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Bitcoin: Is It Really a Sound Financial Instrument?

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The emergence of cryptocurrencies has sparked debates among scholars, investors, economists, and enthusiasts around the world. Being coined as “cryptocurrency,” many people think that cryptocurrencies are the same as money. But is Bitcoin indeed a financial instrument?

Defining Financial Instruments

Accountants define a financial instrument as the one “that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.”

Though it may sound complicated, financial instruments are monetary contracts that contain contractual obligations that may require either one of the contracting parties to provide a good or service in exchange for a consideration.

A typical example of a financial instrument is a cash deposit. In cash deposits, the bank is liable to the depositor’s money. If the depositor needs his money, the bank should be able to return the money immediately.

Another example would be loans. In a loan, a bank provides financing to an individual or entity. This transaction creates a financial obligation for the individual or entity to pay the loan. In contrast, it also gives the bank the right to demand payment when it comes due.

Other complex examples of financial instruments are derivatives and hybrid securities.

Bitcoin as a Financial Instrument

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Debates around the world say that cryptocurrencies are not financial instruments. Accounting standard-setters also disagree with this claim.

Though Bitcoin and other cryptocurrencies have the same characteristics as money, governments around the world don’t recognize it as “currency.” For starters, cryptocurrencies are not legal tenders and, therefore, cannot be compared with money.

The prevalence of transactions settled with Bitcoin created this dilemma. If someone can buy and pay using Bitcoin, why can’t it be considered as money?

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Another issue is the introduction of cryptocurrency futures. Futures contracts per se are financial instruments. But, will it remain the same if it is trying to hedge cryptocurrencies?

German Court Decision–Bitcoin Not a Financial Instrument

In Germany, the Criminal Chamber of the Higher Regional Court or Kammergericht concluded that cryptocurrencies, according to their current laws, are not financial instruments.

The German Federal Financial Supervisory Authority (BaFin) treated Bitcoin and other cryptocurrencies like units of accounts. German Law provides that units of accounts are financial instruments.

Moreover, the law provides that trading and brokering financial instruments require licensing. The BaFin has been licensing Bitcoin trading, and it resulted in an unfavorable court judgment.

The Berlin Court concluded that Bitcoins could not be considered as “units of accounts” due to its lack of economic value. Moreover, the decision condemned Bitcoin traders who trade Bitcoin without a license. Such trading is considered illegal.

 

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