A powerful cross-party group of MPs has called on the UK government to abandon plans to regulate crypto as a financial service and instead treat it as gambling.
The Treasury select committee said in a report that proposals for the Financial Conduct Authority to regulate the crypto industry could create “a ‘halo’ effect” that gives the impression crypto is “safer than it is” and might tempt people to put money into a speculative market they should avoid.
“The events of 2022 have highlighted the risks posed to consumers by the cryptoasset industry,” said Harriett Baldwin, the committee’s chair, referring to when UK-based crypto holders lost hundreds of millions to fraud, scandals such as FTX and wild swings in cryptocurrencies’ values.
“With no intrinsic value, huge price volatility and no discernible social good, consumer trading of cryptocurrencies like bitcoin more closely resembles gambling than a financial service, and should be regulated as such,” she added.
A person familiar with the TSC’s position said it was taking a “very different approach” to that of the government, which has just closed a consultation on proposals for the FCA to regulate crypto in much the same way as it oversees the issue and trading of stocks and bonds.
The Gambling Commission, which has a staff of around 300, did not immediately respond to a request for comment on whether it would be willing or able to regulate the cryptocurrency industry.
“Risks posed by crypto are typical of those that exist in traditional financial services and it’s financial services regulation — rather than gambling regulation — that has the track record in mitigating them,” said the Treasury.
“Crypto offer opportunities but we are taking an agile approach to robustly regulating the market, addressing the most pressing risks first in a way that promotes innovation,” they added.
The TSC’s is keen to avoid creating the perception that crypto is a legitimate investment, according to a person familiar with the matter, and the report did not focus on the detail of protections under both regimes,
Sam Richardson, money deputy editor at consumer advocacy group Which?, said it was “right that MPs are highlighting the risk of investors being exposed to unscrupulous firms or individuals” but he declined to comment on whether falling under the gambling regime would offer more or less protection to consumers.
Gambling firms are required to “treat customers fairly”, while the FCA has a much more detailed set of rules on trading and issuing securities and will soon impose a new consumer duty requiring firms to deliver fair outcomes.
The FCA said it welcomed “the Treasury select committee’s input to the ongoing discussion around regulating cryptoassets in the UK”, adding that it has been “working closely with the government” and is looking forward “to the outcome of its consultation and subsequent new legislation”.
The TSC’s report on crypto regulation also criticised the government for asking the Royal Mint to create a non fungible token (NFT) “as part of the chancellor of the exchequer’s ambition to make the UK a global hub for cryptoasset technology and investment”.
“It [the government] should seek to avoid expending public resources on supporting cryptoasset activities without a clear, beneficial use case, as appears to have been the case with the Royal Mint NFT,” the TSC said.
The FCA already has limited oversight of cryptocurrency businesses and acts as the anti-money laundering supervisor for registered entities. It will soon be able to police advertisements by crypto firms based in the UK and abroad.
The UK government’s approach to crypto regulation is largely in line with markets such as the EU and the US, where financial and securities regulators are taking on more responsibilities.
City groups had already cautioned the UK over its proposals for crypto regulation, warning the plans could offer legitimacy to a dangerous market.
The FCA warned in 2021 that consumers should be “prepared to lose all their money” if they put money into crypto products.
Later that year the FCA said Binance, by far the world’s largest crypto exchange, could not be regulated after it failed to respond to basic queries. The company has since said it intends to be regulated in the UK.
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