In a major piece of Bitcoin news, the Commodity Futures Trading Commission (CFTC) ruled that the digital currency is a commodity.
It's a significant step along the road toward Bitcoin regulation. While some early adopters of Bitcoin would prefer no government involvement with Bitcoin, Bitcoin regulation is necessary for the digital currency to play any meaningful role in the financial system.
The CFTC ruling was issued simultaneously with an order against San Francisco startup Coinflip Inc. for "operating a facility for the trading or processing of commodity options without complying with the CEA [Commodity Exchange Act] or CFTC regulations."
Coinflip had launched a Bitcoin options exchange, Derivabit, in March 2014. The company consented to the order, but it was somewhat of a moot issue.
Coinflip CEO Francisco Riordan told Bloomberg the company halted trading in July 2014 and refunded customers' money because "there wasn't enough trade volume for the site to sustain itself."
But what really matters is the clarification of the CFTC's position that it does indeed consider Bitcoin a commodity, an action it has been leaning toward since last year.
"It is no surprise that the CFTC would exercise its jurisdiction over futures and options trading of Bitcoin, as it does with any other commodity," said Perianne Boring, founder and president of the Washington-based Chamber of Digital Commerce. "We believe that a well-functioning and appropriately regulated futures and options market in Bitcoin is an important step in the overall development of the Bitcoin ecosystem, and that the CFTC is the appropriate regulator for such activity."
It means that any company interested in operating a trading platform for Bitcoin derivatives, futures, or options will need to register as a swap execution facility or designated contract market with the CFTC.
Most other ways of investing in Bitcoin should not be affected, but regulators have struggled with the digital currency.
How the CFTC Bitcoin News Will Affect the Digital Currency
And the CFTC decision does add a new wrinkle, according to New York Law School professor Houman Shadab, who has studied Bitcoin's relationship to the financial world.
"The action puts to rest any notion that virtual currencies qualify as securities. Otherwise, the Securities and Exchange Commission would be bringing this action, not the CFTC," Shadab told CoinDesk.
But what about the long-awaited Bitcoin ETF, the Winklevoss Bitcoin Trust?
The Winklevoss Bitcoin ETF (Nasdaq: COIN) appears to be in the clear. It's set up like the SPDR Gold Trust ETF (NYSE Arca: GLD), which is not subject to CFTC regulation.
A project of twins Tyler and Cameron Winklevoss, this Bitcoin ETF is in fact expected to get regulatory approval from the SEC within the next few weeks.
Likewise, the CFTC Bitcoin news shouldn't affect a Bitcoin exchange unless they delve into the derivatives or swaps contracts. Tera Exchange, for example, which does trade Bitcoin derivatives, already has its CFTC approval.
Standard Bitcoin exchanges like ItBit, the Coinbase Exchange, and the Gemini Bitcoin exchange, another project of the Winklevoss twins, should not require CFTC approval. They don't need any more regulatory complexity. As it is, each has sought regulatory compliance by a different route.
However, the CFTC's Bitcoin news is a reminder that the cryptocurrency's unusual characteristics have made it challenging for regulators.
Bitcoin Regulations Are a "Necessary Evil"
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As a digital currency, Bitcoin does not exist in the physical world. It has no central authority, being controlled by software code that lives on the Internet. And despite what the CFTC says, you can use Bitcoin as a currency to buy things.
The interest of multiple regulatory agencies in Bitcoin - at least 10 in the United States alone, not to mention each of the 50 states - threatens to slow the process of Bitcoin adoption while they sort out who's responsible for what. Many investors and potential users will sit on the sidelines until they know where these regulators stand.
Arguably, this uncertainty has weighed on the Bitcoin price, which in recent weeks has been stuck around the $230 level.
Regulators have also taken a long time to decide who's responsible for the different aspects of Bitcoin use, and what they want the rules to be.
Meanwhile, the financial world has been taking Bitcoin more and more seriously, from the world's big banks to venture capitalists.
In a sense, Bitcoin regulation has become a double-edged sword. It's needed to allow Bitcoin to function and lend it legitimacy. But regulation will also restrict innovation, create onerous requirements, and generally make Bitcoin more difficult to use.
Daniel Scott, the chief technology officer of Isle of Man-based Bitcoin company CoinCorner, told the Financial Times that Bitcoin regulation is a "necessary evil."
"[People] were happy to see some light-touch regulation to help investors see it is legit," Scott said. "But the other argument is that increased regulation means startups end up needing millions of dollars just to get off the ground, and that ends up handing more power back to banks that Bitcoin was originally designed to operate outside of."
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About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.