UK ministers have come under pressure over planned crypto regulations from a group of crusading MPs seeking a more radical overhaul of the industry.
The Treasury Select Committee published a report on Wednesday in which members said that cryptocurrencies should be treated as gambling, given that they had “no intrinsic value, high price volatility, and no discernible social good.”
Parliamentarians on the committee said the government’s proposals would create a “halo effect”, giving consumers the impression that assets were safe and secure.
What is the government doing to regulate cryptocurrencies?
The treasure established in the February proposals to regulate the crypto industry, including new rules to govern the issuance, trading, and lending of crypto tokens (digital representations of assets) in an effort to safeguard customer funds.
Cryptocurrency exchanges would be required to comply with the rules governing traditional financial services, including the obligation to protect client money in the event of insolvency and conduct due diligence and monitoring of assets listed on their platform.
The government’s measures follow a period of turmoil in the sector. Several lenders and exchanges like the Celsius Network, FTX and Voyager Digital fell into trouble in the past 12 months, sending the price of cryptocurrencies down sharply and undermining investor confidence.
Where do the committee’s plans diverge?
Expert witnesses gave evidence that cryptocurrency trading and investment activity reflected gambling, the lawmakers said, as they questioned the government’s view that crypto activity should be regulated like any other financial service.
The committee highlighted evidence from Charles Randell, former chairman of the Financial Conduct Authority, who said that “speculative cryptocurrencies are pure and simple gambling.” He also called for cryptocurrency-related tax receipts to be used to support debt and addiction services.
The committee also said the government should take a stronger stance on unbacked cryptocurrencies such as bitcoin and ether due to the volatility of their prices and the risk that consumers are exposed to significant losses.
How has the cryptocurrency industry reacted?
Crypto UK, the industry body, attacked the committee’s proposals, arguing that they had overlooked potential benefits and use cases. He said that an appropriate regulatory framework would help mitigate any risk that crypto assets pose to consumers.
“Professional investment managers see Bitcoin and other crypto assets as a new alternative investment class,” said Ian Taylor, Crypto UK board adviser. He said gambling was exempt from capital gains tax, and changes would risk losing the Treasury tens of millions of pounds.
Taylor added: “Equating cryptocurrency with gambling is useless and disingenuous.” Gambling companies must comply with consumer protection rules, but the FCA applies a more stringent set of rules for trading and issuing securities.
What do the proposals mean for those with losses or anyone who has been scammed?
The MPs stressed that the government and the regulator do not currently plan to compensate investors where they suffered significant losses. Harriett Baldwin, a Conservative MP and chair of the committee, said: “In betting on these unbacked tokens, consumers should be aware that they could lose all their money.”
However, the committee’s proposals would not eliminate scam risk, volatility or address energy consumption, according to Dion Seymour, director of crypto and digital assets at tax consultancy Andersen LLP, and former policy lead at HM Revenue & Customs on cryptoassets.
Seymour said consumers were more concerned about getting caught in a scam. The Financial Services Compensation Scheme reported last month that more than half of all consumers expressed “fear of being scammed”, while just 12 per cent said they were worried about possible addiction.
I’m not interested in cryptocurrencies, so how does this affect me?
Despite the fact that the parliamentarians expressed deep skepticism about cryptocurrencies, they said that the technologies can be useful, for example, to reduce the cost of payments. Meanwhile, the government is eager to make the UK a hub for the industry.
Aside from the reforms discussed in the committee’s report is work from the Bank of England and the Treasury exploring whether to issue a digital currency to protect the pound sterling against stablecoins (types of cryptocurrencies tied to sovereign currencies) and to reduce the cost of financial transactions.
Meanwhile, HMRC officials have redoubled efforts to increase tax compliance of digital assets. Starting in 2024-25, self-assessment tax returns will have a separate section for individuals and trusts that have disposed of crypto assets.