Not bad.
Oh, wait! I also know bitcoins are notorious for wild price swings; that they became infamous a while ago as the currency used for buying drugs online.Even better.
So why are we talking about bitcoin now?Because, it’s back in the news.
It’s kind of a back-to-the-basics argument, which might make it a little tiring, but that’s news for you. The question is — what is a bitcoin, after all?
Apparently, it may not even be a currency, crypto or otherwise.
But wasn’t it invented to create an alternative financial system.Yes, you’re very well-informed. But turns out, the answer is no.
Oh.In the US, where the bulk of bitcoin action was taking place, three separate definitions seem to be emerging. There is its history as a currency, or as a system of money. American income tax authorities think it should be treated as property — something that is owned. And recently, the Commodity Futures Trading Commission (CFTC) in the US has decided to treat the bitcoin as a commodity — like crude oil or gold — because there are derivative products, like futures and options, based on the bitcoin.
Why is the commission butting in?The commission is the local commodity regulator in the US, which oversees the futures and options market. So when F&Os based on the bitcoin popped up, it probably felt it had to act. The commission said it would act against agencies which provide bitcoin derivatives without getting registered with the commission first. That’s the kind view.
And the unkind view?That there isn’t much financial innovation happening in the US; so every regulator wants to bring the bitcoin into its jurisdiction.
Whom did the CFTC target?A bitcoin derivatives market called Derivabit operated by a bitcoin exchange called Coinflip. The ironic part is that when the commission did get in touch with Derivabit, the exchange was already defunct.
When bitcoin itself is speculative, why are derivatives necessary?Exactly because bitcoin prices are speculative. For those who hold large quantities of bitcoins, buying regulated derivatives brings a certain amount of stability to the value of their bitcoin holding.
But do commodity regulators usually regulate currency derivatives?That doesn’t seem to be the case generally. In India, for instance, it is regulated by the RBI and the SEBI. So some people believe the FTC’s move may be challenged in court, where it would be overturned and bitcoins might return to being just a currency.
Besides this, all has been quiet on the bitcoin front?Actually, the bitcoin world is going through something of an internal upheaval. To put it simply, high-profile developers in the bitcoin world have decided to split it into two — the new Bitcoin XT and the old Bitcoin Core. The bitcoin world is calling it The Fork.
Essentially, the two bitcoin versions have popped up because developers couldn’t agree on how to scale up the size and load capacity of the existing one. If they don’t upgrade it, however, the currency’s transaction processing ability slows down, making it unattractive to users. But let’s leave that for another day.
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