At this point in the evolution of digital assets, it is clear that Bitcoin is a digital commodity and that the majority of other cryptocurrencies are digital securities. Digital commodities do not pass the Howey test, whereas digital securities do. The inclusion of these two categories in a linear arrangement based on market capitalization is misleading and predatory.
For a new entrant in the digital asset ecosystem, assuming they haven’t taken the time to study and understand the fundamental difference between digital commodities and digital assets, they find exchanges listing the entirety of these assets based on market capitalization and, without realizing it, they associate them as alternative assets competing in the same space. They are not.
A security, according to the Howey test, is an entity that involves the investment of money in a common enterprise with a reasonable expectation of profits derived from the efforts of others. Most cryptocurrencies pass this test and should be registered as securities with adequate investor protection. Bitcoin fails this test and is thus classified as a digital commodity.
For instance, FTX had issued a security token called FTT through which investors could profit from the exchange’s activities. Because the exchange was largely unregistered and unregulated, it provided fertile ground for the leadership to misappropriate client funds, resulting in the crash and massive losses for investors trading on the platform. This would not have happened if this entity had been fully registered, regulated, and audited on a regular basis.
Price-tracking websites for crypto assets, such as Coinmarketcap and Coingecko, frequently list digital assets in a single column, ordered by market capitalization. The assets are also listed in the same way on exchanges. Even media companies reporting on digital assets, which are frequently listed in order of market capitalization, have adopted this practice. This gives the impression that they belong to the same category.
When compared to traditional financial market participants such as Forex brokers and banks, different asset classes are distinguished before being listed for public display. Consider looking at stock prices based on market capitalization and your broker sneaks in a bond. Wouldn’t you feel duped? Yes, they are both investment products, but bonds should be listed separately to differentiate between the two.
Digital asset wallets are also major perpetrators of this deception. They list the coins they support on a linear scale based on market capitalization or popularity, without distinguishing between digital commodities and digital securities. Their users are duped by this association trickery.
When the media reports on the performance of traditional investment assets, they clearly distinguish between them. They frequently report on stocks, indices, bonds, commodities, and so on. When it comes to digital assets, however, they overlook the fact that they, too, have fundamental differences that should be separated for accurate reporting.
Commodities such as gold, bitcoin, and oil are not investments. You instead speculate on their prices or use them to satisfy a need. When it comes to securities, such as stocks, exchange-traded funds, and cryptocurrencies, you invest with the expectation of profiting from the efforts of others.
When exchanges list digital assets in one line without categorizing them, a user is led to believe they are all in the same category. A person looking for a digital asset to securely store value may subconsciously choose a centralized crypto from an exchange without realizing the vast benefits they would otherwise receive by choosing Bitcoin. The user would have a better chance of making an informed decision if the exchange had a separate list with proper labels indicating that this column is for digital securities and that the other is for digital commodities.
Because the goal of centralized exchanges is profit, they all want users to trade and hold their native tokens. In this regard, they are not incentivized to distinguish between digital securities and digital commodities. If an exchange has a native token, that token is considered a security and is subject to the risks associated with its own books. When the books are bad, the token holder frequently loses. This strengthens the case for exchanges to provide accurate risk disclosures for all assets they offer.
A digital commodity such as Bitcoin should be categorized as a commodity in the money category. On the other hand, cryptocurrencies that pass the Howey test should be categorized as security tokens under the category of digital shares.
With the losses that people have experienced when trading digital securities with an associative nature alongside digital commodities, it is critical that this distinguishing feature be implemented in all digital asset platforms. This will assist in avoiding the events that occurred in FTX, Celsius