Trading in bitcoin and other speculative cryptocurrencies should be regulated as gambling to avoid consumers from being lulled into a false sense of security about the risks posed by the $1.2 trillion market, MPs have warned.
The Treasury select committee has told ministers that there is a danger of creating a “halo” of credibility around unbacked cryptoassets if they are treated as part of financial services. The MPs also criticised a now-aborted idea at the Treasury for the Royal Mint to create a digital token.
Their intervention comes just months after the government set out its long-awaited plan to regulate activities in the crypto industry, which will fall to the Financial Conduct Authority under the current proposals.
Cryptocurrencies, which lie beyond the control of authorities such as central banks and governments, have exploded in popularity since the creation of bitcoin in 2008.
Although central banks, including the Bank of England, are exploring starting their own forms of digital money, and some cryptocurrencies are backed by hard assets such as the dollar, much of the market is made up of unbacked tokens, such as bitcoin.
These cryptoassets are often subject to wild price movements and are a focus for speculative trading by retail investors hoping to make quick profits. Bitcoin reached a record high of almost $69,000 in November 2021 but has slumped to less than $22,000. Sentiment towards the digital markets soured last year after a series of collapses in the industry, including the bankruptcy of crypto exchange FTX.
MPs on the Treasury committee last scrutinised cryptoassets in 2018, when they warned that the digital markets were akin to the Wild West. In a new report published by the committee this week they said that “nothing we have heard in our current inquiry has changed that impression”.
Writing in The Times, Harriett Baldwin, who chairs the committee, said events last year had exposed cryptocurrencies “as the fool’s gold that many had suspected all along”.
She added: “With the price of bitcoin tumbling three-quarters in the year to November 2022 and several high-profile failures, including FTX, it was clear for all to see that cryptocurrencies were the tulip bulbs of the 21st century.”
In its report, the committee argued that consumer speculation in cryptomarkets “more closely resembles gambling than it does a financial service”. Regulating the trading of unbacked cryptoassets as a financial activity could “create a halo effect that leads consumers to believe that this activity is safer than it is, or protected when it is not”.
The idea to launch a Royal Mint digital token was mooted last April, when Rishi Sunak, who was then the chancellor and is now the prime minister, said that he wanted the UK to become a “global hub” for crypto technology.
The committee said that the government should take a balanced approach to crypto and warned: “It is not the government’s role to promote particular technological innovations for their own sake.”Last year’s “crypto winter” exposed cryptocurrencies as the fool’s gold many had suspected all along.
With the price of bitcoin tumbling three quarters in the year to November 2022 and several high-profile failures including FTX, it was clear for all to see that cryptocurrencies were the tulip bulbs of the 21st century.
The crypto industry remains a wild west, with numerous firms operating with questionable credentials or intentions.
Crypto has become central to the activities of criminal fraudsters, with more than half of investment scams now involving cryptocurrencies, according to the Financial Ombudsman. The Financial Conduct Authority (FCA) told us that it had rejected 85 per cent of applications from crypto firms for their anti-money laundering regime, such was the poor quality of the crypto firms’ responses.
Unbacked cryptoassets, often called cryptocurrencies, aren’t supported by any underlying asset. They remain the most prominent type of crypto, with bitcoin and ether accounting for two-thirds of all cryptoassets.
They have no intrinsic value and, in the view of the Treasury committee, provide no social good.
About five million adults in the UK hold or have held cryptoassets, according to HM Revenue & Customs. More than half claimed they invested for “fun”. Research conducted last year suggested up to 80 per cent of retail crypto investors had likely lost money.
Crypto has a huge environmental impact, with bitcoin’s total energy usage larger than that of entire countries such as Norway or Sweden. Consumers need to be aware that trading in crypto is the very opposite of sustainable investing.
There are some positives. The technologies underlying crypto may bring benefits, particularly when it comes to reducing the cost of cross-border transactions, and payments in countries with less developed financial sectors.
Regulators must keep pace with technological developments and ensure that potentially productive innovations like these are not unnecessarily constrained, including by ensuring the FCA’s authorisations gateway is open and responsive.
However, the scale of the potential future benefits is unclear, while the risks posed to our constituents and the environment are real and present. The government, therefore, needs to take a balanced approach to supporting these new technologies, avoiding spending public resources without a clear benefit, as was the case with the now-abandoned Royal Mint non-fungible token.
In our view, regulating retail trading in cryptocurrencies as a financial service, as proposed by the government, will create a halo effect, leading consumers to believe this activity is safe and protected, when it is anything but.
The extreme price volatility and absence of any intrinsic value means cryptocurrencies inevitably pose significant risks to consumers. These characteristics, and the extreme risk of losses, more closely resemble gambling than a financial service.
It’s high time that effective regulation of cryptoassets was introduced. However, consumer cryptocurrency trading is not a financial service. It is gambling, pure and simple — and must be regulated as such.