To quote Dorothy from the movie The Wizard of Oz, “Toto, I’ve a feeling we’re not in Kansas anymore..” The CFTC (Commodity Futures Trading Commission) has officially designated bitcoin (a virtual “currency”) as a commodity. Why is this such a big deal? Well, the CFTC historically oversaw the futures markets for physical commodities such as agricultural crops, e.g. corn, wheat. Here’s a short description of what the CFTC does:
“The CFTC’s predecessors in the Department of Agriculture date back to the 1920s, but the Commission was formally created as an independent agency in 1974. The Commission historically has been charged by the Commodity Exchange Act (CEA) with regulatory authority over the commodity futures markets. These markets have existed since the 1860s, beginning with agricultural commodities, such as wheat, corn and cotton.
Over time, the markets regulated by the Commission have grown to include contracts on energy and metals commodities, such as crude oil, heating oil, gasoline, copper, gold and silver, and contracts on financial products, such as interest rates, stock indexes and foreign currency.
In the aftermath of the 2008 financial crisis – caused in part by the unregulated swaps market – President Obama and Congress charged the CFTC with reforming this market. The agency now also has regulatory oversight of the over $400 trillion swaps market, which is about a dozen times the size of the futures market.” Source: Commodity Futures Trading Commission
Bitcoin is included in the U.S. Code Chapter 1 – COMMODITY EXCHANGES (9) Commodity:
“The term “commodity” means wheat, cotton, rice, corn, oats, barley, rye, flaxseed, grain sorghums, mill feeds, butter, eggs, Solanum tuberosum (Irish potatoes), wool, wool tops, fats and oils (including lard, tallow, cottonseed oil, peanut oil, soybean oil, and all other fats and oils), cottonseed meal, cottonseed, peanuts, soybeans, soybean meal, livestock, livestock products, and frozen concentrated orange juice, and all other goods and articles, except onions (as provided by section 13–1 of this title) and motion picture box office receipts (or any index, measure, value, or data related to such receipts), and all services, rights, and interests (except motion picture box office receipts, or any index, measure, value or data related to such receipts) in which contracts for future delivery are presently or in the future dealt in.” Source: Cornell University Law School
The big deal about bitcoin is that it is virtual not physical. You can also say that about the derivatives marketplace since derivatives are a financial vehicle or instrument not an agricultural product. Anyway, there is no physical item that one can touch. There is no actual metal (or otherwise solid) coin that one can handle or count. Bitcoins are derived, “minted”, produced, and accumulated from NOTHING! Someone created computer code to “manufacture” the bitcoin. You can search the Web for many stories about bitcoin and other virtual attempts at creating virtual currency, I will not attempt to recreate a listing of links in this posting.
However, this vintage of virtual coin has graduated to become recognized by the U.S. Federal Government through the CFTC.
“In First Action against an Unregistered Bitcoin Options Trading Platform, CFTC Holds that Bitcoin and Other Virtual Currencies Are a Commodity Covered by the Commodity Exchange Act”
Source: Press Release CFTC
Who would have thought that wampum*, gold coins, silver dollars, fiat currency would evolve into electrical magnetic impulses existing on a computer hard drive, in a portable telephone, or in “space” so to speak as in the Internet “cloud.”
* wampum. Dictionary.com. Dictionary.com Unabridged. Random House, Inc.http://dictionary.reference.com/browse/wampum (accessed: October 05, 2015).
The dream of some is that the United States Federal Reserve Bank be abolished. The essence of virtual currency is that it is not controlled by any government or country’s regulations. Is that a good thing or a bad thing? It’s way too complicated for me to say. As I journey through our financial system…and I know that many of you WordPress readers are traveling along with me…thanks for your support! Anyway, the idea of “control” enters into any financial equation I think, virtual or physical. The attraction of bitcoin to many is that it has a finite maximum amount of bitcoins that can be “minted.” So one could say, is that in itself not a “control?” Well, before I get really philosophical, it’s a fascinating evolution of an international currency, I call it “international” because no sovereign government has created or minted it. Any currency only has “value” if others perceive it has value. In the end it’s all about “perception”!
If you are interested, I have several previous postings that address the CFTC governing issue concerning the 2008 financial crisis and derivatives in general:
- Collateralized debt obligations
- Great Recession
- Who prints the Money? U.S. Treasury or The Federal Reserve Bank?