All bets are off for the cryptoasset (‘crypto’) industry following publication of the House of Common’s Treasury Committee report on Regulating Crypto last week. The report has hit the headlines in light of the Committee's view that retail trading and investment activity in unbacked cryptoassets, such as Bitcoin and Ether, should be regulated as gambling rather than as a financial service. This marks a notable departure from HM Treasury’s vision for the future regulatory regime for cryptoassets, articulated in its February 2023 Consultation Paper (the contents of which are summarised here).
The Committee's differing approach seeks to avoid a 'halo' effect, where consumers believe that this activity is safer than it is, or protected when it is not. In support of its conclusion, the Committee points fingers at the fact that unbacked cryptoassets display "significant price volatility" and an "absence of intrinsic value", exposing consumers to significant risks of losses. Indeed, research by the Bank for International Settlements into the retail adoption of cryptoassets estimated that 73-81% of the users that entered the Bitcoin market over 2015-22 were likely to have lost money on their investments. The report further notes that cryptoasset speculation "can be addictive", and that cryptoasset owners tend to be young men, commonly identified as the most risk-seeking segment of the population.
Perhaps unsurprisingly, crypto enthusiasts have not suffered this report in silence. CryptoUK, the UK's self-regulatory trade association for the crypto sector, has described the conclusions as “unhelpful, false, fundamentally flawed and unsubstantiated” in a statement which stressed the report had not reflected the “true nature, purpose and potential of the crypto industry.” Of particular note, CryptoUK highlights that it has not seen any other jurisdiction take this approach to cryptoassets, positioning the UK as playing a solitaire hand globally. It is certainly striking that the Committee's report was published in the same week that the Council of the EU adopted the EU's flagship regulation on markets in cryptoassets (‘MiCA’). Should the Committee's position on unbacked cryptoassets be taken up, this will be a conspicuous point of regulatory divergence with the EU.
CryptoUK's statement also highlights a key reason as to why opting for the gambling route might not be straightforward: tax. CryptoUK points out that winnings from gambling are exempt from capital gains tax, and rightly questions whether the Government wishes to exclude tax income from gains made by the buying and selling of unbacked cryptoassets. It could also be asked whether the Gambling Commission, which regulates gambling in the UK under the Gambling Act 2005, has the right toolkit (statutory powers) and resources for the job, as compared with the FCA.
Under the dim light of the casino hall, it remains to be seen how the UK Government will play its cards in response to the report. What is clear is that the powers that be are not singing from the same hymn sheet: it is difficult to see how the Committee's conclusions marry up with the Government's plan to become the “global hub for cryptoasset technology and investment”. As ever, the road to crypto regulation is paved with controversy.
This post was prepared with Alice Gordon, Financial Regulation knowledge paralegal.