The definition of a commodity is imperfect and ambiguous – there is no bright line test. Generally, commodities are basic goods that can be bought and sold at prices that are heavily influenced by supply and demand. In commerce, commodities are interchangeable with other goods of the same type. For example, a piece of corn is interchangeable with another piece of corn in the market with no regard to who produced the corn.

Commodities can be anything. They are generally natural resources, but recent innovation has expanded the classification of commodities to include new developments that represent the same characteristics, such as computer memory and more recently, bitcoin. 

Pursuant to the U.S. Commodity Exchange Act (CEA), a commodity is defined broadly by a list of enumerated products. For example, a commodity is defined as being wheat, cotton, rice, or corn but not onions or motion picture box office receipts – it can get confusing. The CEA does not include bitcoin or other virtual currencies in its enumerated definition of commodity. So, why is bitcoin classified as a commodity?

In 2015, the U.S. Commodities Trading Future Commission (CFTC) defined bitcoin and other virtual currencies as commodities under the U.S. Commodity Exchange Act. The CFTC’s definitional decision came to light in a settlement order, which stated, “[T]he definition of a “commodity” is broad […] Bitcoin and other virtual currencies are encompassed in the definition and properly defined as commodities.” 

As stated, determining if something is a commodity does not require an elemental test or clear-cut definition as used by the Securities and Exchange Commission (SEC) for securities determination (i.e., the Howey Test). Moreover, securities are commodities but not all commodities are securities. In a separate enforcement action, a U.S. federal court found that the CEA’s text supports the CFTC’s position that virtual currencies are commodities, as the CEA defines “commodity” generally and categorically, “not by type, grade, quality, brand, producer, manufacturer, or form.” 

Therefore, the CFTC defined bitcoin as a commodity because it looks and acts like a commodity. It’s an illustrative example of functional regulation. Never mind the colloquial reference to “digital gold” (gold being a commodity), bitcoin and other cryptocurrencies behave like commodities. Bitcoin is interchangeable, meaning each coin is identical. Bitcoin’s price is also driven by supply and demand and is not dependent or influenced by a producer or “centralized entity.” Bitcoin is categorically a commodity. 

Whether other virtual currencies are to be considered commodities is to be determined. To date, the CFTC has made a declarative judgment that bitcoin and ether are commodities and Congress is working to solidify that declaration through statute (see the S. 4760, Digital Commodities Consumer Protection Act). 

Likely, many other virtual currencies should be classified as commodities, while others will inevitably meet the SEC’s test and be deemed securities. It will be up to the regulators to provide that judgment and clarity. Stay tuned!