The House of Commons Treasury Select Committee has published the UK government’s response to its report on Regulating Crypto from May 2023. In that report, the Committee called for consumer trading in unbacked crypto to be regulated as gambling.
The Committee pointed out that unbacked cryptoassets or cryptocurrencies are not supported by any underlying asset. They are the most prominent form of crypto. Bitcoin and Ether account for two thirds of all cryptoassets between them. According to HMRC, about 10% of UK adults hold or have held cryptoassets.
Due to their price volatility and the risk of losses, the Committee reached the controversial conclusion that retail trading in unbacked crypto is more akin to gambling than a financial service and should be regulated as such. It was concerned that regulating consumer crypto trading as a financial service, as planned by the UK government, would create a "halo"’ effect, that is, leading consumers to believe this activity is safe and protected, when it is not.
However, it recognised that technologies underlying cryptoassets may bring benefits to financial services, particularly for cross-border transactions and payments in less developed countries. It called on the UK government and regulators to keep pace with developments so potentially productive innovations are not unduly constrained.
The UK government has now published its response. It disagrees with the Committee’s recommendation on gambling and confirms its plans to regulate retail trading in unbacked cryptoassets as a financial service. It says the Committee’s approach would run counter to globally agreed recommendations from international organisations and standard-setting bodies.
According to the government, the Committee’s suggestion would also 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.
It says that 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.
As a result, the government says that a financial services regulatory framework is more appropriate for addressing the risks of unbacked cryptoassets and creating the conditions for safe innovation. It says that there will be robust measures to mitigate consumer risks mentioned in the Committee’s report, including the risks of consumers being misinformed. The government says that it is already taking concrete action on this, through the introduction of a dedicated financial promotions regulatory regime for cryptoassets: legislation has been laid before Parliament and will be in force by late 2023.