Regulators Struggle: Currency or Commodity?

Following the bankruptcy of Mt.Gox, Japan is now about to clarify their view on Bitcoin. The Japanese government doesn’t consider Bitcoin a currency, and this is unlikely to change. But this doesn’t automatically make Bitcoin a commodity either. There are, however, plans to treat Bitcoin as gold and tax it as such. On the other hand, Britain’s tax authority just scrapped plans to tax the virtual currency.  This is just one example of how regulators struggle with cryptocurrencies and their definition. A key question herein is whether they should be treated as currencies or commodities.

Global debate

The discussion isn’t just limited to these countries, there is much debate on cryptocurrencies around the globe. A U.S. Senator suggested a complete ban of Bitcoin, following similar actions from Russia and China. Even though California recently declared cryptocurrencies to be “Lawful Money.” In the meanwhile, the European Banking Authority (EBA) announced it’s creating a taskforce to “advise it on whether virtual currencies, such as Bitcoin and Dogecoin, should be regulated.”

Differences in cryptocurrencies

What makes the matter even more complicated is the different set up and resulting behavior of various crytpocurrencies. Virtual currencies such as Bitcoin and most others are set up with deflationary pressures, causing it to behave like gold. Once Bitcoin reaches the hard cap of 21 million coins in 2014, the amount of coins in circulation will only decrease due to lost coins (eg. lost passwords, computer failures). This will lead to an increase in the perceived real value of the virtual currency over time. Of course, this is not the only reason why Japan is considering treating Bitcoin as gold. As in Finland, Bitcoin fails the “Money Test” because there is no issuer responsible for its operation. A key element of all cryptocurrencies is that they are “decentralized and not issued by government, they are supposedly free from interference and manipulation.”

Contrary to Bitcoin, coins such as Dogecoin experience a perpetual predetermined amount of inflation. In the case of Dogecoin an annual amount of about 5 billion coins will be added after reaching the initial 100 billion coins. Such an expanding supply encourages transactions and makes it feel more like fiat money. It adds the flexibility that both gold and Bitcoin lack. But in the end, it has no issuer reponsible for its operation either. Yet, given the previous perhaps there should be a distinction between crypto-currencies and crypto-commodities. After all, it would be a waste not to take advantage of the potential Economic impact that a real virtual currency could bring. A large part of this would be lost if cryptocurrencies were taxed as commodities.