Crypto leaders in the UK have branded a government body’s calls for unbacked digital assets to be regulated in the same way as the gambling industry as ‘an appalling backwards step’.
The Treasury Committee report, released this morning, said that cryptocurrencies “such as Bitcoin have no intrinsic value and serve no useful social purpose, while consuming large amounts of energy and being used by criminals in scams, fraud and money laundering”.
The damning dossier, compiled by a cross-party committee of MPs also raised concerns that regulating consumer crypto trading as a financial service – as proposed by the Government – will create a ‘halo’ effect, “leading consumers to believe this activity is safe and protected, when it is not”.
Around 10 per cent of UK adults hold or have held cryptoassets, according to HM Revenue & Customs.
“Given the future benefits of crypto remain unclear, the Government should take a balanced approach to supporting the development of cryptoasset technologies and avoid spending public resources on projects without a clear, beneficial use, as appears to have been the case with its now-abandoned Royal Mint non-fungible token (NFT),” the report claimed.
“It is not the Government’s role to promote particular technological innovations for their own sake.”
Harriett Baldwin MP, Chair of the Treasury Committee, drew a scathing conclusion over cryptocurrency as she submitted her group’s report.
“The events of 2022 have highlighted the risks posed to consumers by the cryptoasset industry, large parts of which remain a wild west,” she said.
“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 committee is understood to be considering central bank digital currencies as “a separate piece of work”.
The Treasury Committee findings triggered some angry responses from UK crypto industry leaders.
Nick Jones, Co-Founder and CEO, Zumo, labelled the report as “an appalling backwards step”.
“Snatching defeat from the jaws of victory, just as it looked as though the UK was finally getting its act together on crypto,” he said.
“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.”
His views were echoed by Ivan Ivanchenko, co-founder and COO of cryptocurrency options trading platform Phinom Digital.
“Treating cryptocurrency trading as gambling would be a backward step for the UK’s digital currency aspirations and another demonstration that the country is fast becoming a sea of red-tape,” he added.
“Cryptocurrency has become a recognised store of value and is no different to traditional forex or stocks and shares.
“And with institutional investors accounting for as much as 70% of trading volumes on some of the most widely-used platforms, it’s time policymakers accepted that cryptocurrency is a mainstream financial asset and treat it as such.”
Dmitry Tokarev, CEO, Copper called for more leadership over the opportunities digital assets present for the UK.
“There is understandable focus from Government and regulators on retail investment in cryptocurrencies and the need to protect consumers. We’ve heard a lot of noise in recent months and our own view is that it’s hopefully beginning to focus minds on the longer-term,” he said.
“While we’re not in the retail space, I think it’s important to recognise the bigger picture. We need to ensure that we differentiate between cryptocurrencies and the digitisation of financial services more broadly, especially tokenization, Distributed Ledger Technology and blockchain.
“We’re already seeing banks, hedge funds and asset managers offering the ability to trade crypto assets and hold those crypto assets safely. There is a big opportunity for the UK in this space and it’s crucial that we become a recognised leader.”
Daniel Howitt, CEO and co-founder of crypto tax calculation service Recap went as far as to say the Treasury Committee report was flawed.
“To invest in crypto assets requires considerable research, understanding of the technology, and risk assessment. Essentially, not dissimilar to investing in stocks and shares,” he explained.
“The committee’s stance fails to appreciate the value and utility that crypto assets offer. They are not merely speculative assets; instead, they represent an innovative technology that holds the potential to disrupt traditional finance, offering unprecedented financial freedom and privacy. This is especially critical for individuals in regions where traditional financial infrastructure is underdeveloped or unreliable. The value of crypto assets, therefore, lies in the utility they provide, not just in their market price.”
He added that, while consumer risk exists in the crypto asset market, it was misleading to equate it with gambling.
“Instead, we should focus on promoting education and awareness about crypto assets and their associated risks. Alongside this, a robust regulatory framework, as proposed in the FCA’s recent crypto regulatory regime consultation, will be critical to protect consumers and foster innovation in the sector.
“The statements by the Treasury Committee also raise concerns about the UK’s ambitions to become a crypto hub. This is not a signal to the world that we understand the potential of the asset class.
“We now look disjoined with the potential for divergent regulatory approaches between government departments, including a crypto-advocating Prime Minister – it could derail these ambitions. It’s crucial that the government adopts a unified, forward-thinking approach that balances consumer protection with the promotion of innovation that crypto assets offer.”
Katharine Wooller, Business Unit Director at Coincover said the industry largely welcomed regulation, but suggested it should not be led by the government.
“We welcome the Treasury Committee’s interest in cryptocurrencies and agree with the need for robust regulation – as with any other asset class,” she said.
“Ultimately, if the UK is serious about becoming a global leader in digital assets, it needs to get serious about governance standards. We’re in a race to capitalise on the space but other countries are currently ahead on the regulatory track.”
She added that, until regulation comes into force, the market will remain open to abuse.
“Not only does that present risks to those who hold digital assets, but the absence of proper governance directly enables the failures and corruption that creates broader market turbulence, as we saw with FTX,” she said.
“That said, we don’t really need Government to lead us. The crypto industry can and should set its own standards. These problems already have solutions, after all. For instance, firms can commission independent audits and introduce transaction monitoring and other protective technology to mitigate against theft and loss.”
Wendy Saunders, Legal Director of lawyers Lewis Silkin, suggested the government – and therefore the crypto community – shouldn’t be too concerned by the committee’s recommendations.
“Trading in crypto assets undoubtedly carries risks for the more vulnerable investor, but as the Committee points out, crypto assets offer potential benefits too. If we draw lessons from other sectors, the current government has followed a light touch regulatory approach to AI, and resisted calls for loot boxes in the context of video games to be regulated as gambling,” she said.
“In its Gambling White Paper, it has taken a less strict approach to regulating gambling than many called for, including parliamentary select committees. It does mention crypto assets in the White Paper, firstly in the context of payments and customer deposits.
“The Gambling Commission already carries out some activity in this space. As a result, it seems unlikely that the government would introduce further regulation in this area. It also specifically refers to its financial services regulatory proposals. It seems likely that it will continue with its current approach, and rely on the FCA and Gambling Commission to monitor developments. The Committee’s concerns about a “halo effect” will depend on the detail of the implementation of the new regime.”
Jemma Fleetwood, commercial litigation solicitor and cryptocurrency specialist at JMW Solicitors was keen to highlight the inappropriateness of bringing crypto under gambling rules – particularly as the industry was striving to move away from the narrative that cryptocurrency is a vehicle for fraud and impropriety.
“There are risks in any investment, and although historically more volatile, the risks inherent in crypto are little different from those found in the more traditional financial world, so to categorise dealing in crypto as being akin to betting it all on 27 red in the casino is scaremongering and unlikely to be effective,” she said.
“As technology continues to evolve and revolutionise our approach to money, the law and enforcement agencies must keep up to date. The UK government is to be applauded for recognising that the best way forward is for crypto to be regulated by the Financial Conduct Authority (FCA), which has a detailed set of rules on trading and issuing securities.
“This should help with fighting financial crime and scams which is a growing problem in the UK, as documented in the Fraud Strategy published by the government earlier this month.”
Mona El Isa, CEO and founder at DeFi company Avantgarde expressed disappointment over the terminology used by the committee and feared it could further perpetuate the misconceptions of digital assets and how the ecosystem works.
“As a very nuanced sector, better understanding is needed to truly grasp the innovations of on-chain investing,” she said.
“That needs to come from the top; good leadership on this will create an environment where the UK can be at the forefront of the future of money. We face the very real threat of being left behind if those in charge aren’t pushing messages of confidence and unpicking the good from the bad.
“Unfortunately, the behaviour of a few centralised crypto companies (FTX, Alameda, Three Arrows Capital, etc) has painted the entire space with a bad brush. This drives a false narrative that digital assets are dangerous. On the contrary, decentralised finance (DeFi) technology actually enables a fairer, more equitable financial system, by using programmable smart-contracts to replace fallible human behaviour.
“The organisations that are operating under a framework of trust, transparency and compliance should be called upon to help dispel the myths and support lawmakers to create fit-for-purpose regulation that could make London a global digital assets hub.”
According to Mark Foster, EU Policy Lead, Crypto Council for Innovation, the UK Treasury Select Committee report misunderstands and misrepresents digital assets.
“Even though it is non-binding, it goes against steps made by the UK government to create much needed rules of the road, regulatory clarity, and consumer protection,” he said.
“Many UK policymakers and regulators have openly committed and made moves to understand, and engage with, digital assets. They want to ensure the responsible growth of the industry and put the UK in the driver’s seat as the digital economy expands.
“The report’s suggested approach fails to recognise the diverse practical use cases around remittances, payments, pathways for greater financial inclusion, and moves by institutional investors.
“With its innovative, principles-based and outcomes-focused approach to regulating financial services, the UK can play a critical role in the growth of crypto assets and be a leader on the world stage. CCI looks forward to supporting next steps. In fact, CCI will be on the ground in London next week to discuss domestic and international digital assets policy parliamentarians and government officials.”
Alisa DiCaprio, Chief Economist at R3, argues that the UK government must use regulation as a means of encouraging innovation rather than hindering it.
“Events of the past year have shown that crypto is a high-risk asset that would benefit from targeted smart regulation and greater consumer safeguards,” she said.
“However, it is vital that the UK Treasury uses policy as a means of bolstering innovation rather than hindering it. Finding this right balance will require close collaboration between the public and private sector, across all industry and market participants.
“Lack of regulation is undoubtedly one of the biggest challenges facing the industry, creating uncertainty and a reluctance to engage with the technology. Smart regulation – tailored to the unique attributes of the crypto market – can serve as the platform for more stringent user protections and the required guidelines on how the underlying distributed ledger and blockchain technology is applied.”
Marina Reason, a partner at financial services regulatory practice Herbert Smith Freehills argued that, while the report recommends regulating retail trading and investment activity in unbacked crypto assets as gambling, rather than as a financial service, it was “hugely different from what the government proposed in its February consultation on crypto assets regulation and certainly not how other jurisdictions are approaching this issue”.
“It would be surprising if the government decides to move away from the proposals set out in its February consultation on the future regulatory regime for crypto assets because of the report recommendations,” she said.
“Yet a future administration with different leadership might. Much will depend on the speed at which the government proceeds with its plans to regulate crypto assets.”
Noting that the report was not entirely scathing of crypto assets, she added: “The Committee clearly sees the potential for crypto assets technologies to improve the efficiency and lower the cost of making payments.
“What the Treasury Select Committee is most concerned about is giving risky and speculative activities the halo of financial services regulation. By comparison, in the EU, the formal adoption of the Markets in Crypto assets Regulation, or “MiCA”, by the Council on 16 May was the last step in the legislative process.
“MiCA is likely to enter into force in July 2023, with some provisions applying a year later and the rest from January 2025. It is not clear at the moment whether the UK would be in a position to follow a similar timeline.”
“The House of Commons Treasury Committee has said that digital assets should be regulated like gambling because they believe that digital tokens have no inherent value. However, just because this select committee is unaware of the many increasing use cases for this asset class, that does not mean that they do not exist. Ultimately, this committee’s ignorance should not become the basis for legislation.
Oliver Linch, CEO of Bittrex Global, pointed a finger of blame at the crypto industry itself, which he says must do a better job of explaining crypto’s benefits.
He said: “As a community, outsiders are often deterred by the annoying number of inside jokes and the ‘if you know, you know’ attitude of insiders. If we are to convince the more sceptical members of society, including the Treasury Committee, then the industry needs to spend much more time explaining the value of those projects that are in fact making a real difference to people’s lives. But also calling out those projects — and thankfully they are being weeded out increasingly quickly — that are pointless, invaluable, or worse, scams.
“If there is a concern about the true value of crypto and the number of pointless projects, the correct way to deal with this is to implement proper disclosure rules. Only then will the market naturally sort the good from the bad and the useful from the pointless — and this is a far better solution than resorting to sweeping and innovation-stifling legislation as is being proposed here. It might not grab as many headlines as the gambling proposal but a legislative framework that provides for clear transparency and conduct requirements — such as that described in the Treasury’s Consultation Paper issued earlier this year — will be a much more effective way of forcing participants to demonstrate their value, and shine a disinfecting light on those that cannot.
“Finally, we must remember that the crypto industry is still very nascent and while there is a strong case for rigidly safeguarding it, we also need to allow the technology to run its course and see where it leads us. Even the most die-hard critic can agree that there is something innovative, exciting, and important about blockchain/DLT technology, and allowing innovation across the digital assets sector that sits on top of it, is absolutely critical if we are to fully understand, appreciate, and harness its potential.”