Don’t treat cryptocurrencies like gambling, even if it’s largely pointless

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Not even the heat of Miami can warm up a crypto winter.

The faithful descended on Florida last weekend for the “largest bitcoin event” in the world. Only half made the trip compared to 2022. Some of the buzz coins and memes were gone. So was the sense of indestructibility, after a year in which some of the biggest names in the cryptocurrency world collapsed and US agencies launched a series of law enforcement actions in the sector.

There was also a blast of cold weather from Westminster last week, where an influential parliamentary committee suggested cryptocurrencies weren’t disruptive or disavowed, but worse: borderline irrelevant. Unsecured cryptoassets, the Treasury Select Committee said, had “no intrinsic value” and served “no useful social purpose.” The right thing to do to protect consumers, he suggested, was regulate this activity as gambling.

This was dismissive, attractive and, I think, wrong. The committee is right about the utility. You can be open-minded about the potential of distributed ledger technology, or even stablecoins and central bank digital currency, and still feel that cryptocurrencies have totally failed to prove their usefulness, whether as a store of value, a medium exchange or financial inclusion tool. “The industry still does a terrible job of explaining things,” says Oliver Linch, chief executive officer of Bittrex Global. “He was a wink. . . if you know, you know, to the nonsense of the moon.

The committee’s concern was that financial regulation would mean a “halo effect” for that kind of guff, giving a false sense of security – a legitimate concern. But “saying it’s gambling doesn’t make sense legally,” says Marc Jones, a partner at law firm Stewarts, emphasizing the ownership aspect of cryptocurrencies. Nor would it be likely to result in effective regulation.

The line between financial regulation and gambling is already blurry. Spread betting and other types of leveraged trading are taxed like gambling but regulated by the Financial Conduct Authority. Advertisements for betting platforms prominently show 80% of retail accounts losing money, a 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’s not “fit for purpose,” says Matt Zarb-Cousin, who campaigns to clean up gambling. This year’s gambling reform proposals ensure belated controls on free bets and other incentives. THE FCA sent shares in spread-better fell in 2016 with leverage limits and bans on bonuses and promotions on the account. Cryptocurrencies (and widespread betting) can cause similar harm to gambling, says Zarb-Cousin. But it’s best to incorporate protections as self-exclusion tools into the tighter financial framework.

Dividing responsibility among regulators would be a mistake. The cryptographic universe is not neatly divided into conceivably useful and downright useless. A split is an invitation to regulatory arbitrage. And the intersection of cryptocurrencies with traditional finance should be as attractive to regulators as the tokens themselves.

The commission’s report appears unlikely to prompt a change of direction by the government, which followed Europe and other jurisdictions such as Hong Kong in February in proposing to regulate cryptocurrencies within the current UK financial services framework.

That doesn’t make it insignificant. After much captivating talk of the UK being a “global crypto hub,” the mood has changed – a change which, oddly enough, this latest broadside could reinforce. Cryptocurrency will increasingly be asked to abide by the rules of traditional finance. The committee is unlikely to push for a lighter touch in the name of innovation.

This also applies internationally. US crackdown is all about protecting investors using the same securities laws and standards as the rest of finance: “There is no reason to treat the cryptocurrency market differently just because different technology is being used,” he said last year SEC Chairman Gary Gensler. Iosco, the coordinating body for global securities regulators, this week called for watchdogs move faster in creating a “level playing field between cryptoassets and traditional financial markets,” including the disruption of cryptocurrency companies where services including brokerage, trading and custody are combined in a way that would be unacceptable elsewhere.

All the signs to date – from Binance’s problems obtaining licenses, to the low success rate for anti-money laundering registration in the UK – suggest that much of the cryptocurrency world, even those eager for the warm glow of accreditation, will struggles to overcome basic hurdles, let alone a similar standard. As the cryptocurrency winter heats up, it won’t just be conference audiences that are shrinking.

helen.thomas@ft.com