Commodity

A commodity is a basic, fungible good used in commerce. Fungibility denotes that one unit of the commodity is equally exchangeable for another unit of the same commodity, such as one barrel of West Texas crude oil being equivalent to any other. Often, commodities are inputs for other goods or services, as when lumber becomes an input for homes.

“Soft” commodities tend to be relevant in agriculture, where commodities are grown (e.g., soy beans, livestock, coffee and corn). “Hard” commodities are generally mined or extracted (e.g., gold, oil and rubber). Commodities are frequently bought, sold and traded on markets and exchanges, with transactions often conducted with derivatives.

Think of contracts on Lean Hog futures, where each contract represents 40,000 pounds of live pigs. Not many people want to take physical possession of the underlying asset. Instead, as a financial instrument, a derivative contract specifies the obligations to the contract’s parties and counter-parties as though one of those parties is obligated to take physical possession of the pigs, when in reality they never actually do. In plainspoken terms, an investor can buy the pigs at one price, never possess the pigs, and then resell them at another price. Derivatives can get a lot more complicated than that. But hopefully, this gives you an idea.

The context of “commodity” in Blockchain Journal’s Glossary is related to the as-of-yet unresolved conversation taking place in Washington, D.C. regarding the regulation of cryptocurrencies. At the time this glossary entry was published, that debate focused on the question as to whether cryptocurrencies should be treated as securities or commodities. From a regulatory point of view, securities are treated differently from commodities.

For enterprises and other businesses that are considering blockchain as an application platform for digital transformation, business innovation and industry disruption, any determination by lawmakers and regulators will have important implications that could impact other longer term business activities involving compliance and taxation. The reason these implications are relevant to businesses is because any usage of a distributed ledger typically requires a business to keep some of that ledger’s native cryptocurrency on-hand in order to pay the on-demand fees for ledger usage.

To further complicate issues, the debate among lawmakers and regulators isn’t just about whether cryptocurrencies as a whole are commodities or securities. It’s also about which cryptocurrencies are commodities and which ones are securities.