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Finance & Restructuring Blog

Bitcoin: Currency, Commodity or None of the Above?

Jeffrey I. Snyder

In my recent post, I discussed the shortcomings of Article 9 of the Uniform Commercial Code as applied to Bitcoin.  Bitcoin does not fall within the definition of “money” under UCC § 1-201, nor do Bitcoin wallets come within the UCC’s definition of “deposit accounts.”  Both the uncertainty surrounding the treatment of Bitcoin and the likely conclusion that it would be treated as a “general intangible” under the UCC create difficulties for lenders and potential exposure for recipients of Bitcoin that may have no way to realize that the Bitcoin received remains encumbered by a prior security interest pursuant to UCC §§  9-315(a) and 9-332.

A fellow blogger (or actually one of his students) creatively argued that Bitcoin may fit within the definition of “security” under Article 8 of the UCC by treating Bitcoin miners as “issuers” and Bitcoins as interests in the collective commercial enterprise of computing strength that is used to verify prior Bitcoin transactions.  This argument is a bit of a stretch of the concepts of “issuer” and “commercial enterprise” under Article 8, but if it worked it would bring Bitcoin into the realm of “investment property” under Article 9 of the UCC, which includes securities, security accounts, security entitlements, commodity contracts and commodity accounts.  This would allow a secured party to perfect an interest in Bitcoin by filing a UCC-1 financing statement, or by taking “control” of the Bitcoin pursuant to UCC §§ 9-106 and 8-106 by entering into an agreement with a Bitcoin wallet-provider to take instructions from the secured party under certain circumstances, including in the event of a default.  This is probably the desired result because it represents a workable way to both perfect a secured interest in Bitcoin and prevent dissipation of the collateral should a triggering event arise.  Nevertheless, it would be better achieved by broadening the definition of “deposit accounts” or creating a new class of collateral than by shoehorning Bitcoin into the regulatory scheme designed for things that are more traditionally regarded as “securities”.

Indeed, others have observed that Bitcoin has more in common with a commodity than it does with money or a security.   For example, according to this article the central bank in Finland has decided that Bitcoin is neither an official currency nor a payment instrument.  The latter requires an issuer that is responsible for its operation and, of course, the hallmark of Bitcoin is its lack of any central operator.  Instead, according to the head of oversight at the Bank of Finland, “it’s more comparable to a commodity.”  Analysts at Goldman Sachs likewise reportedly observed that Bitcoin is commodity-like in that it is an “item that ‘accommodates’ our physical wants and needs,” although they point out that, Bitcoin is thus far inferior to gold in its ability to accommodate our need for a store of value.

The definition of “commodity” under the Commodity Exchange Act (7 U.S.C. § 1A(9)) includes all goods, articles, services, rights and interests (except onions and movie box office receipts) in which contracts for future delivery are presently or in the future dealt in.  Under this broad definition, Bitcoin arguably qualifies as a commodity because forward contracts for the delivery of Bitcoin exist (mostly among Bitcoin miners seeking to lock in a price for future Bitcoin), even if most Bitcoin transactions are purchases or sales or Bitcoin at spot prices.  Incidentally, the Commodity Exchange Act definition of “commodity” is pulled into the Bankruptcy Code by 11 U.S.C. § 761 and, accordingly, could operate to exempt certain transfers in connection with forward Bitcoin contracts from avoidance pursuant to 11 U.S.C.  § 546(e).

If Bitcoin were deemed a commodity, this would allow futures contracts, options on such contracts, options on Bitcoin, or any other contract or option on Bitcoin that is traded on an exchange or market to be treated as investment property under Article 9 and subject to perfection by “control.”  This, however, does not lead to a more satisfying result under Article 9 for Bitcoin itself, as it remains property in which a security interest is perfected through the filing of a UCC-1 Financing Statement.

While there are substantial issues with each position, arguments exist in different contexts and under different legal frameworks for the treatment of Bitcoin as property, currency, a security and a commodity.  Each has potentially unintended legal, tax and other consequences for parties transacting in Bitcoin.  Until these matters are settled by the courts or by legislation, it is likely that mainstream adoption of Bitcoin will be only for the purpose of immediate conversion to cash.

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