic Niedermowwe, CEO of London-based cryptocurrency fund Prime Factor Capital, said:
"If they are categorized as financial instruments in some way, there will be a ripple effect, which will qualify them for retail funds."