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No Crypto Can Be A Commodity

Published 29.11.2023

Regulators are trying to divide various cryptocurrency projects into commodities and securities. All cryptocurrencies are only digital assets recorded in the blockchain. From my point of view, no cryptocurrency can be a commodity, as digital assets cannot exist without a protocol. It makes no sense for BTC to be labeled as a commodity and for example, ADA to be labeled as a security.

Permanent Dependency Of Coins On The Protocol

Bitcoin is sometimes referred to as digital gold. This is to evoke the impression that it has the same characteristics as gold. Can BTC coins be a commodity in the sense in which people normally perceive commodities?

Considering BTC as a commodity has several shortcomings.

First of all, cryptocurrencies are not a physical thing like gold or coal. The creation of gold, along with other heavy elements, is a cosmic event.

Cryptocurrencies have a very short history. It's basically technology, more specifically, protocols. It is the result of human ingenuity.

You can touch the gold and put it in your pocket. Digital currency is only virtual. It's basically just a number written on the internet.

A commodity exists independent of the surrounding environment. It cannot suddenly disappear from the world. The existence of BTC and ADA coins is existentially dependent on protocols, i.e. teams, people, electricity, computers, and the Internet.

The difference can be well understood in the context of the long-term economic sustainability of blockchain networks.

Commodities have no such thing. Gold can lie in the ground in its raw form or as a gold brick in a bank. No matter what happens, the state of the commodity will not change.

Digital coins exist only conditionally.

A distributed network must produce new blocks in order to verify the existence of coins and do something specific with them. In most cases, people want to spend them, i.e. send them to another blockchain address.

Block production is dependent on electricity, the Internet, people receiving economic incentives to run full nodes and produce blocks, and teams maintaining protocols.

You have a gold ring on your finger. Imagine having to pay miners forever to mine gold for your ring, which happened 20 years ago.

A commodity does not behave like this. Once the miners extract the gold and sell it, the commodity is independent of the miners. Miners can go bankrupt. If less gold is mined, the value of the commodity in the markets will increase as it will become more rare. Your ring is not dependent on how the miners are doing economically. They could even go bankrupt.

BTC coins behave exactly the opposite. Your wealth is forever dependent on the network that produces blocks. Miners have to consume electricity and receive sufficiently large rewards from the Bitcoin protocol. Internet must work. Regulators cannot mandate blocking of the Bitcoin protocol at the network level. The team must not overlook a critical vulnerability in the source code or introduce a new one, etc.

In the case of holding BTC and ADA coins, you do not have a peaceful sleep. You have to be concerned about security, decentralization, long-term economic sustainability, the quality of the team, etc. These concerns do not exist in the case of gold.

Miners or other circumstances can forever limit your ability to spend coins for various reasons. Fees can be high. A regulator can blacklist your blockchain address. You can hold so-called dirty BTC.

If the blockchain stops producing blocks for any reason for an extended period of time, the coins can lose value relatively quickly. It can be said that virtual coins will basically disappear from the world. You can hope that the problem will be fixed and the blockchain will start producing blocks again. However, such an incident may have a negative impact on the coin's market value.

The gold ring will always have approximately the same value over time and similar incidents can never happen. If someone steals your gold ring, it will not affect the value of any other existing rings. Conversely, if you protect your gold ring, it will always have value.

It is not possible to ensure the permanent and environment-independent existence of crypto coins. Therefore, I believe that it is not possible to label cryptocurrency as a commodity.

The existential dependence of digital coins on the protocol presents significant risks that we do not observe with ordinary commodities.

What Is The Difference Between Cardano And Bitcoin?

I believe that ADA and BTC are basically very similar virtual assets. It's a new asset class.

How is the US Dollar different from the Euro or Yen? They are all fiat currencies. They exist in physical form (coins and banknotes), but nowadays mainly in digital form. They are just numbers on the servers.

It makes absolutely no sense to say that USD is a commodity and UERO is a security. I feel that in the case of cryptocurrencies, regulators, as well as some crypto fans, are trying to find a difference where they can't find it.

Cryptocurrencies are primarily a technology for the financial sector. They differ among themselves mainly in the following characteristics:

  • The quality of decentralization
  • Long-term economic sustainability
  • Security
  • Scalability
  • Network Consensus
  • Efficiency and power consumption
  • The number of operations to handle coins
  • Initial coin distribution

I will add that this is not an exhaustive list. The aim of the article is not to address all topics.

Bitcoin is a transactional network with limited options for script execution. Cardano is a smart contract platform. I don't think that greater flexibility and capabilities is the fundamental difference that would allow one project to be labeled as a commodity and the other as a security.

What Cardano can do on the first layer today, Bitcoin can do on the second layer(s), or even on the first layer in the future. Bitcoin has the option of having tokens (including NFTs) on the first layer, and they can easily be tokenized fiat currencies. From an external point of view, it makes no sense to look for differences.

It is sometimes said that BTC is a commodity because mining requires a huge amount of energy. The energy demand is determined by the PoW consensus properties.

However, electricity and other resources are consumed by every blockchain network. Electricity is necessary to run a full node. Cardano (including coins) would not exist without energy consumption.

The difference is only in the amount of energy consumed. Cardano is 99% more energy efficient than Bitcoin. Is higher efficiency a reason for BTC to be considered a commodity and ADA a security? Should we define a consumption threshold that must be exceeded for a coin to become a commodity? It makes no sense.

Energy consumption is an important aspect in the context of the long-term economic sustainability of the project. The existence of coins depends on the fact that the protocol can ensure security. Ideally forever. However, this is impossible to ensure without potential changes to the protocol or monetary policy of the project!

The existence of coins is conditioned by the security of the protocol, which in the case of Bitcoin is conditioned by the ability to pay rewards. However, the rewards are halved every 4 years. The security of Bitcoin is not stable, but it can go down or up. One day it may drop so low that someone can successfully attack the protocol, or people will lose trust.

As I wrote in the first paragraph, uncertainty regarding the future development of security (or the phenomenon called security budget) is not something we would associate with a commodity.

By the way, Cardano has a certain advantage in this regard, as lower energy consumption is a good prerequisite for longevity. However, Cardano, like any other blockchain, will only exist if economic sustainability can be ensured. This is only possible if the protocol will prosper economically, i.e. it will have revenue (user fees).

The biggest difference lies in the initial coin distribution. This topic is very thin ice.

Forgetting about states and regulations for a moment, I think that any project can be launched in any way as long as the community accepts it. There is no one-size-fits-all key or guide to the only way it can be done.

It is impossible to argue that Bitcoin is the only one that got it right.

They say ADA must be a security because the team was selling coins. Let's leave out the details that the Cardano community is sure to know well.

The development of such a complex project as Cardano must be financed from something. It's fair to get rewarded for delivering a project like Cardano.

All BTC coins had to be mined. But Satoshi and his friends at the very beginning mined a huge amount of BTCs. Rumor has it that Satoshi didn't sell the coins, but we don't know for sure. We don't even know who else mined the worthless coins at the beginning.

It can be said that even Satoshi got a fair reward for delivering Bitcoin.

What if Satoshi sells the coins? So he earns just as much from it as other (potential) team members or friends. But the fundamental question is, would this event change the view of Bitcoin from a regulatory perspective?

The question is, can mining BTC after the launch of Bitcoin compare to selling ADAs before the launch of Cardano?

From my point of view, it is possible. In both cases, I see the same principle: get cheap and sell high.

ADA coins could be bought directly (via vouchers and only in Asia), while for BTC mining it is necessary to have hardware (in the beginning a laptop was enough) and to cover energy costs. However, the principle is still the same. In both cases, people are interested in profit.

How is the activity of miners different from those who bought the coins first?

All blockchain projects have a team and leaders.

Don't be fooled that Satoshi has left Bitcoin and there is no leader. Satoshi handed over the management of the project to Gavin Andresen, who in turn handed it over to Pieter Wuille.

Gavin Andresen founded the Bitcoin Foundation and there was even a debate between the Foundation and US regulators over 10 years ago. If you still believe that Bitcoin does not have a delivery address, believe that it did long ago.

Bitcoin has many developers who work for companies that are funded either by VC funds or by donations from crypto companies or people who got rich on BTC. These companies, surprisingly, have CEOs. For example, Adam Back is the CEO of Blockstream.

It is not fair to say that Cardano has a team led by Charles Hoskinson and that Bitcoin does not have a team because Satoshi left the project. This is a terrible hypocrisy that makes no sense because without the team Bitcoind would not be here.

A few critical bugs have been fixed in the past. They were found by white hackers and disclosed to the team through private channels.

The IOG team is responsible for the Cardano protocol. A small Core group of developers is responsible for Bitcoin. The argument that 'Satoshi left' is nonsense, as his role was naturally taken over by someone else. Anyone who says otherwise doesn't know what a command line is and what source code is.

We can talk about project transparency or how often and how the team communicates. However, this does not change the fact that behind every protocol there is always a team and someone (a small group) who makes decisions.

If the decision about what is or is not a commodity should depend on the existence of a team, then believe that every blockchain project has a team.

Where Has Crypto Punk Gone?

It's incredible how much the Bitcoin community has changed since Satoshi left the project. Almost nothing remains of the original ideals.

Bitcoin maximalists are friends with state representatives and advise (allegedly bribe) regulators on how they should regulate cryptocurrencies. In the past, we could observe attempts to enforce a law in which it would be explicitly written that PoW is an allowed consensus and PoS should be banned. This is just one example.

I'm not a lawyer. It is clear to me that regulators and various organizations are able to label virtual assets as commodities or securities, based on how it fits in their boxes.

I feel positive that cryptocurrency experts and project representatives are communicating with legislators and explaining complex concepts to them. Cryptocurrencies are a new asset class and a new box should be prepared for them.

But I don't understand why crypto OGs and Bitcoin maximalists are trying to promote only Bitcoin and try to ban everything else.

A better and more free world cannot be built on the basis of banning competition. Such a world would not be free. Freedom is about choice and the possibility to join at any time, but also to leave.

The new world order built on top of blockchain technology cannot be built through competition bans and laws tailored to one project. There have been such attempts in history and it never turned out well.

What is disappearing from the crypto industry are the basic principles. If we lose them, the entire industry will lose the meaning of its existence. Despite the fact that new cyberpunk traitors are constantly appearing, it is necessary to insist on the principles of decentralization.

Conclusion

If you look at cryptocurrencies with common sense, you cannot call any of them a commodity. Digital assets on the blockchain are very similar and differ in small technological details. In addition, innovations are constantly being worked on, so what applies today may be completely different tomorrow. Laws from the last century written by people who knew nothing about the Internet cannot be used to regulate cryptocurrencies.

Cryptocurrencies are not securities either. It is possible to declare that a project meets the definition based on some fact or event. Dividing cryptocurrencies into several different asset classes seems to me to be as naive an attempt as if you wanted to do the same with fiat currencies or fruit.

With all due respect to Satoshi, maximalists should realize that Bitcoin is not fundamentally exceptional or unique. It is simply a technology that other people imitate and improve. That is the way to freedom. Limiting free choice is a dictatorship.

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