The UK Treasury Committee today published the Government’s response to its report on Regulating Crypto.
In the report, published in May, the cross-party Committee of MPs called for consumer trading in unbacked crypto to be regulated as gambling.
Unbacked cryptoassets – often called cryptocurrencies – are not supported by any underlying asset. They are the most prominent form of crypto, with Bitcoin and Ether alone accounting for two-thirds of all cryptoassets.
Given their price volatility and the risk of losses, the Committee concluded that retail trading in unbacked crypto more closely resembles gambling than a financial service and should be regulated as such.
The Committee outlined concerns that regulating consumer crypto trading as a financial service – as proposed by the Government – would create a ‘halo’ effect, leading consumers to believe this activity is safe and protected, when it is not.
The MPs recognised that technologies underlying cryptoassets may bring benefits to financial services, particularly for cross-border transactions and payments in less developed countries, and called on the Government and regulators to keep pace with developments so potentially productive innovations are not unduly constrained.
In its response, the Government disagrees with the Committee’s recommendation on gambling and re-affirms its intention to regulate retail trading in unbacked cryptoassets as a financial service.
HM Treasury says that it firmly disagrees with the Committee’s recommendation to regulate “retail trading and investment activity in unbacked cryptoassets as gambling rather than as a financial service”.
Such an approach, the Government argues, would run completely counter to globally agreed recommendations from international organisations and standard-setting bodies, including the International Organization of Securities Commissions (IOSCO) and the G20 Financial Stability Board (FSB).
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.
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 cryptoasset regulation—including those associated with market manipulation, inadequate prudential arrangements, and deficiencies in core financial risk management practices.
The Government concludes that a financial services regulatory framework is more appropriate for addressing the risks of unbacked cryptoassets and creating the conditions for safe innovation. This can – and will – come with a set of robust measures to mitigate consumer risks mentioned in the Committee’s report, including the risks of “consumers getting misinformed”.
