Consumer trading in unbacked crypto-assets is akin to gambling and should be regulated as such, a committee of influential UK lawmakers said today. Technology underpinning crypto may have some benefits for financial services, but those are unclear, the Treasury Committee’s crypto-asset report said.
Large parts of the crypto-asset industry remain a “wild west”, said Harriett Baldwin MP (Con) and committee chairperson. “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,” she said.
Regulating crypto as gambling would be consistent with its stated principle of same risk, same regulatory outcome, the report said.
“We welcome the Treasury Select Committee’s input to the ongoing discussion around regulating crypto-assets in the UK. We have been working closely with the government and look forward to the outcome of its consultation and subsequent new legislation, which will determine the future regulatory regime,” a Financial Conduct Authority (FCA) spokesperson said.
Risks posed by crypto are typical of those that exist in traditional financial services, said a Treasury spokesperson.
“It’s financial services regulation – rather than gambling regulation – that has the track record in mitigating them. Crypto offer opportunities but we are taking an agile approach to robustly regulating the market, addressing the most pressing risks first in a way that promotes innovation,” the spokesperson said.
Halo effect, meme coins
Lawmakers are concerned regulating retail trading and investment activity in unbacked crypto-assets as a financial service will cause consumers to believe crypto is a safe, protected investment when it is not. That is called the ‘halo effect’ and it play a large role in the London Capital & Finance minibond scandal.
“The EU has taken a big leap forward with MiCA now adopted by the Council and will be at the forefront of the standards battle for digital assets. The UK’s approach is likely to follow Europe’s as it focuses on guardrails for disclosures, investor protection and market abuse for crypto-assets and does not ban any assets from trading. Though some in the UK may see crypto as gambling, taking them out of scope of financial services would put the UK on an uneven footing with respect to the rest of the global marketplace,” said PJ Di Giammarino, chief executive at JWG, a regulatory think tank in London.
The way in which crypto coins trade and gain popularity can make it look much like gambling, however. This week, for example, the number one trending coin on CoinMarketCap.com is Pepe coin. It is a meme coin based on the Pepe the Frog internet meme.
Pepe coin is ranked 65th in market capitalisation on CoinMarketCap and has spawned other Pepe coins seeking to capitalise on Pepe coin’s popularity. It is all driven by social media hype, much in the same way Dogecoin became popular after billionaire investor Elon Musk promoted it on Twitter. Dogecoin, which began as a joke, is ranked eighth in terms of market capitalisation on CoinMarketCap.
The committee report highlighted the FCA’s concerns about rising crypto gambling addictions and the limited controls to protect vulnerable consumers.
“Speculative crypto is gambling pure and simple. It should be regulated and taxed as such, with levies to support the debt advice and addiction services for which it will fuel demand. If the issue and trading of speculative crypto are instead treated as financial services, conferring the ‘halo’ of financial services regulation, then increased consumer loss and calls for compensation provided by taxpayers or financial services levy payers will inevitably follow,” said Charles Randell, the former FCA chair in his submission to the report.
Some 85% of crypto firms that have applied to be registered for anti-money laundering purposes failed. It was “exceptional by any historical experience to us in terms of the quality and, frankly, the integrity of the answers we were receiving from some of the firms that were applying,” said Nikhil Rathi, the FCA’s chief executive as quoted in the report.
Since 2020, the FCA has received more than 300 applications from crypto-asset businesses for registration under the MLRs and has closed 284 of these applications as of end March 2023. Of the applications it has closed, it approved and registered 41 firms, 214 firms were either refused or withdrew their application and rejected 29 (11%) submissions. It rejected submissions from firms where there was insufficient information for it to conduct an assessment.
The report noted the crypto-asset industry’s belief the technology will deliver faster payments and financial inclusion; however, it also noted opposing views.
“The government should stop believing the myths of ‘ground-breaking’ features of blockchain technology. It is simply another way to record and store information based on ideas that had already emerged in the 1980s, which became possible to fulfil in the last decade thanks to the increase in computer power,” said Dr Larisa Yarovaya, associate professor of finance at the University of Southampton, as quoted in the report.
The extent of the benefits crypto-asset technology may bring to financial services in the future — and the areas in which the technology may have the most impact — remains unclear, the report concluded.
There are several strands to the UK’s regulatory efforts for crypto-assets. Ahead of the wider crypto regime, firms will soon need to comply with the incoming FCA financial promotions regime for crypto-assets. Crypto-asset businesses marketing to UK consumers, including firms based overseas. Firms may potentially face criminal sanctions if they do not comply with this regime.
The FCA and the Bank of England will consult on rules relating to stablecoins once the Financial Services and Markets Bill obtains royal assent. The government published its consultation on the future regulatory regime for crypto-assets in February and it closed on April Regulatory rulemaking will require another consultation process.
This article was produced by Thomson Reuters Accelus Regulatory Intelligence on 17 May 2023
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