Treasury Committee recommends regulating unbacked cryptoasset trading as gambling

The House of Commons Treasury Committee published its report Regulating Crypto on 17 May 2023, recommending that retail trading and investment activity in unbacked cryptoassets be regulated as gambling rather than as a financial service¹. The report is the fifteenth of the 2022-23 session, and the Government has two months to respond¹.

The Committee said unbacked cryptoassets, which it also calls cryptocurrencies, are not supported by any underlying asset and so have no intrinsic value². It said they pose significant risks to consumers given their significant price volatility and associated risk of losses, can consume very large amounts of energy, and are used by criminals in scams, fraud and money laundering¹. It also said regulating this activity as a financial service would create a "halo" effect leading consumers to believe it is safer or protected when it is not¹.

The report sets out the size and shape of the market. It says there are currently more than 23,000 cryptoassets in existence, with Bitcoin and Ether alone accounting for around two-thirds of total market capitalisation². Total cryptoasset market capitalisation stands at $1.2 trillion, or 0.2 per cent of the $487 trillion of total global financial assets, down from a peak of $2.9 trillion in November 2021². It cites Bank for International Settlements research estimating that 73 to 81 per cent of users who entered the Bitcoin market over 2015 to 2022 were likely to have lost money². On crime, it cites estimates of the proportion of global cryptoasset trades related to crime ranging from 0.15 per cent to 46 per cent, and a National Crime Agency estimate that illicit cryptoasset transactions linked to the UK in 2021 likely equated to at least £1.24 billion, around 1 per cent of total transaction value, with a realistic possibility they were significantly higher². It also cites the Financial Ombudsman Service saying just over half of the investment scams it has seen involve cryptocurrencies². On energy, it cites the Cambridge Centre for Alternative Finance estimate that the Bitcoin network's annualised energy consumption is 131 terrawatt-hours, more than that of Norway or Sweden².

The Committee's concerns follow earlier warnings. Its predecessor committee published a report in 2018 calling for greater regulation to protect consumers from an industry it described as a "wild west", and the Committee said nothing heard in its current inquiry had changed that impression¹. The report notes the Government announced in April 2022 its plan to make the UK a "global hub" for cryptoasset technology, and published a consultation paper in February 2023 setting out its plan for the regulatory framework for cryptoassets used within financial services². The Committee said it welcomes those proposals, and recommends the Government take a balanced approach to supporting cryptoasset technologies and avoid expending public resources on activities without a clear, beneficial use case, citing the Government's abandoned Royal Mint non-fungible token as a case in point¹. It said the most convincing use case it heard was the potential to improve the efficiency and reduce the cost of payments, especially cross-border and in lower income countries with less developed financial sectors¹.

Why it matters for households

The recommendation concerns retail trading and investment in unbacked cryptoassets, meaning buying and selling assets such as Bitcoin and Ether that are not backed by any underlying asset¹. The Committee's stated reason is that these assets have no intrinsic value and their price volatility exposes consumers to the potential for substantial gains or losses¹. Its concern is that treating the activity as a financial service would lead consumers to believe it is safer than it is, or protected when it is not¹. The report does not propose a change to the rules in force; it is a recommendation to Government, and the current position is that the Government is consulting on a framework that would bring cryptoassets within the Financial Services and Markets Act 2000 framework by expanding the list of specified investments in the Regulated Activities Order². The report also notes that an anti-money laundering and counter terrorist financing regime has applied since January 2020 to businesses undertaking cryptoasset exchange or custody wallet services in the UK, and that legislation on cryptoasset promotions was laid in Parliament in March 2023². The Committee says it is considering central bank digital currencies separately from the wider cryptoasset market, as are the Government and Bank of England¹.

What happens next

The Government has two months to respond to the report¹. The Committee also said it will continue to follow developments as the industry and the Government's regulatory approach develop¹. It said it is important that the Government and regulators keep pace with developments, including by ensuring that the Financial Conduct Authority's authorisations gateway is open and effective¹.