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Crypto serves no 'useful social purpose', regulate it like gambling - UK Treasury Committee

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(Kitco News) - The House of Commons Treasury Committee published a report on Wednesday which “strongly recommended” that crypto be regulated as gambling in the UK, contradicting Treasury’s aim to treat them as financial services.

“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 Committee wrote. “These characteristics more closely resemble gambling than a financial service, an impression reinforced by the evidence we have received of consumer behaviour.”

The Treasury published the United Kingdom’s long-awaited regulatory framework for crypto regulation on Feb. 1. The framework laid out the government’s choice of regulator to oversee the sector, detailed direction on stablecoin classification, rules for ICOs, exchanges, custody, and other key regulations for digital assets.

The House of Commons Treasury Committee wrote that they disagree with Treasury’s stated intention to place crypto activities under the UK’s Financial Services and Markets Act 2000 (FSMA).

“We are concerned that regulating retail trading and investment activity in unbacked cryptoassets as a financial service will create a ‘halo’ effect that leads consumers to believe that this activity is safer than it is, or protected when it is not,” they said. “We therefore strongly recommend that the Government regulates retail trading and investment activity in unbacked cryptoassets as gambling rather than as a financial service.”

All online and in-person gambling in the UK is governed by the 2005 Gambling Act and regulated by the Gambling Commission.

The Treasury’s February framework was designed to adhere to a set of core design principles, including “Same risk, same regulatory outcome,” meaning the government will remain “technology agnostic” when deciding if digital assets increase or mitigate risks, “but the aim is to achieve the same or a very similar regulatory outcome” whenever possible.

The Treasury Committee argued in Wednesday’s report that the Government’s “same risk, same regulatory outcome” principle would necessarily entail treating nearly all cryptocurrency transactions as wagers.

While the Committee’s report did acknowledge some potential advantages that blockchain technologies could offer, such as reducing the cost of cross-border payments and improving financial inclusion, their overall assessment of the impact of crypto on the United Kingdom was negative.

“The extent of the benefits cryptoasset technologies may bring to financial services in the future remains unclear,” they said. “In the meantime, the significant risks posed by cryptoassets to consumers and the environment are real and present.”

Dan Nissanoff, CEO and founder of Game of Silks, a metaverse platform which combines elements of horseracing, gambling and NFTs, told Kitco News that the Treasury Committee’s proposal would only serve to muddy the waters and undermine the regulatory clarity the UK is seeking to provide.

“The fact that some UK regulators now believe that crypto should fall under gambling instead of financial regulations creates a headache of a challenge for clarity in crypto regulation,” he said.

Nissanoff said that gambling and financial regulations were created for different purposes, with gambling laws designed to protect the consumer from bad actors (cheating) and themselves (addiction), while financial regulation is meant to protect consumers from financial crimes such as fraud.

“If crypto is regulated under different frameworks, there’s no clarity as to how to protect both companies and investors, and this could stifle innovation in the industry,” he said. “We’ve seen that already with the ongoing debate between the SEC and CFTC on whether crypto should be classified as a security.”

Placing crypto under an overarching, industry-agnostic regulatory framework makes rules more transparent, he said, while still achieving the goal of preventing unlawful activities. Fragmenting crypto into different regulatory frameworks, or pigeon-holing it into just one, “would ultimately stifle the huge potential of blockchain technology.”

Even as Prime Minister Rishi Sunak’s government has promoted the UK as an ideal jurisdiction for digital asset companies to start and grow, other key players are giving crypto the cold shoulder, with an April 2 report showing that UK banks are stonewalling crypto firms seeking financial services.

Twelve crypto executives interviewed by Bloomberg cited “a host of difficulties, ranging from having applications rejected to getting buried in paperwork.” The report claims that crypto firms have been driven to take their complaints directly to the government.

Crypto executives pressed Economic Secretary to the Treasury Andrew Griffith on the problem of banking access at a meeting on Mar. 8, according to two people who were present. The report said Griffith told them “he would try to resolve the problem with lenders.” A Treasury spokesperson said afterwards that the government would continue to engage with stakeholders on “emerging issues” without commenting on the specifics of the meeting.

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