A commodity? Come to think of it, it does behave a lot like oil and gold - it can be bought and sold in cash markets or via derivatives such as futures.

What about a security? Many cryptocurrencies are, in a way. They’re issued like stocks in “initial coin offerings” and used to represent shares in online projects.

The debate may appear abstract, with little bearing on the hard-boiled world of finance, but it is attracting increasing interest from economists and lawyers who say it could have major implications for the future of cryptocurrencies.

How bitcoin and other digital coins are defined could shape how they are regulated around the world. In turn, the rules they are subject to could determine whether they make the leap from a niche to a mainstream asset.

So how will regulators treat them?

In the United States, federal watchdogs say they see elements of both securities and commodities, but like most major economies have not come up with a set of rules. The European Union, however, will outline a framework this year, which could see crypto wedged into existing regulations, or a whole new set of rules created.

For market players, how bitcoin and its kin are regulated will have serious ramifications.

Commodity markets operate with relatively little regulatory oversight. Securities, on the other hand, are typically subject to more onerous rules on price transparency, trade reporting and market abuse.

“When we’re going through the security process, we spend a lot of fees and lawyers to make sure we’re in compliance,” said Benjamin Tsai, president of Wave Financial, an investment manager in Los Angeles overseeing $40 million in crypto.

“It’s a lot more of a pain in the butt.”

CHARACTER CLUES

Some of the cryptocurrency identity crisis lies in the fact that bitcoin was originally conceived as a means of payment, but now rarely bears the hallmarks of dollars, euros or pounds.

It’s of little use as a store of value because of its volatility, and is hampered as a means of exchange by its slow network and high transfer costs.

A booming bitcoin lending market is offering clues to its character.

Bitcoin lending offers lines of credit to crypto firms earning money in cryptocurrencies, such as payment processors or miners, looking to secure traditional money for covering expenses. Also, traders who don’t want to sell their bitcoin holdings use them as collateral to borrow cash for use in algorithmic or high-frequency trading.

For those lending money, relatively high yields are an attractive proposition in an era of rock-bottom rates.

Key characteristics of this market, such as market-led price discovery and the motivation to seek liquidity, mirror that of commodities leasing, according to market players and economists.

“The commodities markets (analogy) is very fitting,” said Deeksha Gupta, an assistant professor of finance at the Carnegie Mellon University in Pittsburgh who has researched crypto.

“One of the biggest similarities is that they are also driven by people wanting to be able to get liquidity.”

The bitcoin lending market has grown quietly as an opaque corner of the cryptocurrency sector, which itself is notorious for its lack of transparency. While there’s little data with which to gauge the size of the lending market, it is widely seen to have expanded rapidly over the past year.

New York-based Genesis Capital, one of the biggest lenders in the market, said its outstanding loans soared late last year to around $545 million compared with $100 million a year earlier.

Implied interest rates in these markets - the price of borrowing bitcoin - stand at around 4-5%, Genesis CEO Michael Moro said. On platforms for people to lend cash against bitcoin, rates are as high as 8%.

FINANCIAL INSTRUMENTS

Cryptocurrencies’ kinship to securities arises largely from their issuance and function in initial coin offerings, or ICOs, where they are used to raise traditional money.

ICOs are often held by companies seeking to raise funds for blockchain-related or other online projects. They raise capital by issuing digital coins, which grant holders access to the new system or software or a share in profits generated.

For instance, Switzerland-based Aragon - a management platform for decentralised organizations - raised about $25 million in 2017 issuing tokens that gave voting rights on how the system is developed.

Regulators may choose to treat different cryptocurrencies differently, depending on their specific characteristics, an approach taken by Britain last year.

Some players say any designation of cryptocurrencies as financial instruments akin to securities may be positive, with burdensome oversight balanced by the potential to allow funds to market cryptocurrencies to a wider pool of investors.

“If they were somehow classified as a financial instrument, then that would have the knock-on effect that they would be eligible for retail funds,” said Nic Niedermowwe, CEO of crypto fund Prime Factor Capital in London.