What Is a Digital Commodity?

Digital Commodity

A commodity that exists digitally, as opposed to in “meatspace.”

What Is a Digital Commodity?

There is a huge range of things that might be termed a digital commodity. These include things like computing power and storage. Increasingly, however, the term digital commodity is primarily taken to mean digital currencies.

In practical terms, digital commodities regulation is targeted squarely at cryptocurrencies. In the U.S., lawmakers signed the Digital Commodity Exchange Act 2020 to regulate the activities of trading platforms. Other laws and regulations governing the use of cryptocurrencies and associated activities have appeared rapidly in recent years, from New York state’s BitLicense through to the United Kingdom banning the sale of crypto derivatives to retail investors.

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Because cryptocurrencies are commodities, they can also be used as the basis for derivatives — a popular financial instrument whose value is based on the value of an underlying asset. For example, a trader might choose to enter into a derivatives contract that gives them the right to buy or sell an amount of cryptocurrency at a certain date or value. The growth in derivatives is seen by many as crucial for the mass adoption of digital assets.

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Confusingly, digital commodity trading can also refer to selling real-world assets such as oil and gas electronically.

Here, digital commodity trading relates to the digitization of different elements of the commodity trading chain.

For example, technology can be used to automate the securitization of assets; for massive data mining intended to help traders make better investment decisions; for optimizing models to help traders take better option positions; and, at the end of the chain, for the automation of back-office processes such as settlement and documentation.

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