Cryptocurrencies and Blockchain-based Assets: A Novel Asset Class
The financial world has been profoundly transformed by the advent of cryptocurrencies and blockchain-based assets. These technological innovations present a new paradigm, driving regulators and legislators worldwide to grapple with their classification. While some may argue that these digital assets fit within the existing definitions of securities or commodities, this essay asserts that cryptocurrencies and blockchain-based assets constitute a distinct and novel class of assets.
Understanding Cryptocurrencies and Blockchain-Based Assets
To establish our assertion, we must first understand what cryptocurrencies and blockchain-based assets are. Cryptocurrencies are digital or virtual currencies that use cryptography for security, with Bitcoin as the most well-known example. Blockchain-based assets, on the other hand, encompass a broader range of digital tokens and coins used for various purposes like utility tokens, governance tokens, or non-fungible tokens (NFTs), each with distinct properties and functions.
Argument Against Classification as Securities
Securities are financial instruments that represent an ownership position in a publicly-traded corporation (stock), a creditor relationship with a governmental body or a corporation (bond), or rights to ownership as represented by an option. The critical attribute of securities is that they represent an investment contract where investors expect to profit primarily from others’ efforts.
Applying this definition, cryptocurrencies and blockchain-based assets fall short. Firstly, these assets typically do not represent ownership of an enterprise nor the right to share in its profits, as stocks do. Secondly, they do not embody a debt obligation, as bonds do. Bitcoin, for instance, does not confer any ownership rights nor does it represent a debt obligation. The same applies to utility tokens that grant access to a product or service but do not confer ownership rights or represent a debt.
Additionally, the “efforts of others” criterion does not squarely fit. Cryptocurrency prices can be influenced by the efforts of developers or miners, but these entities do not owe any obligation to token holders, unlike a corporation to its shareholders. Therefore, it can be argued that cryptocurrencies and blockchain-based assets are not securities.
Argument Against Classification as Commodities
Commodities are basic goods used in commerce that are interchangeable with other goods of the same type. They are often the building blocks for more complex goods and services. Commodities include agricultural products like wheat and corn, energy resources like oil and gas, metals like gold and silver, and even financial instruments.
At first glance, it may appear that cryptocurrencies, such as Bitcoin, could be classified as commodities since they can be used in commerce and are interchangeable. However, the nature of cryptocurrencies and blockchain-based assets extends beyond this basic functionality. These assets are not merely “building blocks” for more complex goods and services. They have inherent functionalities and capabilities like programmability and interoperability, which go beyond the functionalities of commodities. Furthermore, they are not physical, tangible assets like traditional commodities.
The Unique Characteristics of Cryptocurrencies and Blockchain-based Assets
Having established that cryptocurrencies and blockchain-based assets do not fit neatly into the categories of securities or commodities, it becomes clear that these assets form a novel asset class. This new class possesses characteristics that are uniquely their own.
Decentralization is a defining feature. Unlike securities and commodities, which are usually issued by a centralized authority, cryptocurrencies and blockchain-based assets are often decentralized, operating on a peer-to-peer network.
Another unique characteristic is their programmability. These digital assets can incorporate complex logic and conditional statements within their protocols, enabling automated actions that are impossible for traditional securities or commodities.
In addition, their potential for disintermediation is revolutionary. Cryptocurrencies and blockchain-based assets can enable direct peer-to-peer transactions without the need for intermediaries, which is unlike the case with securities and commodities that often require brokers or exchanges.
Conclusion
Cryptocurrencies and blockchain-based assets, given their distinct characteristics and the value they provide, represent a novel and unique class of assets. They defy traditional classifications of securities and commodities, demanding new regulatory considerations and financial models. This presents an exciting challenge for policymakers, economists, and financial experts, who must work to understand, classify, and regulate this novel asset class in a way that balances innovation with risk management.
Generated by ChatGPT (GPT-4), from the prompt “Write a 2000-words essay arguing that cryptocurrencies and blockchain-based assets are neither securities or commodities, but form a novel and specific class of assets on their own.”
Image: Kandinsky
