At this point in the evolution of digital assets, it is clear that Bitcoin is a digital commodity and that the majority of other cryptocurrencies are digital securities. Digital commodities do not pass the Howey test, whereas digital securities do. The inclusion of these two categories in a linear arrangement based on market capitalization is misleading and predatory.
Graphic illustration of a crypto trading platform on a tablet and a smartphone.
For a new entrant in the digital asset ecosystem, assuming they haven’t taken the time to study and understand the fundamental difference between digital commodities and digital assets, they find exchanges listing the entirety of these assets based on market capitalization and, without realizing it, they associate them as alternative assets competing in the same space. They are not.
A security, according to the Howey test, is an entity that involves the investment of money in a common enterprise with a reasonable expectation of profits derived from the efforts of others. Most cryptocurrencies pass this test and should be registered as securities with adequate investor protection. Bitcoin fails this test and is thus classified as a digital commodity.
For instance, FTX had issued a security token called FTT through which investors could profit from the exchange’s activities. Because the exchange was largely unregistered and unregulated, it provided fertile ground for the leadership to misappropriate client funds, resulting in the crash and massive losses for investors trading on the platform. This would not have happened if this entity had been fully registered, regulated, and audited on a regular basis.
Price-tracking websites for crypto assets, such as Coinmarketcap and Coingecko, frequently list digital assets in a single column, ordered by market capitalization. The assets are also listed in the same way on exchanges. Even media companies reporting on digital assets, which are frequently listed in…
