Regulate Crypto as Gambling Say MPs
A new report published by the Treasury Committee has called for consumer trading in unbacked crypto to be regulated as gambling. The cross-party group of MPs has called on the government to demonstrate the risks posed by cryptocurrency to investors and to avoid using public resources to promote crypto. However, the Treasury does not support the Committee’s stance.
According to the Treasury Committee digital currencies have no intrinsic value or useful social purpose. ©Alesia Kozik/Pexels
Risk to Investors
MPs have urged the government to regulate consumer cryptocurrency trading as a form of gambling. In a new report published by the Treasury Committee, cross-party MPs have stated that cryptocurrencies such as Bitcoin serve no social purpose and have no intrinsic value. The report raises concerns that unbacked cryptoassets pose a risk to consumers.
According to the scathing publication, crypto is being used by criminals to carry out scams, fraud and money laundering. It also claims that cryptocurrencies consume large amounts of energy and pose a real and present risk to the environment. Chair of the Treasury Committee Harriett Baldwin MP commented:
“The events of 2022 have highlighted the risks posed to consumers by the cryptoasset industry, large parts of which remain a wild west. Effective regulation is clearly needed to protect consumers from harm, as well as to support productive innovation in the UK’s financial services industry.”
Expanding on the matter, Baldwin said that cryptocurrencies resemble gambling more closely than a financial service due to their price volatility and lack of intrinsic value or social benefit. She added that consumers should be made aware that by betting on unbacked ‘tokens’ all their money could be lost.
A statement issued by the Committee explained that unbacked cryptoassets are not supported by any underlying asset. These are the most prominent form of crypto, with Bitcoin and Ether accounting for two thirds of all cryptoassets. The price volatility of cryptocurrencies poses a significant risk to consumers, as huge losses can be accrued.
It argues that retail trading in unbacked crypto more closely resembles gambling than a financial service, calling on the government to regulate it as such. It also raises concerns that if crypto were to be regulated as a financial service, it could lead consumers to believe that this activity is safe and protected.
Boom and Bust
Cryptocurrencies have seen a phenomenal rise in popularity since Bitcoin first launched in 2009. HM Revenue and Customs estimates that around 10% of adults in the UK have or have held cryptoassets. The digital mode of currency is not reliant on any central authority such as a government or bank. As a result, it sidesteps the need for an intermediary when funds are exchanged.
The Committee accepts that the technologies underlying cryptoassets could bring benefits to financial services, in particular when it comes to cross-border transactions and payments in less developed countries. It wants to ensure that the government and regulators keep pace with developments so that productive innovations are not unduly inhibited.
However, the future benefits of crypto remain unclear. Over the last fifteen years the price of Bitcoin has repeatedly soared and crashed. 2018 saw the biggest mass sell-off of cryptocurrencies, and has since been dubbed ‘the Bitcoin crash’. That September the value of cryptocurrencies fell by 80% from their January peak, marking it as a worse crash than the dot-com bubble collapse.
The group of MPs has urged the government to take a balanced approach to supporting the development of cryptoasset technologies. The report states that the government should avoid spending public resources on projects that do not present a clear and beneficial use and should not promote particular technological innovations for their own sake.
It cites the abandoned Royal Mint NFT as an example. In April 2022 former Chancellor of the Exchequer Rishi Sunak asked the Royal Mint to produce an NFT for Britain, in a bid to make the UK a global hub for cryptoasset technology and investment. The NFT bubble has since burst and less than a year after its first announcement the Treasury has scrapped the proposal.
Disagreement Over Regulatory Approach
The summary of the Treasury Committee’s report makes a number of key recommendations. These include assurance that the Financial Conduct Authority’s authorizations gateway is kept open so as not to constrain potential productive innovation in financial services. Whilst the extent of benefits that cryptoasset technologies may bring to financial services remains unclear, the risks posed by such assets to the consumer and the environment are apparent.
The government should take a balanced approach to supporting the development of cryptoasset technologies, without dipping into the public purse. The report makes it clear that the volatility and absence of intrinsic value of crypto poses a real risk to consumers.
It takes the view that consumer speculation in such products more closely resemble gambling than a financial service. Regulating crypto as a financial service could create ‘halo’ effect, implying a false sense of security for investors. The MPs strongly recommend that the government regulates retail trading and investment in unbacked cryptoassets as gambling instead of as a financial service.
The report follows an inquiry into the cryptoasset industry. An oral evidence session with leaders of the Financial Conduct Authority revealed that around 85% of cryptoasset firms that applied were not able to meet the minimum standards required for registration according to its anti-money laundering and counter-terrorist financing safeguards. The Committee has stated that it is considering central bank digital currencies separately.
The Treasury has rejected the Committee’s assertion that crypto should fall under the regulation of gambling. It says that the risks posed by crypto are typical of those that exist in traditional financial services. Trade association CryptoUK has also rejected the report, describing the observations of MPs as unhelpful and unsubstantiated.
Lawmakers around the world are posed with the same problem of how to regulate crypto. The European Union recently approved the world’s first set of comprehensive rules for crypto markets, which are expected to be instated next year. The regulation of crypto has become an increasingly urgent matter following the collapse of FTX last November.
