UK Rejects Push to Regulate Cryptocurrencies as Gambling Products

UK’s government has announced that it will not consider the House of Commons Treasury Committee’s proposition to treat cryptocurrency trading as gambling. Economic Secretary has confirmed this to the Treasury Andrew Griffith, who stated that categorizing crypto trading as part of gambling will go against globally agreed definitions of the term and what it entails.

The House of Commons Treasury Committee’s recommendation from back in May was made after lawmakers considered the volatility of cryptocurrency trading. This definition was especially pushed when it came to unbacked crypto-assets, which the Committee termed as having ‘no intrinsic value and no useful social purpose.’ As such, it meant that the crypto investments bear similar risks to gambling rather than financial services.

All said and done, the debate as to whether trading with cryptocurrencies and non-fungible tokens (NFTs) should be considered gambling or investments has been raging on for some time now. Suffice it to say all sides have presented some seemingly valid arguments.

The Genesis of It All

In February, the UK government set into motion a plan to regulate the cryptocurrency market by including it under the financial services law. The Committee put out a report stating that the approach the government should go with is to take note of the risk factors involved when crypto investors speculate on unbacked assets. With that approach, the recommendation was to bring the crypto and NFTs industry under the same regulations overseeing betting operators, casinos, and lotteries.

Further, a report released in May claimed there was substantial evidence suggesting addictions to digital currencies speculation with no standards and rules to mitigate such risks. And according to the Committee, treating digital currencies as financial assets rather than gambling products would create a halo effect, misleading consumers into thinking of them as safe and protected when in fact they weren’t.

To prove its point, the House of Commons Treasury Committee began an inquiry into crypto-assets targeted at stakeholders and regulators in early July. The report aimed to gather written evidence showing whether cryptocurrencies could replace fiat currencies and the possible opportunities and risks posed to individual citizens and the economy. These efforts have not deterred the government from proceeding with its plan to regulate digital currencies as financial services.

In its report, the Committee stated that research on consumer behavior had revealed that trading in cryptocurrencies more closely resembled gambling as compared to financial investments. Finally, the Treasury Committee at that time concluded that:

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“Unbacked crypto-assets have no intrinsic value, and their price volatility exposes consumers to the potential for substantial gains or losses while serving no useful social purpose.”

Ironically, Gambling Commission CEO Andrew Rhodes has previously pointed out the difficulty for a regulator with the Commission’s mandate to take action on digital currency matters. He also pointed out that while the products contained some aspects of gambling, there was not enough to consider such activities as gambling. Rhodes noted:

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“What we typically see with novel products is part of what they offer crosses the boundary, not necessarily the entire product.”

Gambling Commission ‘Not Well-equipped to Address Crypto-Assets Risk Factors’

UK’s Treasury has since refuted what it views as the ‘same activity, same risk, same regulatory outcome’ approach by the Committee. The Treasury further pointed out that it could negatively affect UK’s relations with other nations as well as British regulatory bodies. Andrew Griffith, UK’s Economic Secretary to the Treasury, explained:

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“The Committee’s proposed approach would therefore risk creating misalignment with international standards and approaches from other major jurisdictions, including the EU, and potentially create unclear and overlapping mandates between financial regulators and the Gambling Commission.”

The finance ministry has also applauded the Commission’s strong track record in safeguarding consumers and the wider public. Additionally, the Treasury noted that while this is the case, the gambling regulatory body does not have the mandate or expertise to oversee financial risks. Griffith then went on to say:

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“A system of gambling regulation could also fail to appropriately mitigate many of the critical risks that were discussed in HM Treasury’s recent consultation on crypto-asset regulation – including those associated with market manipulation, inadequate prudential arrangements, and deficiencies in core financial risk management practices.”

The Ministry of Finance further elaborated that it based its stance on lessons learned from FTX’s collapse, which it did not see how gambling law would deal with crypto risks. In its judgment, approaching the matter from a financial services point of view would be a better way to mitigate the risks to consumers. This points to a financial services regulator as opposed to a gambling regulator.

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“HM Treasury and the FCA (Financial Conduct Authority) will work with the industry to ensure crypto firms are made fully aware of the standards required for approval at the FSMA gateway. Further communications will be provided in due course to ensure standards for approval are clearly available to crypto firms operating in the UK.”

A Win for UK’s Crypto and NFT Scene

As the past week’s events continue to unfold, the government has announced plans to proceed with reviewing a bill tabled in June. The proposed legislation seeks to establish an authority with the expertise needed to oversee crypto activities in the country. Moreover, the Treasury has revealed that PM Sunak’s vision to make the UK a leader in web3 technologies, including crypto-assets investments, is still on track.

This vision is to be ultimately implemented by putting up clear and robust regulatory frameworks. Current projections indicate that legislation safeguarding cryptocurrency financial activities will be in place by the end of 2023. And, of course, the recommendations from the Treasury Committee will be considered. However, whether the regulations will be finalized alongside setting up a regulatory authority remains to be seen.