Everything you need to know on UK regulating crypto as gambling

A recent House of Commons Treasury Committee report has stirred a heated debate by recommending that retail trading and investment activity in “unbacked crypto assets, such as Bitcoin and Ether,” be regulated as gambling.

The government’s insistence in referring to crypto assets as “unbacked’ during a time of high inflation of a FIAT currency backed only by trust in the Bank of England and the power of the military is a frustratingly common occurrence throughout the report. For example, the phrase “unbacked crypto assets” appears 26 times in the first 20 pages of the main section of the report. However, innovative blockchain solutions like DeFi, ReFi, yield farming, zero-knowledge (ZK), and even staking are not mentioned once.

TL;DR

The report made the following recommendation on crypto regulation:

• Apply blockchain-based solutions to enhance payment processing, particularly in  “lower income countries and cross-border transactions.”
• Establish timely regulatory frameworks and streamlined authorization processes.
• Support crypto technologies with “clear beneficial use cases, avoiding public resource waste in niche innovations.
• Consider regulating retail trading in “unbacked crypto assets as gambling,” given their price volatility and resemblance to gambling rather than financial services.
• Apply AML/CTF “safeguards” The Gambling Commission uses to crypto assets.

Road to zero tax on crypto?

If enacted, this regulatory change would fundamentally alter the landscape of cryptocurrency activity in the U.K. and set a precedent for other jurisdictions worldwide.

Members of the UK Parliament have admitted that the country needs to incentivize blockchain innovation. Its inability to embrace the emergent technology has led to the U.K. losing ground to other more crypto-friendly countries such as Portugal and Dubai. Matt Hancock said the U.K. should adopt a “growth-maximizing view” on crypto.

“HMRC has taken a revenue-maximizing approach…applying it in a sledgehammer way… what we need to do is take a growth-maximizing view where revenues in the future will be far greater.”

While the recent Treasury Committee report was much less supportive of crypto than Hancock, it surprisingly opened an option for pro-crypto MPs to use the gambling approach to eliminate crypto taxes.

The U.K. has no tax on gambling — with income derived from gambling not declared on personal tax returns. Could treating gambling be a loophole for web3 companies to relocate to the U.K. and supercharge the country’s Fintech industry?

Deep dive: Treasury Committee Report

The Treasury Committee’s report scrutinizes the potential impacts of crypto assets on the financial services landscape. It acknowledges potential benefits, such as to “improve the efficiency and reducing the cost of making payments, especially cross-border transactions and those in lower-income countries.” However, it also underscores the “significant risks” involved, including price volatility, high energy consumption, and usage in scams, fraud, and money laundering.

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

The unflattering and highly debatable initial assessment of the crypto industry continues with the report highlighting the government’s proposals to regulate crypto assets within the financial services sector “to foster innovation, maximize potential benefits,” and mitigate risks.

After emphasizing the importance of not utilizing public resources for activities without a clear and beneficial use case, the report then draws parallels between crypto and gambling due to significant price volatility — recommending a similar approach to regulation.

Crypto is gambling

The committee states that its recommendation to regulate retail trading and investment activity in “unbacked crypto assets” as gambling rather than a financial service is rooted in the principle of “same risk, same regulatory outcome.”

“We therefore strongly recommend that the Government regulates retail trading and investment activity in unbacked crypto assets as gambling rather than as a financial service, consistent with its stated principle of ‘same risk, same regulatory outcome.”

However, the report highlighted criticisms of this, arguing that this could also create a “halo effect, leading consumers to believe that this activity is safer than it is or protected when it is not.” Charles Randell, former Chair of the FCA, even predicted demand for “addiction services” for crypto investors;

“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.”

Furthermore, the report’s ‘Key Issues’ section cites a 2022 Bank for International Settlements (BIS) survey, revealing that most new Bitcoin users are “young men below 35 years old.” The survey also highlighted the possible risks this demographic faces — which is considered the “most inclined to take risks among the population.”

Therefore, the recommendation to treat crypto trading as gambling could arguably make it more attractive to those compelled by high-risk activities, bringing the protecting consumers argument into question.

Balancing innovation and consumer protection

The report included additional external responses to the inquiry — including The Financial Services Consumer Panel — which expressed concerns over the government’s focus on developing new crypto asset technology at the expense of consumer protection. In addition, Ian Taylor of CryptoUK argued that appropriate regulation would help mitigate consumer risks, stating:

“We need regulation of certain centralized market participants. Perhaps if we had had some regulation, some of these recent events may not have taken place, where we have seen some pretty poor business practices.”

Taylor continued his criticism of the committee in statements made since the report was released.

In finding an equitable solution to crypto regulation, the challenge lies in striking the right balance between fostering innovation and protecting consumers. While the report may be overly critical of the crypto sector, it does reiterate the government’s approach — as outlined by Rishi Sunak:

“To make the UK a global hub for crypto asset technology, and the measures we’ve outlined today will help to ensure firms can invest, innovate and scale up in this country.”

Government legislators seek to bring crypto assets within the Financial Services and Markets Act 2000 (FSMA) framework — which governs various financial services.

However, the report seeks to pull back on new innovations and, instead, focus on reducing “significant risks posed by crypto assets to consumers and the environment [which] are real and present.”

While the report opens up an interesting debate around crypto tax and regulation in the UK, the Treasury Committee has not changed its anti-crypto stance:

“Our predecessor Committee published a Report in 2018 that called for greater regulation to protect consumers from an industry it described as a “wild west.” Nothing we have heard in our current inquiry has changed that impression.”

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