I would argue cryptocurrency has reached the point of becoming mainstream. As the uses and impacts to daily life continue to grow, regulators are finally catching up, and more crypto-positive legislation is helping to change the way retail and institutional investors view cryptocurrency.

Despite outliers such as India, most governments are accepting that cryptocurrency is here to stay and have been doing the work to build legislation accordingly. This framework is helping to provide investor confidence with many beginning to approach cryptocurrency differently. However, the crypto ecosystem is growing rapidly and there are concerns that it is outstripping governments' abilities to understand it and to approach regulation in a just way.

Is Crypto a Currency, Security, or a Commodity?

In the US, one of the big questions surrounding cryptocurrency is its status. Legislators have differing views on how exactly cryptocurrency should be treated. The importance of this, is that it affects the outcome of the investment as the application applies to tax implications.

The main argument for the moment rests on whether they are securities or commodities. The challenge for regulators is that cryptocurrencies are highly diverse, and this means one-size-fits-all legislation is unlikely to be effective.

Bitcoin and Ether vs. XRP

Take the Securities and Exchange Commision (SEC), for example. While they have stated that they do not view Bitcoin (BTC) or Ethereum (ETH) as a security, they have recently begun a high-profile investigation into Ripple (XRP).

The SEC contends that XRP is an unregistered security.

• The SEC views XRP differently than Bitcoin and Ether because the latter two digital assets are not produced or controlled by a single individual or entity.

• By contrast, the SEC contends that Ripple Labs, Inc., a private company, “initiated a large scale distribution” of over 14 billion units of XRP.

Futures Trading

Bitcoin and Ether have benefited from the SEC not viewing them as securities. For example, the Commodity Futures Trading Commission (CFTC) has decided that Ether, the token for Ethereum, should be considered a commodity. The CFTC has made a similar claim on jurisdiction over Bitcoin.

Now both Ether futures and Bitcoin futures are traded as cash-settled derivatives on the Chicago Mercantile Exchange (CME), which is regulated by the CFTC. Investors also have a choice of trading options on these futures.

The opportunity to trade cash-settled crypto futures on a platform regulated by the CFTC is attracting institutional investors, like billionaire Paul Tudor Jones. In 2020 Jones stated he was allocating 1%-2% of his fund to Bitcoin futures traded on the CME.

Why Does the Legal Status of Crypto Matter?

The legal classification of cryptocurrency is important because it will influence adoption and use, including among institutional investors. For example, if a cryptocurrency is considered a security, as Ripple is, this means it must comply with strict SEC regulations designed to protect investors. On the other hand, if a cryptocurrency is considered a commodity then it is an asset to be traded. This gives it a lot more freedom in regulatory terms and opens the door for futures markets, which can add more trading options.

The final reason that status matters is stability. As the cryptocurrency markets make inroads in being approved by regulators, they continue to attract increasing interest from institutional investors, particularly in Europe. For example, Microstrategy was able to grow its stock price from just $125 at the beginning of 2020, to more than $1,000 in February 2021 via Bitcoin investments. They have since been followed by bigger names, including that of Tesla’s Elon Musk.

Regulations Vary Widely, By Country

While the US appears to be embracing cryptocurrency, other nations are less positive. India has taken a hard stance against cryptocurrency. Its Government has made another attempt to ban cryptocurrency outright, citing money laundering concerns. The move is deeply unpopular and threatens to damage India’s small yet thriving crypto industry.

Other countries, including China and Nigeria, have made attempts to curtail crypto trading. But Their efforts haven't worked well. P2P exchanges simply send the crypto trade underground, and governments lose access to capital they could have otherwise taxed.

Another area of contention is the downstream crypto derivatives market that targets retail consumers. This market includes instruments like contracts-for-difference (CFDs) that reflect the movement of crypto prices. While this type of trading is popular, the UK’s Financial Conduct Authority (FCA) recently banned the sale of such derivatives citing among their concerns the difficulty that retail consumers may have in understanding the crypto markets and the potential for significant financial losses.

Legislation May Become Irrelevant Anyway

Decentralized cryptocurrencies, particularly the recent slew of DeFi apps, appear to be thriving regardless of the prevailing attitude to cryptocurrency. They are not held to the same Know Your Customer (KYC) standards as centralized exchanges and this significantly lowers the barrier to entry.

For example, many people in Africa and South America have turned to cryptocurrency. In fact, Africa is one of the few places where cryptocurrency is actively used as a currency.

These developments represent a significant change from how cryptocurrency has operated in the past. Rather than a series of speculative assets, or small idealistic projects, a crypto community separate from government legislation is beginning to be built. This could pose an opportunity for significant growth, but it may also render government legislation impotent in the process.

We suggest you work with a legal professional. We have identified a few that specialize in this budding industry, but feel free to suggest others you have had positive experiences with in the comments below.

This article was written in collaboration with the team at Commodities.com.