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A recent House of Commons Treasury Committee report has stirred a heated debate by recommending that retail trading and investment activity in âunbacked crypto assets, such as Bitcoin and Ether,â be regulated as gambling.
The governmentâs insistence in referring to crypto assets as âunbackedâ during a time of high inflation of a FIAT currency backed only by trust in the Bank of England and the power of the military is a frustratingly common occurrence throughout the report. For example, the phrase âunbacked crypto assetsâ appears 26 times in the first 20 pages of the main section of the report. However, innovative blockchain solutions like DeFi, ReFi, yield farming, zero-knowledge (ZK), and even staking are not mentioned once.
TL;DR
The report made the following recommendation on crypto regulation:
- Apply blockchain-based solutions to enhance payment processing, particularly in âlower income countries and cross-border transactions.â
- Establish timely regulatory frameworks and streamlined authorization processes.
- Support crypto technologies with âclear beneficial use cases, avoiding public resource waste in niche innovations.
- Consider regulating retail trading in âunbacked crypto assets as gambling,â given their price volatility and resemblance to gambling rather than financial services.
- Apply AML/CTF âsafeguardsâ The Gambling Commission uses to crypto assets.
Road to zero tax on crypto?
If enacted, this regulatory change would fundamentally alter the landscape of cryptocurrency activity in the U.K. and set a precedent for other jurisdictions worldwide.
Members of the UK Parliament have admitted that the country needs to incentivize blockchain innovation. Its inability to embrace the emergent technology has led to the U.K. losing ground to other more crypto-friendly countries such as Portugal and Dubai. Matt Hancock said the U.K. should adopt a âgrowth-maximizing viewâ on crypto.
âHMRC has taken a revenue-maximizing approachâŠapplying it in a sledgehammer way⊠what we need to do is take a growth-maximizing view where revenues in the future will be far greater.â
While the recent Treasury Committee report was much less supportive of crypto than Hancock, it surprisingly opened an option for pro-crypto MPs to use the gambling approach to eliminate crypto taxes.
The U.K. has no tax on gambling â with income derived from gambling not declared on personal tax returns. Could treating gambling be a loophole for web3 companies to relocate to the U.K. and supercharge the countryâs Fintech industry?
Deep dive: Treasury Committee Report
The Treasury Committeeâs report scrutinizes the potential impacts of crypto assets on the financial services landscape. It acknowledges potential benefits, such as to âimprove the efficiency and reducing the cost of making payments, especially cross-border transactions and those in lower-income countries.â However, it also underscores the âsignificant risksâ involved, including price volatility, high energy consumption, and usage in scams, fraud, and money laundering.
âUnbacked 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.â
The unflattering and highly debatable initial assessment of the crypto industry continues with the report highlighting the governmentâs proposals to regulate crypto assets within the financial services sector âto foster innovation, maximize potential benefits,â and mitigate risks.
After emphasizing the importance of not utilizing public resources for activities without a clear and beneficial use case, the report then draws parallels between crypto and gambling due to significant price volatility â recommending a similar approach to regulation.
Crypto is gambling
The committee states that its recommendation to regulate retail trading and investment activity in âunbacked crypto assetsâ as gambling rather than a financial service is rooted in the principle of âsame risk, same regulatory outcome.â
âWe therefore strongly recommend that the Government regulates retail trading and investment activity in unbacked crypto assets as gambling rather than as a financial service, consistent with its stated principle of âsame risk, same regulatory outcome.â
However, the report highlighted criticisms of this, arguing that this could also create a âhalo effect, leading consumers to believe that this activity is safer than it is or protected when it is not.â Charles Randell, former Chair of the FCA, even predicted demand for âaddiction servicesâ for crypto investors;
âSpeculative crypto is gambling, pure and simple. It should be regulated and taxed as such, with levies to support the debt advice and addiction services for which it will fuel demand.â
Furthermore, the reportâs âKey Issuesâ section cites a 2022 Bank for International Settlements (BIS) survey, revealing that most new Bitcoin users are âyoung men below 35 years old.â The survey also highlighted the possible risks this demographic faces â which is considered the âmost inclined to take risks among the population.â
Therefore, the recommendation to treat crypto trading as gambling could arguably make it more attractive to those compelled by high-risk activities, bringing the protecting consumers argument into question.
Balancing innovation and consumer protection
The report included additional external responses to the inquiry â including The Financial Services Consumer Panel â which expressed concerns over the governmentâs focus on developing new crypto asset technology at the expense of consumer protection. In addition, Ian Taylor of CryptoUK argued that appropriate regulation would help mitigate consumer risks, stating:
âWe need regulation of certain centralized market participants. Perhaps if we had had some regulation, some of these recent events may not have taken place, where we have seen some pretty poor business practices.â
Taylor continued his criticism of the committee in statements made since the report was released.
In finding an equitable solution to crypto regulation, the challenge lies in striking the right balance between fostering innovation and protecting consumers. While the report may be overly critical of the crypto sector, it does reiterate the governmentâs approach â as outlined by Rishi Sunak:
âTo make the UK a global hub for crypto asset technology, and the measures weâve outlined today will help to ensure firms can invest, innovate and scale up in this country.â
Government legislators seek to bring crypto assets within the Financial Services and Markets Act 2000 (FSMA) framework â which governs various financial services.
However, the report seeks to pull back on new innovations and, instead, focus on reducing âsignificant risks posed by crypto assets to consumers and the environment [which] are real and present.â
While the report opens up an interesting debate around crypto tax and regulation in the UK, the Treasury Committee has not changed its anti-crypto stance:
âOur predecessor Committee published a Report in 2018 that called for greater regulation to protect consumers from an industry it described as a âwild west.â Nothing we have heard in our current inquiry has changed that impression.â
The post Everything you need to know on UK regulating crypto as gambling appeared first on CryptoSlate.
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