What Is a Crypto Commodity?
"Crypto commodity" is the generally accepted term for a tradable and fungible token representing a commodity, utility, asset, or contract in the real or virtual world. The underlying asset's value is tokenized on a blockchain, and the asset is secured or held in reserve. Once created, the token is considered a crypto commodity. It can then be traded like any other cryptocurrency or commodity wherever it can legally be traded.
The term can also refer to legally regulated cryptocurrencies traded as commodities. Bitcoin, ether, and other cryptocurrencies are considered commodities by the Commodity Futures Trading Commission.
Key Takeaways
- A crypto commodity is a tradeable and fungible token representing an underlying asset.
- The Commodity Futures Exchange Commission has defined cryptocurrency and related assets as commodities, thus claiming jurisdiction under specific use cases.
- The framework for defining crypto commodities and other virtual assets remains gray because regulators, developers, traders, investors, and courts are battling over definitions and jurisdiction.
The History of Crypto Commodities
A quick dive into the evolutionary history of cryptocurrency platforms is warranted to understand the concept ofcrypto commodities.
As the Bitcoin network evolved, it gained popularity for its ease of payment processing and decentralized nature. Technology stalwarts quickly realized that blockchain networks could be used for more than simple online payments. Bitcoin had a fiat currency value, which created interest in transferring other asset values to the blockchain. Asset ownership could be recorded on the chain, and tokens created to represent ownership of that asset.
Once this was realized, the world exploded with tokens. Digital art was tokenized on a blockchain and sold to collectors; virtual property in a persistent digital landscape was tokenized and sold; and the concept of tokenizing real estate and property emerged. Many other tokens were created and could be bought and sold on digital exchanges.
As long as there is demand from investors for crypto commodities, they are likely to continue being traded on commodity and crypto exchanges.
Next came the idea that derivatives of the tokens could be created, much like stock and commodity derivatives. These are contracts that could be bought and sold by traders and investors, who are essentially betting on the price movements of the assets the contracts were linked to. The Commodity Future Trading Commission (CFTC) quickly stepped in and began regulating these tradeable assets.
Concerns About Crypto Commodities
As of August 2023, virtual assets like cryptocurrency and crypto commodities do not have clearly defined legislation or regulatory guidelines. Due to existing regulations, authorities have claimed jurisdiction over specific blockchain-related tokens, assets, and investing and trading activities. However, there is still controversy regarding regulating decentralized assets such as crypto and if regulators have jurisdiction over them.
Both the Chicago Mercantile Exchange and the Cboe Options Exchange have cryptocurrency-derived products, which can be readily traded alongside more traditional commodities like gold and corn.
However, in July 2023, the Southern District of New York district court issued a summary judgment against Ripple for violating securities laws when it sold cryptocurrency to institutional investors. But the company was judged to have not violated any securities laws when selling its coin on exchanges to individual investors. The effect this ruling will have on crypto commodities, which are basically cryptocurrencies, remains unclear.
Which Cryptos are Classified as Commodities?
Some or all cryptos are commodities, depending on which regulatory authority you ask. The classification depends on the circ*mstances the cryptocurrency is issued under, how it is made available to investors, how it trades, and how investors and traders treat it.
What Is the Difference Between a Commodity and a Cryptocurrency?
Traditionally, a commodity is a raw physical good used in other goods and services. Cryptocurrency began as a virtual payment system. The line distinguishing between the two is blurring as cryptocurrency investing and trading products continue to emerge.
What Commodities are Backed By Cryptocurrencies?
There are no commodities backed by cryptocurrencies. However, there are commodity-backed stablecoins, which are cryptocurrencies that are collateralized by reserves of physical goods. Examples are PAX-Gold (PAXG) and Tether Gold (XUAt).
The Bottom Line
Cryptocommodities are tokens that represent an underlying or secured commodity on a blockchain. They can also be cryptocurrencies, depending on specific regulatory authorities' definitions.
