Plodding Mediocrity (Part IV)

These series are from April 2018

Commodity class of bitcoin - hurdle to stability

In this section I am going to talk whether bitcoin is a currency or a commodity. Eventually I don’t think this subject will be clear to the reader, because it encompasses various complex topics starting from understanding currencies to how forex market works. Main point I would like to make here is that it is still early to agree that bitcoin is a commodity and regulate it as such. Classifying bitcoin as a commodity further brings ambiguity for the long-term vision and, as well, raises its stability questions.

There’s difference between currency and commodity. Commodity spot market is not benefiting from direct oversight, while its futures markets are. Commodity is a fungible good, it can be produced by any party. Currency is a medium of exchange and store of value, it can become a commodity in specific situations, while a commodity can be used as a currency in broader cases.

On the surface bitcoin’s deflationary nature is the driver for it to become store of value, although forks can avoid it and its technology and decentralization are incentives for it to be used as a medium of exchange. Currency’s inflationary nature stimulates us to use it as medium of exchange. A currency works through government backing and by making it illegal to not accept government issued currency, thus having a complete control over it. But these are not rules, seen that some countries are using U.S. dollars and that in prison a cigarette is a better trade instrument than anything else.

Regulatory ABCD

Regulatory issues in crypto worked their path to become a hot topic, sort of an enlightenment with positive outlook. I shared the same perspective in early and mid 2017, when capital kept accumulating in token sales - it did seem irrational to me. I kept thinking that of course in pre-sales millions are raised through PPM and not through 30 pages long white papers and of course broader public flooding the market to make an easy buck will eventually be outplayed by the large investors.

A brief chronology of attitude towards regulations looks something like this:

  1. We hate regulators (they have negative outlook on the market that is making all of us rich, they are bitter)

  2. Regulators were right (look at all these scams out there)

  3. Let them regulate, they know their game (prices went down they know something, let them deal with it)

Right here we got tricked by a) conformity bias, where we took a position of laisser-faire to the ones who showed reliable knowledge on the issue and b) by doubt-avoidance tendency, where we ceded to question the fundamentals.

And this is where point D comes to the above-mentioned A, B and C. "D is the Status Quo". Not all regulations are created equal and wrong regulations do not align to fundamentals.

As of today I do not hold the same view. Because Chris Giancarlo is very enthusiastic and passionate crypto regulator doesn’t mean his vision is beneficial in the long-term, or if it were, that he alone could push a right agenda. There will be a goat rodeo on crypto regulations soon, if you do not go slow by observing what happens and rush to regulate it. To explore this I’ll need to go deeper

Market has subdued to the non-clarity, we read about “regulations" in every second article that tries to explain bear moves in the market, but reality is non-clarity is not an "event", it is a prolonged, continued state that if settles in will make bullish breakthrough a little bit hard to come by. I do not see much of technological advancements and progresses that would translate in the market price and take a note that these are the events that moved it last year more or less. The longer the regulatory uncertainty continues the bigger and splashier news the market will need to move up.

Monetary Regimes

Over the time we have agreed to believe in the promise that stable and rich financial markets of today are built not on commodity, but on sovereign developed economy, economy mostly denominated in US dollar and it took us time to move away from pegging mechanism.

I have to resort to cover few historic things and market infrastructures to provide a backdrop to emphasize the importance of the currency and commodity classification. The more the economy progressed over the time, the more the trades grew interconnected and the dependency to peg to one asset class became redundant, from gold standard to Bretton-Woods system and to the floating rate, we have witnessed the progress that free trade bears better fruits. I’m not in the best position to provide any in depth criticism or praise over the international monetary regimes, but it is obvious that avoiding standardized currency frameworks have put an interest of developing economies of sovereign states on a scale and test. Gold standard locked the sovereign flexibility and put a pressure on interconnectivity on the weak (developing) actors. Today those who introduce foreign currency in their states as legal tender, strip off independent growth because they can not be policy-makers in currency supply, while for rich countries fixing a currency brings trade stability, in order to do so country has to pay premium to keep the conversion in range, developing countries usually can not afford it, contributing to policy trilemma of incompatibility of free capital flow with monetary policy autonomy and a fixed exchange rate regime.

Ditching Bretton Woods and introducing floating rates have stripped off the importance of the commodity nature in currencies, in a way where currencies became more independent assets in international markets but prone to their respective economies’ fluctuations. This should have put the bigger importance on the transparency of how currencies are issued as well.

From the big picture each currency is a private currency in a free market, if you look at currencies from this angle you will notice the importance of transparency. The absence of intrinsic value in fiat currencies requires a lot of information to be available in order to consider the currency that you trade healthy.

Because we have abandoned Bretton-Woods system now and fiat currency is based on the government backing and regulation, the nature of currency has changed. Prior affiliation to the commodity would help one to measure each currency to that said commodity. Now here is the difference in nature of the currency as a class. If currency is as fungible as commodity is, then it’s procurement is more complex than that of the commodity. Issuing currency depends on economic performance, commodity does not, while commodity is something that does have utility value, currency’s only utility value is that of a legal tender.

Currency / Commodity Question

Theory exists that government needs to force you the medium of exchange nature of the money, because in other case it will become store of value and slow down the economy.

If medium of exchange and store of value are the features of currency forced by governments, then the unit of account is as well its feature. Unit of account is the forced mental model of denomination. While unit of account when forced has subconscious imprint, medium of exchange when forced in transaction is conscious and cognitive. It is usually hard to change subconscious.

Because currency is government forced and it is illegal to not accept it as medium of exchange, or price products in other currencies, the sovereignty of the currency is by itself a regulatory statement. The issuer is a government or autonomous regulator not an S Corp who’s transparency is demanded by regulation. We are forced to believe that government acts in its good faith, this is where the currency does not need regulation - its issuance level, on the trade level it is promises against future delivery of goods where CFTC can step in and it is AML/KYC regulation that helps to not channel the money to terrorists, apart from these whatever regulation is tied to a currency it is not a regulation but a fluid policy.

Thus important things to factor in determination of currency and commodity behavior are issuance, transparency and governance - they all have deterministic importance in how we trade the instrument and assess it.

Importance of this is emphasized by the availability of the Federal funds to the commercial banks through discount window. Only recently broker/dealer companies started to participate in this program, but this brought regulatory backlash from commercial banks, who suggested that investment banks must be regulated the same way as the commercial banks are. Impasse happened where the investment banks raised concerns that the there is fundamental difference on the usage of the funds, one is where the customers are depositors and the other is where they’re investors. This is actually a distant subject but it shows where to draw the line in regards of the currency. Where depositors with commercial banks are users of legal tenders, users at the broker/dealers might be interested in vast spectrum of financial instruments and the entity that oversees the money supply historically preferred to differ these two fundamentally different institutions. Fiat currency is very specific class. Banks believe because they deal and see currency as legal tender, they must have a priority seat at the Fed table.

Now think about the complexity of each sovereign country, its economy and geopolitical situation, factor in its own monetary policy and international trade. You receive a very specific asset to trade internationally - a foreign currency. And if currency is a specific legal tender in jurisdiction where it is issued in most cases, then how to treat foreign currencies in international transactions, so far the reply to this is - treat them as commodities.

Geopolitician George Friedman wrote in his op-ed about the problem that he had with understanding what bitcoin really is asking “my core question is this: Is bitcoin a currency designed to facilitate commerce, or is it a commodity that has intrinsic value, which rises and falls according to supply and demand?” As a currency it is so volatile that each purchase is a gamble - this is not feature of a currency, and as a commodity it does not have use value except for the transactional one “and the problem with bitcoin, unlike real estate or tungsten, is that it has no intrinsic value beyond people’s confidence, and confidence is the most volatile of things”. Bitcoin as a currency (unit of account) is a stronger sell, compared to any other possible commodity attributes of it. Currency is fungible exchange instrument. Now Friedman’s concern is not defined by regulations, and I’d like to make a point that so far commodity factor of bitcoin in regulations is complicating things even further.

Commodity, due volatility, is not the best medium of exchange or unit of account, currency is. Foreign currencies are commodities, because sovereign countries distrust foreign jurisdictions, this is challenging for regulating international market and enabling multilateral trust. Lack of transparency and policymaking in other country’s money supply is discouraging countries from deeming each other’s currencies as medium of exchange or unit of accounts. Bitcoin as settlement is the innovation (medium of exchange nature of it), bitcoin can be an alternative settlement coexist with fiat (like gold, before it became inconvenient), it will need to overcome its hoarding issue and be used as medium of exchange, though gold apart from its high perceptive value (that results from centuries) has utility usage, bitcoin can champion its promise by being alternative medium of exchange.

Forex Hell

Forex trading is one of the largest trading market with around $5 trillion trading during a day (BIS), it is also not regulated as tight as other markets are. Its actors are dual in nature - commercial and speculative. Currency trading in huge blocks is a privilege of governments, central banks and commercial banks, in a nutshell authorities who are entitled to our trust. Where the regulation might come in these trades is the speculative side of forex.

The driver and growing volume of speculative trade in foreign currencies raises the need for regulatory intervention. Because transactions have two natures they are intertwined and to regulate them it is better to distinguish their natures as well. The growth in forex market and speculation has been increasing recently, on-boarding even larger spectrum of participants including retail investors.

Transactions on these markets are not broadcasted like on National Securities Exchanges, usually large commercial banks and interbank systems are privy to them, this drives more risk of high frequency traders hijacking the speed and lack of transparency puts average investor in a blind position where he can not rely on market information but on news headline or feeds that his brokers can provide him.

Because each currency in each jurisdiction is representing each sovereignty, regulating the forex would mean regulating the global trade. What first started as instrument for banks to offset risks in currency trades, turned out to be a huge decentralized foreign currency market with brokers and all kind of institutions playing in it, alluring retail investors to join. While large players and retail banks have resources to keep main pairs move slowly, the bad actors and their dishonest trades can have more serious consequences on fragile currencies that might get hijacked easily.

CFTC was able to set a bar on the leveraged forex transactions and allowed NFA to regulate all dealers dealing with forex and retail investors, but due to the interbank nature of forex, banks have the biggest say on the market and banks are regulated by OCC (Office of Comptroller of Currency). What you deal with when you are trading forex electronically is not an access to the exchanges but an access to your dealers book where dealer gives you quotes. To retail investors these are all parts of a deal and how to protect them is a challenge. The larger fishes are institutional investors who participate in forex, their fundamentals are not speculation per se, they need to settle transactions and hedge risks. They are as well influenced by speculative nature of the retail forex trading, where they need to offset speculative volatility and be aware of the potential currency crisis due to their badly placed bets.

The nature of the forex trade and its infrastructure is important. One, participants are both institutional and retail investors, compared to securities and futures exchanges that are classical markets (digitized today), forex market is built upon big commercial banks with their dealers granting access to retail investors. Infrastructure nature poses regulatory oversight disruption and nature of trades does not favor all participants by nature due to the infrastructure being not regulated. What institutions do know, retails do not, market data is not consolidated and presented live to retail investors, retail investors do not know what is going to happen as fast as institutional traders. But then again by non regulating forex we give advantage to largest players to proceed in their business dealings as usual without more paperwork and compliance and mostly we avoid the complex topic of international trade and currency sovereignty. What we instill upon the retail investor is the disadvantage of the market which, due to the infrastructure and as well regulatory fragmentation, gives forex brokers ability to advertise advantages of forex trade compared to stock markets, even with as low as $200 deposit and large gain - retail investors buy in.

So we have 2 types of transaction natures: speculative and commercial and we have 2 types of actors retail and institutional and they do not marry each other well. To recap we can say that speculative nature of trade represents 87% and commercial represent 13%, while retail investors represent 5% and institutional represent 95%.

Because currency is privy to government regulation and foreign currency trade encompasses multiple of governments, thorough international regulation on the issuer of currency is irrelevant for floating system. Infrastructure of the trade must encompass the protection of average investor. This way currency acting like commodity is not the optimal as well. Commodity’s factor of independent procurement plays a big role, its loose disclosure and procurement are not registered so it’s not fully transparent, currency is stabilized by economic factors in this case, it as well affect purchasing power of average citizen not that of institutional investor. Due to this to define nature of forex trade is important. Should an average investor be able to trade on forex? That is when you bet for or against the company’s stock, you bet against or for its management, market conditions and business environment, while in forex trade, retail investor is trading on macroeconomic factors that he’s not completely aware of due to lack of enforced transparency.

Tobin Tax can work to circumvent rampant speculation by a) taxing short term flipping and b) taxing the size of the trade. Banks’ nature of forex trade is settlement and due to this it can do so in large chunks, while small traders can be considered speculators and taxing their activities can discourage them from trades or we can apply tax to the registered broker firms who cater to retail investors, broker/dealers can be taxed and they will project their tax cost in the trades. Third option does bring another possibility, the brokerage already conveys the nature of the transaction, banks transacting on their behalf will not incur the tax as their nature is commercial rather than speculative. Per Tobin Tax you’d tax spot transactions, this way avoiding to tax the hedging instruments in currencies, you’d be able as well to offset small retail spot conversions by taxing large sums and demanding identity provision for those who’d game the regulation by splitting their transactions in small chunks. These different scenarios provide a room for deliberation on the speculative nature of forex trades, but they are far from satisfying the market players.

The decentralized nature of forex trade, the underlying assets that are currencies and players that are large banks, lurking retail players constitutes a great recipe for a goat rodeo. Maybe we can look at this decentralized market that trades foreign currencies as an example of how asymmetrical its nature is and how currency transforms into commodity due to the hurdles of jurisdiction, trust and lack of coordination, that by itself is the fruit of the free market.

Current regulatory support of bitcoin as commodity

Now I’m well over-complicating things here, but this is exactly my intention and job. I do not try to simplify and condense something, condensing and simplifying is for people who pitch solutions and I’m concerned that complications of today’s market are not addressed in full in any of the solutions that are on the table. And I’m not saying that claiming bitcoin is a commodity is a crime against the nature, I see very well how it can evolve and help market to gain some regulatory certainty, but I will avoid this narrative because this is the narrative that is persistent today, that is cheered and lauded. What I want to provide is the cascade of information that should be accounted for, that should make market players and technology evangelists question the current state. Where’s the promise of a currency? Why we’re not clear on it from regulatory perspective?

Normal course of regulatory action must look something like this: a) bitcoin is a commodity; b) commodity leads to derivatives such as futures and c) options; d) these contracts stabilize the market volatility through price discovery and e) we are able to implement ETF and other retail grade products and finally f) we can live in a decentralized future. As a side note we’d ideally add spot market oversight just to be sure. Now what does timeline for this course of action can look like is beyond my understanding, but it sure can iron out some uncertainties and deliver an outline for the future.

It’s ironic how we got tricked by regulatory steps, first we hated regulators, then we subdued to them to take an action. Now while above mentioned course does look valid and good, it doesn’t represents the entire crypto market and it doesn’t deliver on bitcoin as a cryptocurrency promise and does not represent international outlook. Most of the above mentioned is derived from the store of value nature in regulations and not the medium of exchange.

Rosenblum in his House hearing recommended multiple times not to craft regulations now. I share this opinion, regulations that take over the transactional nature of crypto assets are early, what is not early though is to implement investor protection and disclosures. Due to the current stance on cryptocurrency there is already a wave of opinions that are layering over the “bitcoin is commodity” decision, burying the opportunity to question it even more. Bear in mind that if an an asset is a commodity (we seem to will largely view it as such) we’ll risk to apply all commodity rules to it in case risks arise.

For example comments for Proposed Rule 82 FR 60335 on “commodity delivery” are not exciting. These comments could look like twitter feed to reflect the market, but they don’t, because commenting on proposed rules are not exciting and are knowledgeable to U.S citizens mostly. Few interesting comments are:

  1. Praises over Giancarlo, they came after Senate Hearing and are appreciative of chairman.

  2. Coin Center’s Peter Van Valkenburgh provides lot of clarification on the term, but never questions the commodity nature

  3. dY/dX explains their business infrastructure because this rule directly applies to how the operate and deliver

  4. NFA mostly endorse the rule.

These texts are the status quo - they do not challenge the statement, they further endorse it.

In early march Judge Weinstein ruled in favor of CFTC. In case where Coin drop markets were charged with fraudulently offering customers virtual currency trading advice, judge made clear that CFTC had a broader leeway in commodity regulation. Ruling read “virtual currencies can be regulated by CFTC as a commodity” in a case where CFTC brought fraudulent charges against Coin Drop Markets. This is interesting case because it challenged if without federal law the CFTC was able to make crypto fall under its oversight and it appears so far that yes. What McDonnel (the owner of Coin Drop Markets did. was that he branded himself as crypto investment expert, solicited money with promise to a serious gain and then misappropriated the funds - this is definitely a fraud).

This case and comments on the proposed rule, both show how strong current opinion over the definition of bitcoin as “commodity” is. In the ruling of the judge although fraudulent activity was present and the ruling was to protect investors. It could have been done as well without bringing up directly the authority of one federal agency’s jurisdiction, if investor protection was implemented through disclosure mechanisms. This point is made to show that investor protection can be implemented and enforced without active engagement of crypto regulation that would define crypto asset classes.

Worst thing we can do to crypto is to "status-quo" it in its early infancy, it's still operating in an uncharted waters. Challenging its concepts and opinions today doesn't mean you're a hater, it means you care for it to deliver on its promise, which is to be an alternative currency. Bitcoin as a commodity might work out nice in the end, but fundamentally we reject its main promise and building regulations upon this, risks to stifle the promise.

Meanwhile there are ton of new ICO guidances around the world which is pretty flawed and untimely. Discussing ICO is very 2017, it must be clear that most current offerings took form of PPM. Discussing how to regulate ICO is just a pure avoidance of the bigger question - first you need to classify the major existing crypto assets, rethink models and regulation, but this is a daunting job and very polarizing as well. What appalls me is that discussion should be championed by bitcoin maximalists and other believers and it is not, we blind ourselves by being comfortable in regulatory definition of today and we only criticize smaller projects built on Ethereum or Neo environment for example that scam people.

Governance through issuance and disclosure

One of the interesting and inherent questions to the bitcoin is the governance, we’ve covered how regulations work in currencies and foreign exchange market, how monetary policies affect them. They all are governed through government and federal agencies. Elected officials have a final say in lawmaking - this is something very traditional and defined for us, I’m not going to challenge or second-guess this procedure, this is something we know. Interesting here is that bitcoin is the first truly global currency and it does not have a central regulator. This is the benefit of technology that removes intermediaries, unsolicited surveillance over the funds and additional costs, but it has its downsides today - although we cherish the benefits of decentralized currency we do not know how to fairly govern decentralized assets and what “fairly” means at all? But again I’m not going to discuss the governance issues, per my taste current model is optimal and we’ll know more as we grow. My concern is if we understand how important governance factor is in deciding regulatory framework. And until we achieve the most optimal model, if changes in governance will change the network and transactional behavior?

As in forex market, speculation in bitcoin market is paramount. If bitcoin is a commodity, how does governance factor in the deliberation of commodity/currency debate and what rules apply to commodities anyway? Currency is not like bitcoin, it’s centrally owned, more regulated. Bitcoin is decentralized but as well governed by the rules of the community and it is simple that in case of an update or enforcement community must come to a consensus. Gold, wheat and oil do not have governance rules and they have utility (gold earrings and diesel cars) and they all are store of value and in dramatic cases can be used as medium of exchange. Medium of exchange is a feature, store of value is contract with future necessity out of expected need or a fear. Commodity might be defined as a fungible good, but this good must have implied utility, this utility factor derives various features.

Now because we discuss commodity / currency let’s apply governance to it. Because most of the commodities are natural resources we let general population to procure them, some require intensive capital deployment some not so much. By governance I do not imply the safety regulations on production sites, licenses to procure and regulations and certificates to trade these products, these do not change the nature of a commodity, here I imply the governance that has the ability to alter the essence of the product. Bitcoin’s governance gives network power to do so, while in gold or oil we do not alter the product through governance.

I like to look at governance not from the wide-angle of its lifecycle, because it should be flexible and it is very hard for me to say what is the best and most optimal model for governance during the lifecycle of the product, but to look at governance at the issuance moment because it defines disclosure enforcement mechanism. This comes handy because we look at the very beginning of the lifecycle of the product and it is relevant as well in a commodity / currency debate. Let’s see how.

Central banks govern the issuance of the currency, how much disclosure is put on this or how is it even enforced is up to a debate. We always question the fundamentals behind any policy moves because we don’t believe in radical transparency in government agencies unless Comey. In regards of the commodity, commodity is not issued but procured, it is a natural resource and we can not control who procures what and how many. Because it is a natural resource the features of the commodity are well-known, defined and can be attested in various certificates, you would not change the function and feature of a commodity, thus its issuance is less regulated. When you trade commodity futures, enforced disclosure is, as Dr. Brummer said during House hearing, more “buyer-beware” rather than stringent disclosure of securities. Now because issuance of securities is completely derived from man-made product (companies), the issuance is regulated, managers are observed and liable and disclosure of the issuance is more thorough. It all comes down to how things are made and are we transparent about them - the disclosure enforcement is just that. Governments control issuance of currency and securities but enforces transparency in form of disclosure over securities and commodities, because they’re third party, and it treats all of them differently because they are all mix of different features. Government’s oversight and AML procedures and as well certifications are just the way to control the circulation and quality of these assets. What government lacks tremendously in regards of cryptocurrencies is control and oversight of their issuance models and by saying it is a commodity it leaves it open to modeling.

The only thing worth enactment is transparency, which shows intention and nature of the trade. Markets might be hit hard at some point and be volatile, they might diverge from equality and inclusion, but through transparency, necessary future regulatory enactments can be detected. It is important to locate where there is a need for transparency in a way that it does not harm the overall policy of the underlying asset and actors dependent on it. Dr. Brummer as well has outlined the need for a specific disclosure mechanism in cryptocurrencies, but he didn’t look at them through classification. I think that bitcoin as a currency might need different disclosure compared to tokens that behave like equity. But when implementing disclosure mechanism we should not think that once done, everything is good, it was pointed during Senate Hearing that disclosures risk not to be read in hot markets and thus be completely useless. Senators can not say it’s our fault if we didn’t read 100 pages document, if they know that people might not read it and still consider it law and investor protection, this is just avoidance of the problem. This might be a reason then to create Self-Regulatory Organization (SRO), but this will be addressed at the later stage.

Bitcoin as Digital Bretton-Woods

If bitcoin is to be considered and regulated like gold or other commodity, while at the same time being digital currency, it is most likely to serves as a reserve currency for other digital assets. This way we’re not getting a decentralized promise, but digital Bretton-Woods for digitally scarce assets. Decentralized promise can live on in other assets, but it will be stifled by the investment rather than what technology initially promised us. It will also be lesser of an experiment in economics, it is going to be just a new asset for investors the first, and technology the second. Trustlessness is going to be a feature not the essence in this kind of structure. The bigger experiment would be to make a universe of trustless digital assets that float independently, that are legitimized for what they represent on fundamental level. Bitcoin as a reserve currency for other non-currency type digital assets will only lock overall market correlation and there’s even more to this pair paradox, e.g. if decentralized assets had more fiat pairs, overall crypto assets today would be less correlated.

We moved from gold standard to Bretton-Woods to finally arrive at floating exchange rate. Float is belief in others but firstly it is belief in yourself and your responsibility, belief in your economy. It moved markets from forced stability to natural “stability”. Bitcoin being a currency is a continuation of this progress and belief, it although questions what a fiat currency is, more importantly how a fiat in one jurisdiction is a currency and in a global decentralized exchange market a commodity? I like using bitcoin as a currency to challenge these thoughts. And this leads me to a thought where bitcoin and its regulation might finally challenge if we need free market and if we can sustain it and if yes in what forms. Through questioning our fundamentals with bitcoin we have opportunity to really arrive at bigger conclusions and not just at mere regulatory frameworks that should be applied to the markets.

Bitcoin’s value should be transactional, otherwise it is going to be a hard-sell in the long-term. An asset that is a commodity, but was destined to be a currency is a goat rodeo in itself. I think at this stage any form of regulatory certainty will improve the market and make it move up but its utility value, the one that is of a currency, if it doesn’t become the main driver, then it might become just a store of value. It is arguable for me that a commodity that is store of value can survive in the long-run while striped off of its fundamental value. It might serve then as a reserve currency for other digital assets but then we give up low correlation of assets and I don’t believe that trade volume of reserve currency can sustain the long-run demand of store of value as well. It matters to be medium of exchange to capitalize on the decentralized nature of system. The essence of the commodities trade (apart from speculation and hedging feature) in the futures market is the illustration that you will need that commodity at some point in future and you prefer to pay the price that you deem reasonable in the future. You will have urgency to supply oil at specific price in Q4 for example, is there the same fundamental for the bitcoin?

Speculation over Medium of Exchange

Bitcoin looks a lot like forex in its speculation and commercial nature. Although compared to forex markets there are lot of hoarders in bitcoin, who buy and wait for the value to surge. They deprive asset from its utility value and medium of exchange, I doubt that they completely understand that its store of value can increase without asset being used as medium of exchange. People either hoard, trade or settle in bitcoin and this is where it looks much like forex market, but forex is dealing with currencies that have utility value as legal tender, if you want to hoard USD you can open savings account within a bank, so speculation in forex market for the tradable asset is justified alternative, whether speculation in bitcoin, where asset’s value is bloated by belief it will go up because it did in 2017 and the utility value of the asset is constantly overshadowed by hoarding is not completely justified and it doesn’t seem to withstand in the long-run. If bitcoin becomes “internet money” whatever this means, it can have utility value. But I want to be clear here that “internet money” seems very blunt, we have hardly understood what money means with introduction of cryptocurrencies, now we want to invent a new class of money and call it internet money, legally it has no meaning to me now, because it can mean many things. And even though I am supportive of this chain of thought, I still think that making bitcoin “internet money” does not do it justice, bitcoin has the power to question many things and be more than millennials’ means of paying for Spotify. I like this idea although because it encloses utility of bitcoin within a confined but vast space, but reason I am doubtful is that calling it “internet money” does not answer questions but rather poses new ones.

Another thing that makes forex market interesting in the context of cryptocurrency is how a fiat currency in one place becomes a commodity in the global trade. It shows the flexibility of currency’s asset classification, in regards with bitcoin although this state should not change once assigned, I see this as more of an example for maybe interledger compatibility in regards of regulation, but not for the token itself, at east at this stage.

Vlad Zamfir has tweeted regarding security/commodity question “We should replace the whole question of "when does a token go from being a security to being a commodity?" with "is this token being bought/sold as a security or as a commodity?" for every individual sale/purchase basis”. His point can be used as an emphasizes for how important is the nature of the trade. This is relevant in forex and this is relevant as well in the cryptocurrencies. Where the asset classification is fluid, the intention of the trade plays an important role.

Regulators must take a look at the current decentralized foreign exchanges and fiat currencies and think about bitcoin as a currency traded on transparent regulated exchanges, decentralized or not. If commodity class provides one set of inherent risks, foreign currency markets now provide another, and deconstructing the systems brings a chance to look and create a better environment. Because bitcoin in case of a currency is not yet sovereign or deeply interconnected to anything else, there is still a good chance to reap benefits from this thinking pattern. Offsetting commodity volatility and offsetting current forex infrastructure to create more transparent environment.

Stability Factor in Bitcoin

Forex (subject to pairs) is less volatile than commodity, bitcoin is more of a currency, but none would legalize it. We can debate if forex is less volatile due to loose regulation or not, but bitcoin, as it is in its infancy, is volatile and fragile organism, not interconnected (interconnection creates strength and stability - see the graphene structure). We need regulation so an asset is stabilized and not taken advantage in the form of “store of value” because digital store of value that’s based on public key cryptography, as good as it can be, is still very hard to grasp. By deeming bitcoin a commodity we remedy its fundamentally taken advantage nature (store of value/speculation), while if what we do is to legitimize it as a n alternative currency we would drive it further to a better adoption, decreased volatility and eventually bring more usability. This scenario is still sci-fi to me but that’s what is fundamentally right, I do not support bitcoin free anarchy, but just acknowledgement of it as a currency. Unfortunately nobody will pass those sweeping changes unless big pain demands it. And in this scenario where bitcoin is a currency we again enforce the question of the free market, are we afraid of it, is it sustainable. I think that we can live in economy where bitcoin has a place as fully fledged currency and not only digital reserve currency of “internet money”.

Commodity has higher volatility than major foreign currency pairs, and we need more stability in the cryptocurrency to deliver on decentralized promise. If bitcoin is going to be internet of money, then it is good to think that the first digital currency must have its value stabilized and not stretched between $19k to $7k within a quarter. Futures introduction has brought price discovery, what would be good now is to further push stabilization by providing more clear regulatory outlook for the future, not regulating it now, but providing an outlook - there’s big difference between these two and this difference is big because market is still young. Sovereign currency volatility is based on broader fundamentals and is more interconnected, compared to crypto, which is out into the wild. Nobody cares about the price of crypto as much as the price of fiat currency, in crypto you must care about the promises, about the technology, unless you make it interconnected to other instruments you must stop being so price sensitive. Deeming bitcoin a currency would bring back its fundamental promise at least.

technology, law, financeGiorgi Gurgenidze