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The UK Treasury Committee‘s recommendation of regulating consumer trading in unbacked crypto as gambling, has sparked a significant backlash from industry experts.

In a new report, the Committee highlights a lack of intrinsic value and social purpose of cryptocurrencies like Bitcoin, pointing out their substantial energy consumption and association with criminal activities such as scams, fraud, and money laundering.

According to the report, unbacked cryptoassets, including Bitcoin and Ether, account for a significant portion of the crypto market. The MPs conclude that the volatility and potential for financial losses associated with cryptocurrencies pose substantial risks to consumers. They argue that consumer trading in unbacked crypto more closely resembles gambling rather than a financial service and thus should be regulated accordingly.

One concern raised by the Treasury Committee is the potential ‘halo’ effect that could arise from regulating consumer crypto trading as a financial service. They worry that such regulation might mislead consumers into thinking that their activities are safe and protected when, in reality, they are not. Approximately 10 per cent of UK adults currently hold or have held cryptoassets, as reported by HM Revenue & Customs.

‘Wild west’

Commenting on the report, Harriett Baldwin MP, chair of the Treasury Committee, said: “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.

“However, with no intrinsic value, huge price volatility and no discernible social good, consumer trading of cryptocurrencies like Bitcoin more closely resembles gambling than a financial service, and should be regulated as such. By betting on these unbacked ‘tokens’, consumers should be aware that all their money could be lost.”

The report

While the report acknowledges the potential benefits of underlying crypto technologies in financial services, such as cross-border transactions and payments in underdeveloped countries, it emphasises the need for the government and regulators to stay abreast of developments and avoid stifling productive innovations unnecessarily.

A call for a balanced approach in supporting the development of cryptoasset technologies is accompanied by a caution against investing public resources in projects lacking a clear and beneficial use case. The report references the now-abandoned Royal Mint non-fungible token (NFT) as an example where public resources may have been expended without a justified purpose.

The Treasury Committee said it is also considering central bank digital currencies separately from the wider cryptoasset market like the Government and Bank of England.

‘Regressive step’

Nick Jones, co-founder and CEO of decentralized mobile wallet and payments platform Zumo, has expressed disappointment in the Treasury Committee’s recommendation, considering it a regressive step that discourages alternative financial solutions.

“What an appalling backwards step this would be. Snatching defeat from the jaws of victory, just as it looked as though the UK was finally getting it’s act together on crypto. Given the recent turmoil in the traditional financial system, the UK should be looking to encourage alternative financial solutions, not discouraging them by likening them to gambling.

“A truly resilient future financial system shouldn’t be resistant to new ideas and structures, rather it should be supportive of them. And it should dare to integrate new ideas where they provide genuine value – not panic and revert to the perceived safety of failing methods.”

‘Unhelpful and untrue’

Ian Taylor, board advisor at CryptoUK – the self-regulatory trade association for the UK cryptoasset industry – strongly disagrees with the conclusion of the Treasury Committee, labeling it as unhelpful, false, fundamentally flawed, and unsubstantiated.

Taylor highlights the conflict between the committee’s statement and the UK government’s consultation proposals on including crypto activities within the existing financial regulatory framework. Institutional adoption of unbacked crypto assets and their recognition as a new alternative investment class challenge the notion of equating them to gambling.

“The Treasury’s statement is in direct conflict with HMT’s consultation proposals on bringing activities, including operating a trading venue and performing intermediary activities, into the existing financial regulatory perimeter.

“Professional investment managers see Bitcoin and other cryptoassets as a new alternative investment class – not as a form of gambling – and institutional adoption of unbacked crypto assets has increased significantly. Furthermore, gambling is exempt from capital gains tax. Does the Government really wish to exclude tens of millions of pounds in tax income from gains made by the buying and selling of unbacked crypto assets?

“We acknowledge that consumer risk exists, and this should be mitigated through education, awareness and a more robust regulatory framework. But equating cryptocurrency with gambling is both unhelpful and untrue.”

‘Misguided and wholly unsuitable’

Blair Halliday, UK MD at crypto exchange Kraken also expressed his disappointment at the Treasury Committee’s findings in a LinkedIn comment.

He said: “We fundamentally disagree with the Treasury Select Committee’s conclusion that cryptoassets have no intrinsic value. It’s regrettable the committee does not support the opportunity the UK has to be a true global leader in our rapidly developing industry.

“Today, crypto is disrupting traditional financial systems across the world by removing intermediaries, offering lower overhead and transaction costs, and settling payments quickly. From using royalties to more fairly compensate artists for their work, to creating decentralised cloud storage systems, we see new use cases that are revolutionising our economy.

“The committee’s suggestion that crypto assets should be regulated as gambling products is misguided and wholly unsuitable for UK consumers. Not only does this miss the purpose and potential of the technology, but gambling protections will not offer the same safeguards as bespoke financial services regulations, on which the government recently consulted.”

‘Caution needed’

Kate Gee, counsel at law firm Signature Litigation, acknowledges the growing desire to regulate the crypto sector and protect investors and businesses involved. However, Gee emphasises the need for caution when fitting crypto assets into existing regulatory frameworks, noting the distinctions between crypto and gambling industries.

“This report reflects the growing desire – and urgency – to regulate the crypto sector and to protect investors and businesses with exposure to crypto and other digital assets,” said Gee. “However, caution must be taken when trying to shoehorn crypto assets into any existing regulatory framework – while there may be similarities between crypto and, as suggested here, gambling, the two sectors are not the same.

“Regulation of crypto assets is overdue, and in its absence, the risks involved are likely only to increase. Europe has taken steps to regulate the sector, and the UK government taking an approach that is informed, comprehensive and co-ordinated (across jurisdictions) will be welcome and most effective – drawing on its experience of regulating financial services and other relevant sectors, including gambling.”