Are cryptocurrencies money? Are they
securities? In this video I’m going to explore how regulators and investors should think about this remarkable new asset class. What actually are cryptocurrencies?
Is Bitcoin money? Is it a security? The question turns out to be significant.
Government’s want to know how cryptocurrencies should be taxed and
regulated. If bitcoin is a security, for instance, then it might have to be
regulated by Britain’s Financial Services Authority or the American
Securities and Exchange Commission or the Australian Securities and Investment
Commission. If it’s a security that affects how it should be taxed. Should
the sale of cryptocurrencies be liable for capital gains tax? So far different
countries have approached this question in different ways but there are still a
lot of open questions, and from an investment perspective, understanding
whether cryptocurrencies are money or securities might change your
diversification strategy. So let’s see if we can figure it out. At a technical
level cryptocurrencies are just tokens that incentivise the users of
blockchains to look after the network. Bitcoin miners
who solve the proof-of-work puzzle and create new blocks of transactions are
rewarded with newly minted Bitcoin. But what are these tokens economically
speaking? One traditional way to think about money is if it fits three criteria:
money is a medium of exchange, store of value and a unit of account. On this
Bitcoin right now does very poorly. It’s not a very good medium of exchange.
Bitcoin transactions can take up to an hour to be confirmed. You’re not going to
want to wait an hour to confirm that you’ve paid for a cup of coffee. There
are technologies trying to solve this problem and there are other
cryptocurrencies that confirm transactions much quicker, but right now
it is a problem. Is Bitcoin a store of value? This is a bit complicated; one
Bitcoin will always be worth one Bitcoin, but the exchange rate between fiat
currencies like the US dollar and Bitcoin fluctuates so heavily it’s not a
great place to store value. Is Bitcoin a unit of account? In the
early days of Bitcoin some online retailers listed their prices in Bitcoin,
that doesn’t really happen anymore. So Bitcoin right now isn’t really
money, but does that mean that cryptocurrencies are securities? Well
some certainly are. There are a lot of cryptocurrencies that look like company
shares where investors have purchased ownership stakes in a platform for
expected gain. But not all are. A lot of cryptocurrencies are what we
call utility tokens; they perform a critical function for the operation of
the blockchain application. You can still invest in a utility token of course but
it doesn’t really make much sense to call it a security. It’s more like an
internal accounting tool within a firm. Looking at the basic economic attributes of cryptocurrencies, my colleagues professor Sinclair Davidson and professor Jason
Potts, have concluded that a cryptocurrency token is a hybrid asset.
Combining the best features of debt and the best features of equity, or, ‘dequity’.
Economists didn’t even know ‘dequity’ was possible before Satoshi Nakamoto
invented Bitcoin. So what are cryptocurrencies? They’re not really
money and they’re not always securities either. Cryptocurrencies are a new form
of asset to exchange value in an economy. We’ve never seen ‘dequity’ before. Part of
what’s so exciting about the cryptocurrency space is seeing
entrepreneurs, investors and innovators try to figure out how best to use this
remarkable new asset class.