Back in May, the Treasury Committee released its headline-grabbing view that the government should regulate retail trading and investment activity in unbacked cryptoassets as gambling rather than as a financial service.

The committee’s argument for this new direction was that it would “better protect consumers from harm” and that regulating cryptoasset trading in a similar way to financial services would create a “halo effect”, leading to the belief that it is a safe activity. Regulating the activity as gambling would, according to the committee, reduce the risks involved whilst remaining consistent with the government’s approach of “same risk, same regulatory outcome”.

‘Firmly disagree’

In response to the committee’s report, the Economic Secretary to the Treasury (EST) stated that they “firmly disagree” with the recommendation. Their response highlighted that treating trading and investing as gambling would be at odds with the general approach being taken elsewhere, for example, with supranational bodies such as the G20 Financial Stability Board or developing positions such as the EU or the US. This, in itself, is not a reason not to proceed with a recommendation, but the test must always be whether the recommendation achieves the stated objective.

The government is clearly of a similar mind, noting that some of the issues seen in the FTX failure, such as the commingling of customer and business assets, inadequate controls and poor governance, would not be resolved by regulating its activities as gambling. These are not matters with which gambling regulators have experience and are much more within the purview of the FCA.

Certainly, the need to increase protection is important, however, regulation needs to be fit for the purpose and the Committee’s recommendation could move exchanges out of the UK. This could reduce consumer protection by, for example, preventing the use of English and Welsh courts thereby hampering individuals’ ability to seek remedy.

Crypto tax silence

Troublingly, the committee did not comment on the taxation implications of its proposal. Gambling winnings are tax-free, but capital gains are not. Perhaps the committee imagined a Remote Gaming Duty with a charge to the profits of the exchange or could it have been a charge on transactions, much like a Tobin tax? However, neither really fit here.

Then there is the unasked question as to when a gamble is an act of gambling — a topic that could be an article in itself.

While the buying and selling of cryptoassets can be a gamble (as they can be volatile, but less so recently), this is not the same as gambling. For example, there is no counterparty to this gamble (like a bookmaker) or a bet on an outcome (only the hope that the value will go up).

Neither do the assertions they are volatile and lack intrinsic value make it gambling. Other assets, for example AIM shares, are volatile and fiat money has no intrinsic value (not all are backed by the state in which they are used with its value mainly derived from the belief of utility) but these are not regulated as gambling. Ultimately, gambling is a question of fact and not one of degree or impression, otherwise we would have “badges of gambling”.

In short, it’s unsurprising the committee’s recommendation was not accepted. However, the report did have some relevant points. Nevertheless, the main recommendation has rightly been deemed out of touch not fully thought-through. HMRC will no doubt be pleased with the EST’s rebuttal, but, it has still left the question of why the report took such a view.