Even the heat of Miami can’t warm a crypto winter.
The faithful descended on Florida last weekend for the world’s “biggest bitcoin event”. Only half as many made the journey as in 2022. Some of the buzz and meme coins were gone. So was the sense of indestructibility, after a year in which some of the crypto world’s biggest names cratered and US agencies launched a slew of enforcement actions in the sector.
There was a cold blast from Westminster last week too, where an influential parliamentary committee suggested that crypto was, not disruptive or renegade, but worse: borderline irrelevant. Unbacked cryptoassets, said the Treasury select committee, had “no intrinsic value” and served “no useful social purpose”. The right thing to do to protect consumers, it suggested, was to regulate this activity as gambling.
This was dismissive, appealing and, I think, wrong. The committee has a point about utility. You can be open-minded about the potential for distributed ledger technology, or even stablecoins and central bank digital currency, and still think cryptocurrencies have totally failed to demonstrate their usefulness, either as a store of value, medium of exchange or tool for financial inclusion. “The industry still does a very bad job of explaining things,” says Oliver Linch, chief executive of Bittrex Global. “It’s been wink wink . . . if you know, you know, to the moon nonsense.”
The committee’s concern was that financial regulation would mean a “halo effect” for that kind of guff, giving a false sense of safety — a legitimate concern. But “to say it’s gambling makes no sense legally”, says Marc Jones, partner at Stewarts Law firm, noting the ownership aspect to cryptoassets. Nor would it be likely to result in effective regulation.
The dividing line between financial regulation and gambling is already murky. Spread betting and other types of leveraged trading are taxed as gambling but regulated by the Financial Conduct Authority. Adverts for betting platforms prominently display that 80 per cent of retail accounts lose money, an at-source version of the FCA’s warnings in the absence of more powers.
Meanwhile, UK gambling regulation is still trying to catch up with the invention of the smartphone. It is “not fit for purpose”, says Matt Zarb-Cousin, who campaigns to clean up gambling. This year’s gambling reform proposals belatedly pledge controls on free bets and other inducements. The FCA sent shares in spread-betters tumbling in 2016 with leverage limits and bans on account bonuses and promotions. Crypto (and spread betting) can cause gambling-like harm, says Zarb-Cousin. But better to incorporate protections such as self-exclusion tools into the tougher financial framework.
Dividing responsibility between regulators would be a mistake. The crypto universe doesn’t neatly split into conceivably useful and definitely pointless. A split is an invitation for regulatory arbitrage. And the intersection of crypto with mainstream finance should be of as much interest to regulators as the tokens themselves.
The committee’s report seems unlikely to prompt a change of direction from the government, which in February followed Europe and other jurisdictions such as Hong Kong in proposing to regulate crypto under the UK’s existing financial services framework.
That doesn’t make it insignificant. After much excitable talk about the UK as a “global crypto hub”, the mood has shifted — a shift that, oddly, this latest broadside could reinforce. Crypto will increasingly be asked to play by the rules of mainstream finance. The committee is unlikely to be pushing for a lighter touch in the name of innovation.
This is also true internationally. The US crackdown rests on protecting investors using the same securities laws and standards as for the rest of finance: “There’s no reason to treat the crypto market differently just because different technology is used,” said SEC chair Gary Gensler last year. Iosco, the co-ordinating body for global securities regulators, this week called for watchdogs to move faster in establishing a “level playing field between cryptoassets and traditional financial markets”, including breaking up crypto firms where services including broking, trading and custody are combined in a way that would be unacceptable elsewhere.
All signs to date — from Binance’s troubles in securing licences, to the low success rate for UK anti-money laundering registration — suggest that large parts of the crypto world, even those eager for the warm glow of accreditation, will struggle to clear basic hurdles, let alone a like-for-like standard. As the crypto winter lifts, it won’t just be conference audiences that have shrunk.