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Securities vs. Commodities

Securities and commodities are two types of asset classes. Different asset classes determine the regulatory framework and agencies governing particular financial products.

For example, investors buy:

  • Stocks
  • Mutual funds
  • Bonds
  • Debt
  • Other interests in companies, governments, or private businesses

These kinds of investments are securities.

Investors can also purchase commodities. Examples of commodities include:

  • Natural resources
  • Agricultural products
  • Wheat before delivery

Digital assets, such as cryptocurrencies, now take their place among financial instruments. There is uncertainty concerning the classification of some digital assets.

In this article, FindLaw overviews commodities and securities and explains their differences. See FindLaw's Securities Law section for more articles and resources, including Securities Law: An Overview and Questions About Securities Law.

What Are Securities?

Securities represent an ownership position. Stocks, bonds, and credit default swaps are common securities. Market participants keep securities to fund tuition, significant purchases, and retirement. Other investors use them to maintain and grow their overall wealth.

U.S. Supreme Court Defined a 'Security'

In 1946, the U.S. Supreme Court formulated a functional definition for a security in SEC v. W.J. Howey Co. The Court held that a security regulated by federal law existed when "a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party."

An investor buying stock in a corporation expects to profit from the company's success. That's a typical security. However, Howey involved an atypical security. A company sold plots of citrus acres while a related company contracted to work and maintain the fields on behalf of the owners.

The Court determined this arrangement to be a security as well. Securities are broadly defined to prevent efforts to evade federal securities regulation.

Examples of Securities

A security can be an ownership position in any of the following:

  • A publicly traded corporation's stock
  • A creditor relationship with a governmental body
  • A bond from a corporation
  • Rights to ownership as represented by an option
  • Other types of securities

Securities play an essential role in the financial system. They provide companies and governments with capital and investors with potential returns.

What Federal Agency Regulates Securities?

The U.S. Securities and Exchange Commission (SEC) regulates securities under the Securities Act of 1933. The SEC emphasizes investor protections, disclosure requirements, and market safeguards. An asset considered a security falls under the SEC's jurisdiction, and securities laws apply to it. The SEC takes the position that most cryptocurrencies are securities.

What Is a Commodity?

Commodities consist of basic goods or raw materials. These physical commodities are either consumed directly or used as building materials to create other products. They are typically tangible assets traded in large quantities and interchangeable with other goods of the same type.

Interchangeability is a commodity's defining feature. One unit is, for all practical purposes, the same as another unit. To an orange juice company, oranges are oranges. To an apple juice company, apples are apples. To an oil refinery, one barrel of oil is like any other barrel of oil.

Business practices for commodities require that they meet certain minimum quality standards. Markets don't distinguish between different types of the same commodity; it's about quantity. 

Examples of Commodities

Commodities fall into several categories. These categories include:

  • Agricultural products, i.e., wheat, coffee, corn, and sugar
  • Energy resources, i.e., crude oil and natural gas
  • Livestock and meat
  • Metals, i.e., gold and silver

Commodities can also include digital assets and cryptocurrency.

Purchasing commodities is a form of investment. Buyers hope to lock in a reasonable price in advance to avoid any price increases. The opposite is true of sellers. Sellers want to sell before the price goes down. Buying oil in advance at $50 will be a bargain if the price of oil later rises to $100. There's profit in buying low and selling high.

What Federal Agency Regulates Commodities?

The Commodity Futures Trading Commission regulates commodity markets under the Commodity Exchange Act of 1936 (CEA). The CTFC focuses on market stability and fraud prevention by regulating commodity trading and other derivatives. The CEA regulates firms and individuals conducting business in the derivatives industry. They must register with the CFTC.

CFTC regulations require, with a few exemptions, CFTC-registered firms to be National Futures Association (NFA) members. The CFTC designates NFA as a registered futures association. It's an industry-wide self-regulatory organization for the U.S. derivatives industry.

A commodity pool operator is an organization or individual that advises others as to the value or the advisability of buying or selling any of the following:

  • Future contracts
  • Commodity options
  • Retail off-exchange contracts or swaps

Commercial enterprises typically trade commodity contracts. These enterprises depend on commodities for their business. Purchasing commodities, on the other hand, involves futures contracts. It's buying goods before they exist. The buyer agrees to purchase so many units of a good at a set price that can be delivered much later.

Regulatory Classification of Digital Assets

"Digital assets" include anything exchanged on a blockchain. They generally fall into several categories, including the following:

  • Crypto assets
  • Stablecoins
  • Non-fungible tokens (NFTs)
  • Central bank digital currencies (CBDCs)
  • Security tokens
  • Ether

Digital assets can include virtually anything of value that is not tangible. This includes Bitcoin, Ethereum (ETH), and other cryptocurrencies.

The classification of digital assets is not clear in certain circumstances. Currently, several state and federal regulators are responsible for overseeing digital assets. Areas of regulatory oversight include the following:

  • Federal and state banking laws governing money services businesses
  • Federal and state securities and commodities laws
  • State regulations, i.e., New York's BitLicense requirement for virtual currency business activities

Digital assets, particularly cryptocurrencies, pose regulatory challenges. For example, lawmakers have requested clarification from the SEC regarding the classification of ETH. The SEC and the CFTC have recognized ETH as a non-security digital asset. Legislators assert that clarity regarding its classification is necessary. Without clarification, regulatory uncertainty will persist.

Congress attempted to institute consumer protections relating to digital commodities with the Digital Commodities Consumer Protection Act of 2022. But in 2023, the bill failed to pass in Congress. The regulatory landscape for digital assets continues to evolve. The SEC draws on existing legal frameworks, namely the Howey Test to determine whether an asset falls under the SEC's jurisdiction and must comply with securities laws.

The Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 brought amendments to the CEA. The Dodd-Frank Act expanded the CFTC's authority to regulate over-the-counter (OTC) markets in swaps and options. Such regulations apply to OTC derivatives transactions involving digital assets. Market participants must stay informed about applicable laws and regulations. The debate on whether cryptocurrencies are deemed securities continues.

Securities vs. Commodities

Securities and commodities are two broad categories of assets. They have distinct qualities regarding tangibility and market volatility, among other attributes.

Securities and commodities are both traded on markets. They're also both liquid. This means they can be easily exchanged. These features invite buying and selling.

An investor buys stock, hoping for its value to rise and make a profit. The same is true for commodities. Both situations involve an opportunity for profit and some degree of risk. It's becoming increasingly common for financial planners to diversify portfolios by including commodities.

Securities and commodities operate under different laws and regulatory authorities. The CFTC and the SEC jointly regulate security futures.

Need Legal Help With a Securities or Commodities Issue?

Securities and commodities can get complicated. Several statutes and agencies govern and regulate them. They also operate in varying markets. These differences affect buyers, sellers, and investors. They can also have a significant impact if you need an attorney.

If you believe you've been the victim of securities fraud or have questions about securities or commodities, consult an experienced attorney familiar with securities or commodities. They can explain your legal options.

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