In a primer for investors, the Commodity Futures Trading Commission(CTFC) defined what a virtual currency is. While the CFTC explicitly refused to recognize this as a position paper, the primer points to where the United States government may take bitcoin regulation in the future.
The CFTC was formed in 1974 to regulate the commodity futures markets in the United States. In the aftermath of the 2008 financial crisis, the commission was strengthened by President Obama to also regulate the swaps market. With a growing number of altcoin derivatives being sold, the posture of CFTC will increasingly define the legality of altcoin use in America and in America-like economies.
This article details the major takeaways of the primer.
Takeaway # 1: Bitcoin is a convertible virtual currency.
The CFTC took a cue from the IRS, which classified bitcoin and other altcoins as virtual currencies and as money, but not as legal tender. This type of device can be converted or exchanged – via purchase or direct trade – to fiat or national currencies, to other altcoins or virtual currencies, or to other commodities. The CFTC recognizes that altcoins based on permissioned or private blockchains to be more trustworthy than public blockchains.
Per the IRS’s definition, altcoins are commodities, or tradeable assets that have no lawful equivalency as legal tender – that is, it cannot be used to pay public or governmental debts – but are tradeable and have monetary worth. This means that altcoins are taxable and subject to capital gains regulations.
Takeaway # 2: Bitcoin are semi-anonymous stores of value.
Bitcoin is “pseudonymous,” meaning that transactions are identified by a public key, instead of personally identifiable information. While this key can be traced back to an individual, this identification is not immediately obtainable. This key is part of the security mechanism that assures that altcoins cannot be double-spent or transferred without consent.
Bitcoin is also decentralized, meaning there is no centralized authority for coin creation, distribution, or verification. Blockchains are distributed ledgers, shared databases held by the blockchain’s miners. Miners are computers that verify blockchain transaction in exchange for a chance of a coin-based reward. Blockchains are trustless in the sense that strangers can verify other strangers’ transaction by verifying their proof-of-work. Additionally, the use of public and private keys mean that bitcoins can be transferred peer-to-peer.
Finite supplies mean that altcoins are non-yielding assets. They do not pay any dividends or interest but, based on demand, hold value that can be divided and transferred with ownership of the coin.
Takeaway # 3: Virtual currencies are volatile.
Virtual currency trading, due to their lack of supply and their very nature, are highly prone to speculation and price volatility.
Takeaway # 4: Bitcoin may be better for international money transfers than existing methods.
Bitcoin’s peer-to-peer decentralized nature may make it easier to transfer large sums of money across borders than navigating a complicated international network of currency transmitters. Especially for areas with limited financial infrastructure, blockchain technology can be a safer, cheaper, faster mode of transmission.
Takeaway # 5: Altcoin acceptance may vary.
Many public blockchain systems use altcoins to serve as fee payment and to power their transactions. Likewise, some merchants and vendors use altcoins as a possible payment option.
Takeaway # 6: Users must be aware of prohibited activities.
Since altcoins are treated as money, there may be a requirement to register as a money transmitter for the brokering of altcoin sales to or from fiat currency. Failure to adhere to money transmitter regulation may expose investors and businesses to legal liability.
Takeaway # 7: The SEC is taking notice of ICOs and altcoins.
The SEC’s commissioners have indicated that they see most altcoins and ICOs as being securities and are in favor of treating them as such. While no rules have been set yet to blanket classify all ICOs as securities, the notion that ICOs are “decentralized autonomous organizations” or virtual organizations where investors invest altcoins for a future share of the earnings suggests that ICOs are indeed securities.
Takeaway # 8: Due diligence is of paramount importance.
The CTFC suggests investing in altcoins with the attitude you can lose your entire investment. High volatility, the potential for fraud, an unregulated ecosystem, and the potential to overcharge – particularly from platforms that sell altcoins from their own held stash – make it essential for investors to use due diligence.