Could cryptocurrencies be traded as commodities?

Investors weigh in on the potential costs and market impact of recategorizing digital currencies

By Ahmed Azzam | @3zzamous | 4 April 2023

Ethereum and stablecoins
  • Many argue that due to their limited supply and fungible nature, crypto tokens like Ether and other stablecoins are already traded on exchanges in a similar manner to commodity assets like XAU/USD

  • Those in opposition suggest that as digital currencies are not tangible assets, they do not hold inherent value in the same manner as traditional commodities

  • Reclassifying Ether and stablecoins as commodities will undoubtedly impact investors, potentially increasing both regulation and compliance costs

What’s the debate about?

Ethereum and stablecoins have become increasingly popular as investment assets, and lately there has been a debate about whether they should be considered as commodities.

Digital currencies like Ether are currently traded as cryptocurrency pairs, often against major currencies like USD. A commodity is a raw material or primary agricultural product that can be bought and sold, such as gold, oil, or wheat, and is also traded against USD on global financial exchanges.

The clash about the future of Ether and other stablecoins is ongoing between the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), and will determine which of the entities will oversee trading in future cryptocurrency markets.

How do Ethereum and commodity assets compare?

Ethereum and stablecoins are not physical commodities like gold or oil, but they are often compared to commodities due to their scarcity and function as a store of value.

Ethereum is a blockchain-based platform that allows developers to build decentralized applications using its network. The native currency of the Ethereum network is Ether (ETH), which is used to pay for transactions and incentivize miners to process those transactions.

Stablecoins are a type of cryptocurrency that are tied to a stable asset such as the US dollar or another fiat currency. The purpose of stablecoins is to provide a stable store of value and to reduce the volatility that is often associated with cryptocurrencies.

The main supporting arguments to classify Ethereum and stablecoins as commodities include that they have limited supply, they are fungible, and they are traded on exchanges. It’s also argued that Ethereum has a similar function as gold, because many investors view it as a hedging method to rally against inflation and market volatility.

Even though Ethereum and stablecoins have similar qualities and functions to physical commodities, there are many that would argue against this consolidated classification.

Opponents argue that Ether is not a tangible asset and does not share the inherent value of traditional commodities. In this sense, the value of Ether is based solely on market speculation and therefore does not serve a practical purpose beyond being a speculative asset.

In a similar fashion, Stablecoins are not seen as commodities because they are neither a raw material nor a primary agricultural product. The opponents have pushed this argument to express that stablecoins are not truly stable, are often subject to price fluctuations and the assets they are tied to also experience significant volatility.

If Bitcoin is a commodity, why not Ether?

The CFTC has previously classified Bitcoin as a commodity, which opened up opportunities for Bitcoin futures trading on commodity exchanges. If stablecoins became widely traded on commodity exchanges, they could also be classified as commodities.

Ether has several similar characteristics to Bitcoin that could classify it as a commodity.
Here are some examples:

  • Scarcity: Ether has a limited supply, with a hard cap of 18 million ETH per year. This limited supply could make Ether a scarce and valuable asset, similar to precious metals like gold and silver.
  • Utility: Ether has utility within the Ethereum ecosystem, as it is used to pay for transaction fees and computational resources on the network. This utility gives Ether an intrinsic value, like how oil holds value as a fuel source.
  • Decentralisation: Like Bitcoin, Ethereum is a decentralised network that is not controlled by any single entity. This decentralised nature could give Ether value as a hedge against centralized systems and government control.

The potential future impact on investors and the crypto market

If Ethereum and stablecoins are classified as commodities, they would also be subject to regulation by the CFTC in the United States. This would likely increase the level of oversight and transparency in the cryptocurrency market and many investors would view this as a positive development.

However, it could also lead to increased regulatory scrutiny and suppress the freedom of innovation in cryptocurrency’s DeFi market. It could also cause an increase in the cost of compliance for cryptocurrency exchanges and other market participants, which might be passed on to investors in the form of higher fees – such as when CFTC’s lawsuit against Sam Bank-Friedman (FTX) declared that digital assets such as Ether, Bitcoin and Tether were commodities.

Ultimately, the argument comes down to how one defines a commodity. While Ethereum and stablecoins do share some characteristics with traditional commodities, they also have unique features that set them apart. As the cryptocurrency markets continues to evolve, one thing that remains certain is that investors will keenly monitor to see how the implications of this debate will impact the broader cryptocurrency ecosystem.