Commodity vs. security: why it matters in crypto (with Bitcoin and XRP as examples)

In the world of traditional finance, the distinction between a commodity and a security is well understood and regulated. But in the fast-moving crypto landscape, this difference is often blurred—and its consequences can be enormous. Understanding whether a digital asset is treated as a commodity or a security affects how it's traded, who can offer it, how it's taxed, and whether regulators may come knocking.

Let’s break down what these terms really mean—and how they apply to Bitcoin, the flagship crypto commodity, and XRP, which has spent years battling over its legal identity.

What is a commodity?

A commodity is a fungible, interchangeable good with intrinsic value, typically used as a raw material or basic input in production. In finance, commodities include physical resources like oil, gold, wheat, and yes—even Bitcoin.

Bitcoin fits the definition because:

• It has no issuer or centralized controller.
• Its value is derived from supply and demand, not from the profits of a company.
• It is mined, scarce, and decentralized.
• It does not represent ownership in an enterprise.

That’s why U.S. regulators like the Commodity Futures Trading Commission (CFTC) classify Bitcoin as a commodity. This gives it a relatively clear legal standing and allows it to be traded on futures markets like the Chicago Mercantile Exchange (CME), just like gold or crude oil.

What is a security?

A security, on the other hand, is a financial instrument that gives the holder a claim on profits, ownership, or debt obligations of an enterprise. Securities are heavily regulated because they involve investor risk and potential fraud.

Under the U.S. legal framework (specifically the Howey Test), something is considered a security if:

1. There is an investment of money,
2. In a common enterprise,
3. With an expectation of profit,
4. Derived from the efforts of others.

Securities include stocks, bonds, and certain tokenized digital assets—particularly when investors buy them hoping the price will go up based on someone else’s work.

Bitcoin: the clear case for a commodity

Bitcoin is the cleanest example of a digital commodity.

It has no CEO, no company behind it, and no central issuance. It is not tied to a business model or revenue stream. Instead, it operates on a decentralized protocol, secured by miners, and has value because people trust its scarcity and neutrality.

As such, regulators have treated Bitcoin as a non-security for over a decade. It is legal to trade, invest in, and hold Bitcoin in most jurisdictions. Its regulatory clarity has allowed institutional adoption to grow rapidly, making it the foundation of the broader digital asset ecosystem.

XRP: the long fight over security status

If Bitcoin is the easy case, XRP is the complicated one.

In December 2020, the U.S. Securities and Exchange Commission (SEC) sued Ripple Labs, the company behind XRP, claiming it had conducted an unregistered securities offering by selling XRP tokens. The SEC argued that XRP was marketed and sold in a way that created an expectation of profit based on Ripple’s efforts, thus meeting all four prongs of the Howey Test.

This lawsuit sent shockwaves through the crypto industry:

• XRP was delisted from major exchanges in the U.S.
• Billions in XRP market cap were wiped out overnight.
• The case cast a shadow over other tokens launched via ICOs or private sales.

The 2023 ruling: clarity at last?

On July 13, 2023, a partial ruling by U.S. District Judge Analisa Torres provided long-awaited guidance:

• XRP is not a security when sold on public exchanges to retail investors (i.e., in secondary markets).
• However, XRP can be considered a security when sold directly to institutional investors by Ripple in over-the-counter transactions.

This nuanced ruling gave Ripple and XRP supporters a partial win—and opened the door for XRP to be relisted on major platforms like Coinbase and Kraken. It also marked a significant moment for the crypto industry, which had feared a blanket classification of most tokens as securities.

Impact on XRP and the industry

For XRP, the decision removed a major regulatory barrier, allowing the token to re-enter U.S. markets and restore investor confidence. However, the court's ruling also signaled that how a token is sold matters just as much as what it is.

For the broader crypto world, the XRP case:

• Reinforced the importance of compliance at the fundraising stage.
• Set a legal precedent that other token projects now study carefully.
• Sent a message to regulators: not all crypto assets fit neatly into old frameworks.

The road ahead: a future shaped by clarity

With this ruling, XRP is no longer buried under the uncertainty that plagued it for years. But the decision also opens the door for case-by-case assessments of digital assets, rather than a one-size-fits-all approach.

Looking ahead:

• Expect more legal clarity, especially as Congress and regulators push for crypto-specific rules.
• More tokens may face litigation, especially those that raised funds through ICOs or centralized token sales.
• Token issuers must be transparent and careful about how they market and sell assets.

And importantly, the XRP outcome shows that crypto isn’t inherently illegal or rogue—but it must evolve to meet regulatory expectations, without losing its decentralization ethos.