A controversial report released by the UK Treasury Committee has said consumer crypto trading should be regulated as gambling rather than financial services.
“We strongly recommend that the government regulate retail trading and investment activity in unbacked crypto assets as gambling rather than as a financial service, consistent with its stated principle of ‘same risk, same regulatory outcome’,” the cross-party committee of MPs say.
The report argues that cryptocurrencies are subject to huge price volatility, they have no intrinsic value and no discernible social good.
It “more closely resembles gambling than a financial service, and should be regulated as such”, Harriett Baldwin MP and chair of the committee said.
“By betting on these unbacked ‘tokens’, consumers should be aware that all their money could be lost,” the Conservative parliamentarian added.
According to UK government figures from 2021, around 10 percent of UK adults hold or have held crypto-assets.
The MPs fear that regulating consumer crypto trading as a financial service will create a "halo" effect that leads consumers to believe that this activity is safe and protected when it is not.
This argument was, in part, based on a testimony given by Charles Randell, former chairman of the Financial Conduct Authority (FCA).
He told the committee it is “disappointing” that the government’s consultation on the crypto regime “proceeds on the false premise that speculative crypto is a financial service”.
For Randell, “speculative crypto is gambling pure and simple” and it should be regulated and taxed as such, with levies to support the debt advice and addiction services for which it will fuel demand.
In other testimony, the FCA told lawmakers that “crypto gambling addictions are rising” and there are limited controls in place to protect vulnerable consumers.
According to the regulator’s CEO Nikhil Rathi, although many consumers invest small amounts of money in crypto-assets, some have lost “life changing sums of money”.
If the recommendation is accepted, it would make crypto trading subject to the UK gambling laws which provide anti-money laundering safeguards and guide businesses on how to prevent problem gambling.
In January, a similar notion was raised by Fabio Panetta, executive board member of the European Central Bank. However, the European Parliament has not embraced the idea and instead treats crypto as a financial instrument, a position which has been solidified with the passing of the Markets in Crypto-Assets Regulation (MiCA).
The UK government is also currently working on a comprehensive crypto regulatory framework.
In a consultation of its proposals in February, Andrew Griffith, economic secretary to HM Treasury, said that crypto-asset regulation is necessary to deliver on the government’s ambition for the UK to be home to the most open and technologically advanced capital markets in the world.
Industry experts are now concerned that any divergence from the government’s current approach, which seeks to bring crypto trading into the existing financial regulatory perimeter, may curtail the attractiveness of the UK market among crypto businesses.
Blair Halliday, managing director UK at Kraken, said it is “regrettable the committee does not support the opportunity the UK has to be a true global leader in our rapidly developing industry”.
Halliday claims the proposal is misguided and wholly unsuitable for UK consumers as gambling protections “will not offer the same safeguards as bespoke financial services regulations”.
Financial services are strongly regulated in the UK and the application of these existing rules to crypto-assets could provide for a high level of protection, Adam Jackson, director of policy at fintech association Innovate Finance, added, and emphasised that the new Consumer Duty “sets a high bar for requiring firms to deliver good outcomes for consumers, including those with vulnerable characteristics”.
Trade body CryptoUK also criticised the Treasury Committee’s conclusion.
“We are both concerned and disappointed by these claims which are unhelpful, false, fundamentally flawed and unsubstantiated,” Ian Taylor, board advisor at CryptoUK, said.
He pointed out that professional investment managers see Bitcoin and other crypto-assets as a new alternative investment class, not as a form of gambling, and institutional adoption of crypto-assets has increased significantly.
Furthermore, gambling is exempt from capital gains tax, which means that the government would fall short of tens of millions of pounds in tax income from gains made by buying and selling crypto-assets.
“The statement fails to reflect the true nature, purpose and potential of the crypto industry,” Taylor stressed.
The Treasury Select Committee report also gave a dressing down to Rishi Sunak’s now-abandoned plans to mint a royal non-fungible token (NFT).
The MPs say that although the benefits of crypto-asset technologies are unclear, the risks posed to consumers and the environment “are real and present”.
“We therefore recommend that the government takes a balanced approach to supporting the development of crypto-asset technologies, and seeks to avoid expending public resources on supporting crypto-asset activities without a clear, beneficial use case.”