Digital currencies, like bitcoin, are actually commodities ruled U.S. Bankruptcy Judge Dennis Montali in the case of HashFast Technologies LLC v Lowe.
The case concerns the transfer, in 2013, of approximately 3,000 bitcoins, valued at the time approximately $300,000, to Dr Lowe, by the now bankrupt Hashfast mining manufacturers, in return for marketing.
The question to be determined by Judge Montali was whether bitcoin, and by implication likewise digital currencies, are to be classified as currency, and thus valued at $300,000 as at the time of transfer, or commodity, and so valued at the current rate of approximately $1.3 million.
Mr Kosalas, Attorney for Liquidating Trustee, argued the court should follow the ruling of Commodity Futures Trading Commission (CFTC) and IRS and find bitcoin is a commodity because it is not recognized as legal tender in any jurisdiction. So persuading Judge Montali, who, in passing judgment, commented bitcoin is not a currency as it is not widely accepted.
This is the first judicial ruling classifying bitcoin as a commodity, in stark contrast to earlier judgments stating bitcoin is a currency.
Trendon Shavers, convicted of running a bitcoin ponzi scheme, relied on the IRS ruling to argue bitcoin is a commodity, therefore, the legal definition of “investment of money” does not apply, but, Judge Mazzant, dismissing the argument, stated:
“It is clear that Bitcoin can be used as money. It can be used to purchase goods or services, and… used to pay for individual living expenses.”
Ross Ulbritch, convicted of running an online drug market and Robert Faiella, convicted of transmitting money without a license, tried to make the same argument, but the presiding judge stated:
“Bitcoin clearly qualifies as money… Bitcoin can be easily purchased in exchange for ordinary currency, acts as a denominator of value, and is used to conduct financial transactions.”
Mr Kosalas distinguished the findings by arguing they were in a criminal law context where the definition of currency is as wide as possible to include any instrument that could be used to exchange value, such as gold.
The contradictory rulings, however, are likely to cause confusion and, treating bitcoin as a commodity when it is used as a currency to make payments, can have negative effects on trade, an argument Dr Lowe’s attorney indirectly advanced by stating if the value of bitcoin had fallen, the trustee would have argued the opposite.
However, all judicial decisions so far have been at a first instance level with no precedent setting power. The confusion, therefore, is likely to continue until a higher court settles the question of whether bitcoin and other digital currencies are a currency when used as currency, or a commodity, regardless of how it is used.