Classifying A Cryptocurrency: Security Or Currency Or Asset?

• Toshendra Kumar Sharma
• September 16, 2019

Cryptocurrencies are a global phenomenon known to almost everyone. Today, it would be extremely difficult to find any major bank, a renowned accounting firm, a popular software company, or a government that has not researched or published a paper on cryptocurrencies or blockchain. But beyond this popularity, there are many consultants, scientists, and developers who have limited knowledge about cryptocurrencies.

 

What only a few people are aware of is that cryptocurrencies are a side product of another invention. Satoshi Nakamoto, the unknown inventor of Bitcoin, did not intend to invent a cryptocurrency. The most important part of Satoshi’s invention was that he found a way to design a decentralized digital cash system. After seeing all the centralized attempts fail, he built a digital cash system without a centralized authority. This was like a peer-to-peer network for file sharing. This marked the birth of cryptocurrency.

 

But is Cryptocurrency Classified As A Security, Currency, Or Asset?

 

What Is A Cryptocurrency?

 

A cryptocurrency is an internet-based medium of exchange which leverages blockchain technology to gain transparency, immutability, and decentralization. It uses cryptographical functions for carrying out financial transactions. A majority of the cryptocurrencies are decentralized systems based on blockchain technology. Bitcoin was the first blockchain-based cryptocurrency which is still very popular and highly valuable. As of February 2019, there were approx. 17.53 million bitcoins in circulation with their total market value being estimated at around $63 billion. Some of the top cryptocurrencies are Ethereum, Ripple, Litecoin, Monero, EOS, Cardano, etc. Cryptocurrencies provide the ability of easily transferring funds between two parties involved in a transaction by eliminating the need for a trusted third party.

 

Why May A Cryptocurrency Like Bitcoin Not Be A Currency?

 

There are two main issues associated with Bitcoin as a currency. One is that its value is unstable and the other is that its transaction processing is too slow. The most important feature of a currency is that it is a stable store of value. It is important for the economy of a developing country to attract the investment it needs. The value of a currency must be stable as it is the key to investment because people expect a stream of future earnings to earn back their investment with a considerable amount of profit. If the value of a currency is unstable, it will be difficult for an investor to predict the value of his future earnings accurately. This will make the investment less valuable. All cryptocurrencies are subject to an average daily change of at least 2% in value. Mostly their value is up, but sometimes it might be down.

 

Another important feature of a currency apart from being a stable store of value is its ability to facilitate transactions. The big drawback of a Barter system is that it is inconvenient. It is necessary to find two people to exchange goods. Three or four-way trades are complicated. This is why currencies replaced barter as they are more convenient. Now, coming to cryptocurrencies. Though blockchains protect and secure cryptocurrencies like Bitcoin, the transactions are processed very slowly. As cryptocurrencies have a limit on the number of transactions that can be done in a day, it usually takes many days to complete a single transaction. Due to these drawbacks, instead of holding cryptocurrencies to use them as a currency, it can be used as a commodity asset that people trade like gold or silver. The ideal uses of cryptocurrencies are to hide wealth, conceal transactions, and make and lose money by trading them.

 

Can A Cryptocurrency Be Considered A Security?

 

The term ‘security’ is usually used to describe financial assets that can be traded. It can be any form of financial instrument, associated tokens, or cryptocurrencies. The Howey Test is done to detect securities within the blockchain industry. The Howey Test is a result of a legal battle from 1946. It is a framework that helps determine if a particular asset can be considered as an investment contract (security). Considering a cryptocurrency as a digital asset depends on the circumstances and facts that surround the original investment. A digital asset may initially be considered and sold as a security as it meets the definition of an investment contract. It is also possible for this designation to change over time if it is offered and sold in such a way that it does not meet the definition. Cryptocurrencies cannot be classified as securities as they are decentralized. They are not governed by a central authority whose efforts are a key determining factor in the enterprise.

 

Can We Consider Cryptocurrencies As Assets?

 

Cryptocurrencies can be considered as an asset in terms of the lucrative returns they give. But cryptocurrencies also have their own issues with volatility in price being one of them. Liquidity leads to a sudden movement in cryptocurrency prices. There are many facets to the concept of liquidity. It can be defined as the ability of an asset to be converted into cash on demand. An asset, as we know, is an economic resource that can be controlled or owned and provides the owner with financial value. Assets come with an in-built promise of increased future value. Cryptocurrencies can be sold and converted to USD or any other currency, whenever you want. It is more liquid and tends to rise in value. Even then, cryptocurrencies cannot be called clear-cut assets such as a house or gold. The top cryptocurrencies are currently rising in value and are being adopted by an increasing number of people every day. But we will only know what it truly is when it is done growing.

 

Conclusion

 

Cryptocurrencies are certainly here to stay and change the world. People all over the globe are buying cryptocurrencies to protect themselves from the devaluation of their national currency. The cryptocurrency market is growing fast and wild. Each day, new cryptocurrencies are emerging, and cryptocurrency trading is becoming increasingly popular with more and more people indulging in it.

 

To stay updated with blockchain technology, check out the Blockchain council.