Currency is defined as being “generally accepted or in use.” For bitcoin, "use" is a key sticking point. Bitcoin evangelists celebrate any and all news of increased usage of bitcoin as a currency.
Pizzerias, car dealerships, start-ups, no matter how small, when a business begins accepting bitcoin as a currency, it's news on the bitcoin forums. To cryptocurrency proponents, widespread usage – not speculation – is necessary for bitcoin’s survival. After all, even the most ardently anti-traditional economic bitcoiners have to admit that without some kind of real world use, bitcoin is not money, but a speculative ploy prone to bubbles and catastrophic pops.
This is also why in the bitcoin subculture, excessive talk about bitcoin’s wild valuation swings is frowned upon. Because, the thinking goes, the greed of early adopters who wish to see and endlessly rising price makes them look like they're into bitcoin for the quick buck, not to mention rapid deflation is antithetical to the purpose of currency.
Only the most limber rhetorical gymnast could argue that people would ever want to actually spend a currency that increases in value exponentially. Currencies have to have a stable price, or they will function more like a commodity. A thing a lot of people trade – but nobody “spends.”
In the US, bitcoin is becoming more popular. But it's becoming more popularly viewed as a commodity. And with it, its existence in a legal "grey" area free from regulation and taxes is put into jeopardy.
Of the bitcoin evangelists, probably the best known are the Winklevoss twins of Facebook Inc. (FB) fame. The Winklevoss twins understand the need for bitcoin to escape its volatile past to attract mainstream investment. The Winklevii also have an ideological (and vested) interest in the success of bitcoin, and have long argued for the necessity of sophisticated economic instruments to attract retail investors to the cryptocurrency.
To both help stabilize bitcoin and attract additional capital, the Winklevii have put forward the creation of two separate entities: a bitcoin ETF and an unfortunately-named price tracking index called the Winkdex. Should these measures be approved by the SEC, they would signal an important step forward in the legitimacy of bitcoin as a tradable commodity.
Referring to bitcoin as a “commodity” and not a currency is no intentional slight; it’s how the Winklevii themselves refer to bitcoin.
Commodity vs. Currency
To wit, from the Winklevii SEC filing proposing the formation of a bitcoin ETF (originally submitted in July 2013):
The (Winklevoss) Trust holds “Bitcoins,” a digital commodity based on an open source cryptographic protocol existing on the online (…)
(I)t is the Registrant’s view that Bitcoins are in the nature of other intangible investments such as commodity futures.
Half of the Winklevii, Cameron Winklevoss, splits the difference and calls bitcoin “commodity money,” which is interesting as commodities have a traditional use outside of value exchange. Oil has a use, wheat has a use, even gold, that most historically popular money-like commodity, can be made into jewelry, used in electronics, or even put on someone’s teeth.
So why do the Winklevii call bitcoin, which has no ostensible "use," a commodity? It’s out of necessity for its evolution in the marketplace. It’s necessary for forming things like an ETF to increase bitcoin’s liquidity. But it also could undermine what makes bitcoin special: its existence in legal limbo.
Avoiding the Pesky Money-Laundering Charges
Regualtors in the state of New York has already made clear they’re cracking down on virtual “currency.” Outside of the US, several countries have declared bitcoin fails the “money test,” and should thus be classified as a commodity, notably China, Norway, and Finland.
Countries tend to view the government-backed fiat currency as the only true “money” allowed within its borders. This is certainly the case in autocratic regimes such as Russia. However, commodities are a different story.
This isn’t just a case of semantics. Classification as a commodity is what allowed bitcoin to not be outright banned in China. Chinese officials said as much in an official statement released in December that said bitcoin is a “special virtual commodity, and does not have the same legal status as a currency,” further clarifying that Chinese denizens could participate in the bitcoin market “provided they assume the risk themselves.”
That "assuming risk themselves" part is an important point. That risk is what has scared traditional commodity traders away from bitcoin. As the current bank run on exchange Mt. Gox has proven, a true free market in bitcoin can leave depositors victimized by a bank failure with no bitcoins and no recourse. But the move towards clearly defining bitcoin‘s place in the market also risks putting bitcoin under an ever-increasing amount of government oversight, like the Commodity Futures Trading Commission (CFTC).
Making Bitcoin a Safe Commodity
Let’s return to the Winklevii and the bitcoin market in America. While certainly not as hardline as the Chinese, America is taking much a similar view of bitcoin: it is a commodity. A special one, to be sure, but a commodity nonetheless.
Classifications won’t stop how bitcoin is used, but it could greatly affect how bitcoin is traded. An interesting take on it is Sweden, who classify bitcoin as an “electronic art.” Without getting into a Continental philosophy as to the post-Capitalist difference between art and commerce, in the eyes of the government, art is a commodity.
So what does this all mean for bitcoin, when potential retail traders and governments and Winklevii all view bitcoin as a commodity? One of bitcoin's biggest allures is the promise of quick, free value transactions between individuals. However, under the purview of the CDFC, bitcoin will come under increased governmental, and investor, scrutiny. People can, and will, still send bitcoins to each other's wallets, free of charge. But with investors heavily staked in bitcoin, a lot more people will be paying attention, in the private and public sector.
In short, the Winklevoss’ index and ETF is a catch-22. When and if bitcoin is traded like wheat or gold, its price fluctuations will smooth out considerably, and trading volume will increase. The liquidity will make it more attractive to use as a currency.
At the same time, bitcoin’s Wild West legal status will be largely affected when and if bitcoin is officially defined as a commodity. Bitcoin is, to be sure, a fascinating experiment, one that could continue to resist being classified strictly as a commodity or a currency. But if bitcoin is to make its debut on the main investor stage, and have official indexes, ETFs, futures trading and the like, it’s going to attract regulators. And they don’t tend to think in grey.