For anyone working in and around the UK crypto sector, the views from the recent report by the UK Treasury Select Committee (appointed by the House of Commons and composed of 11 Members of Parliament) have come as an unwanted bolt from the blue.
Strident in their criticism of crypto investment, the group of British MPs who compiled the paper, titled “Regulating Crypto,” did their utmost to ensure cryptoassets struggle to prosper in the years ahead.
Treating Crypto as Gambling
The headline from the report was that the committee urged the UK government to abandon plans to regulate crypto as a financial service, and recommended that cryptoasset investment should be treated as gambling.
Harriet Baldwin, the committee’s chair, said: “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.”
We have met with and engaged with MPs over the last five years and were shocked by these words. We have little doubt that this report was a deliberate move aimed at reducing the credibility of the crypto sector in the UK.
Throughout the process, we espoused the many virtues of cryptoassets. More than that, we listened to MPs’ concerns, provided answers, and drew their attention to how the industry has evolved far beyond its initial reputation as “the Wild West.”
Our impression, having devoted so much attention to the crypto industry, is that the committee members haven’t fully understood the market. We are firmly of the view that the committee’s recommendations are divorced from reality, and suggestive of a predetermined outcome to the inquiry.
Focus on the Negative
After all the evidence hearings from industry, as well as the investment from both retail and high-profile institutions, it was extremely dispiriting to note that the overall sentiment of the report was that cryptoassets have limited existing purpose, other than as a digital payment system.
The committee’s findings focused entirely on the negative aspects of crypto.
In drawing her conclusions, Baldwin referenced how UK-based crypto holders lost hundreds of millions of pounds to fraud, scandals such as FTX, and wild swings in the value of cryptoassets. Yet the committee barely touched on the opportunities that cryptoassets provide, and the use and transparency of blockchain technology.
For those of us who have spent so much time working within the crypto industry, it is impossible to envisage how classifying it as gambling solves issues raised in the report, notably volatility and energy usage.
While some aspects of cryptoassets feel more like a gamble in that they are hugely speculative—and the latest craze in meme coins helps the committee’s case—this generalization can’t be made across the entire market.
The report specifically targets “unbacked” cryptoassets such as Bitcoin and Ether, but Bitcoin, as an example, has a multi-billion-pound trading volume per day, and an International Monetary Fund report highlighted the correlation of Bitcoin with the stock market.
Regulation Fit for Purpose
MPs on the committee know that we have called for, and welcome, regulation of the industry, because consumers and businesses want certainty and protection. Regulation, however, needs to be fit for purpose to achieve desired outcomes, and that isn’t what the committee is suggesting.
Furthermore, the committee’s approach is a significant divergence from the government’s stated ambition to make the UK a global crypto hub. Ministers have just closed a consultation on proposals for the Financial Conduct Authority to regulate crypto, in much the same way as it oversees the issue and trading of stocks and bonds.
For this sector to be treated as gambling is also at odds with international approaches. The report doesn’t consider how the Gambling Commission would regulate the sector in practice nor how this would solve the report’s stated issues with Bitcoin criminality, volatility, and energy usage. While it certainly grabbed headlines, the report does little to guide those hoping to resolve its recommendations.
While bringing crypto under the auspices of the gambling authority might initially sound like great news for investors in terms of tax, with “winnings” considered as tax free, it would create uncertainty to what is a taxable cryptoasset. A further obstacle is that winnings from gambling are generally tax free. The report is conspicuously silent on the possible impact that this may have on the established approach to the taxation of cryptoassets, on which the UK tax authority, HM Revenue & Customs, has reached an opposing viewpoint.
Any move to try and regulate some cryptoassets as gambling, and other cryptoassets as financial assets regulated under the financial conduct authority will create further uncertainty and more red tape for businesses, who won’t operate in the UK.
What is and isn’t taxable may be a moot point if you can’t invest in cryptoassets where banking restrictions can be used to curb investment.
After the committee’s report emerged, it was pleasing to read that the treasury itself takes a more pragmatic approach to crypto, acknowledging that there are risks in crypto investment, but that these are the same risks that exist in traditional financial services. Promising to take an “agile approach to robustly regulating the market,” the treasury says it will address risks but also promote innovation.
While the treasury committee is just one voice in a much larger machine, and the recommendations in the report are unlikely to be implemented, it nonetheless sends a message to young talented Web3 professionals eager to flourish in this exciting growing sector that the UK is closing its door on attracting such talent.
So, in short, the treasury committee’s report is more than disappointing.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
Zoe Wyatt is a partner and head of crypto and digital assets and Laura Knight is international and crypto tax director with Andersen LLP.
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