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Crypto Trading: UK Suggests Gambling Regulation

In a House of Commons Treasury Committee report titled “Regulating Crypto”, the UK Treasury Committee has provided analysis of the crypto landscape, acknowledging both the potential benefits and risks of cryptoassets. However, the contents may concern many in both the crypto and gambling industries, particularly regarding crypto trading.

Promise of Cryptoassets

The report highlights the potential of cryptoassets to improve the efficiency and reduce the cost of domestic and cross-border payments. Cryptoassets, particularly stablecoins, can offer a cheaper and more efficient alternative to traditional payment methods. As Ian Taylor from CryptoUK pointed out, “merchants are starting to see the benefit in the UK of accepting a stablecoin as a means of payment versus a credit card payment, because it is significantly cheaper.”

However, it’s important to note that while the technology is promising, it’s not the only factor in improving payment systems. For cryptoassets to truly revolutionise payment systems, regulatory requirements, messaging standards, and data flow barriers need to be addressed.

Risks of Cryptoassets

The report doesn’t shy away from discussing the risks associated with cryptoassets. The price volatility of unbacked cryptoassets like Bitcoin and Ether is a significant concern. This volatility can be likened to a roller coaster ride, with exhilarating highs often followed by stomach-churning lows.

The document also raises concerns about the potential harm to consumers, especially where there is a disparity in knowledge or power. This is particularly relevant in the cryptoasset sector, where retail investors may lack the necessary knowledge to navigate the complex and volatile market. As the Financial Services Consumer Panel pointed out, “Harm to consumers needs to be prevented (in line with the FCA’s new Consumer Duty), and this is particularly the case where there is a disparity in either knowledge or power.”

Regulation Debate

The document’s discussion on the regulation of cryptoassets is particularly noteworthy. It suggests that retail trading and investment activity in unbacked cryptoassets should be regulated as gambling rather than as a financial service.

“We therefore strongly recommend that the Government regulates retail trading and investment activity in unbacked cryptoassets as gambling rather than as a financial service, consistent with its stated principle of ‘same risk, same regulatory outcome’.”

This is a significant point. It implies that the same rules and regulations that apply to traditional gambling activities could potentially be applied to cryptoasset trading.

Some may argue that treating cryptoasset trading as gambling could stigmatise the industry and deter potential investors. However, the report asserts that regulating cryptoasset trading as a financial service could create a ‘halo’ effect, leading consumers to believe that this activity is safer than it is.

Balanced Approach

The report concludes with a call for a balanced approach to supporting the development of cryptoasset technologies. It urges the government to avoid expending public resources on supporting cryptoasset activities without a clear, beneficial use case.

Misconception of Cryptocurrency Trading as Gambling

Crypto trading, at its core, is an investment activity. It involves buying and selling digital assets with the expectation of making a profit. Comparing crypto trading to gambling, which is based on chance and randomness, is a misplaced analogy.

Binary options, a type of financial derivative, provide a useful comparison. Despite their highly speculative nature, they are not regulated by the Gambling Commission but by the Financial Conduct Authority (FCA) in the UK. This is because, like cryptocurrency trading, they are considered financial instruments, not games of chance.

Role of the UK Gambling Commission

The Gambling Commission’s mandate is to regulate gambling and supervise gaming law in the UK. Its expertise lies in overseeing games of chance, not complex financial systems. Regulating crypto trading would require a deep understanding of financial markets, something the Gambling Commission is not responsible for.

Need for Appropriate Regulation

The cryptocurrency industry is intricate and multifaceted with assets that necessitate a well-considered and detailed strategy when it comes to their regulation. Viewing crypto trading merely as gambling activities, akin to games found in a casino, is an oversimplification that doesn’t fully capture their complexity. This approach would result in regulatory measures that are not only ineffective but also fail to address the unique challenges and opportunities presented by innovative digital assets.

Regulation should aim to protect and safeguard investors, ensure market integrity, and prevent financial crime. This requires a regulator with expertise in financial markets, such as the FCA. In fact, the FCA already regulates certain types of cryptoassets in the UK.

Risks of Misplaced Regulation

Misplaced regulation could have serious consequences. It could lead to inadequate investor protection, a lack of market transparency, and an increase in financial crime. Moreover, it could stifle innovation in the cryptocurrency sector, a sector that has the potential to revolutionise finance.

The wider risk is jeopardising the UK Governments plan to “make UK a global cryptoasset technology hub”.

A Call for Thoughtful Regulation

Crypto trading is a complex financial activity that requires thoughtful and informed regulation. While the sector certainly needs oversight, the Gambling Commission is not the right body for the job. As we navigate the new frontier of digital assets, let’s ensure we’re guided by expertise, not misconceptions.

You can read the full report here.


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