Written by Zoe Wyatt, Partner and Head of Crypto and Digital Assets and Dion Seymour, Crypto & Digital Assets Technical Director with Andersen LLP
The Treasury Committee (TC) has an interesting history and view on cryptoassets. In 2018 the TC released a report that identified uses for crypto and that regulation was needed for the cryptoasset market, which few at the time argued.
However, any positive aspects were overshadowed by the headline that the sector was the “wild west”. It was a soundbite that persisted for a number of years.
On 17 May 2023, the TC released a further report entitled “Regulating Crypto” with comments that seem to be divorced from reality.
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.” The report states that “[I]n particular, unbacked cryptoassets pose significant risks to consumers, given their significant price volatility and associated risk of losses. They can consume very large amounts of energy and are also used by criminals in scams, fraud and money laundering.”
The report updates the “wild west” headline with a new one – that is gambling. It can be expected that the soundbite “it’s gambling” will be used as much as the previous one. Notably this view was reserved for investment in “unbacked” cryptoassets, for example Bitcoin and Ether, and as gambling they should be taxed as such. This recommendation was made by very few of the third parties that provided evidence to the TC, perhaps indicating that comments were not treated equally.
Following the release of the report, other MPs have made comments supporting the view that the Gambling Commission “could bring some order” to the sector. This is seemingly despite the efforts of the FCA as the money laundering regulator for cryptoasset firms since the introduction of regulation in 2019. Again, it is unclear as to what the TC considers the treatment as gambling would achieve over and above that being done by the FCA. There appears to be a misplaced halo effect around the treatment of gambling.
A recent survey from the FSCS (Financial Services Compensation Scheme) on attitudes towards cryptoassets found that scams were the main concern in relation to cryptoassets. However, many scams do not involve cryptoassets. For example, where social media adverts are used, purporting to be comments from celebrities, to encourage people to use their services. Often these unscrupulous actors are located outside the UK and cryptoassets are not even provided – they are an outright scam. The existing Financial Promotions regulations already cover these adverts, though they are difficult to remove from social media. The best way to address this is through education rather than regulation (which has limited effectiveness). Interestingly, only 12% of respondents to the FSCS survey stated that they were concerned about becoming addicted to buying cryptoassets.
It should be noted that the TC is not part of the Government nor is the Government bound to follow their recommendations. In response to the report, HM Treasury (HMT) published the following comments in the press:
“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.” Furthermore that “Crypto offers 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.”
On the face of it HM Treasury does not seem to be convinced by the views from the TC. Nonetheless, the TC is run by Members of Parliament and the report will have weight in both of the Houses of Parliament. The 2018 TC report has been mentioned in Parliamentary Questions and can be brought-up during any Parliamentary discussions. However, the TC is not the only Parliamentary group. Separately, an independent All Party Parliamentary Group (APPG), led by Lisa Cameron, was also established to consider the sector and sought evidence from participants in the sector. We are expecting their report to be released imminently and to be more balanced. Cameron has previously stated that she is “an advocate for getting regulation in place that makes the most of the potential of the sector whilst protecting consumers”
While the report certainly grabbed headlines, it does little to guide those hoping to resolve its recommendations. If the current approach from the FCA has been found wanting, and the report does not state that they have been, then why not state that for the change in approach and try to fix the issues rather than starting again.
The recommendations from the TC are also at odds with international approaches. Last week the World Economic Forum (WEF) released their report “Pathways to the Regulation of Crypto-Assets”, recommending that jurisdictions work more closely to promote uniform regulation, quite the opposite of jurisdictions striking out on their own arbitrary journeys.
On the taxation front, to treat investment in unbacked cryptoasset as gambling creates significant concerns. The report is conspicuously silent on the possible impacts that this may have on the established approach to the taxation of cryptoassets and may lead some to consider that their gains are tax free – as it is gambling. Whilst 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 as to what is a taxable cryptoasset.
Furthermore, with winnings being tax free, this report could actually increase non-compliance in this sector, and HMRC has a history with gambling. In 2014, HMRC released their first guidance on the treatment of cryptoassets that included a line taken by some to indicate that cryptoasset investment was gambling. This was repeated by many YouTube videos and articles. This was incorrect, and in 2018 when HMRC updated their guidance it was made clear that investment in cryptoassets was not gambling. Despite this, as many cryptoasset investors do not read HMRC guidance, the view still persisted for a number of years afterward. To be clear cryptoassets are already taxable.
Practically speaking, it would be possible to put a gambling duty on cryptoasset transactions. If such a duty was to be introduced, it would need to follow existing principles of remote gaming duty (RGD) to ensure that exchanges based outside the UK do not have a
competitive advantage. Gambling requires there to be a counterparty to the bet, the gambling platform, who pay the winnings and, of course, take your losses. However, cryptoasset exchanges do not operate like that and make their profit from effectuating transactions. Therefore, it would be sensible for any tax to be transactional based, like a Tobin tax, as used in the financial sectors unlike RGD which is charged against the gross gambling profits of UK customers.
However, it has been reported that it is difficult to police the gambling platforms that are based outside the UK. This could increase the cost of compliance for HMRC and increase the tax gap. The report does not consider these wider impacts nor how this would solve the report’s stated issues with Bitcoin criminality, volatility and energy usage as these would, seemingly, all persist regardless of whether it is regulated as gambling or as a financial service.
We need to encourage cryptoasset platforms to the UK. As raised by the report, consumer protection is important and, as we have seen with FTX, if something goes wrong UK customers do not have the benefit of being able to pursue damages in a UK court. This increases both the complexity and cost of any action thereby reducing consumer protection.
The report is disappointing; it does nothing to practically address the concerns raised, it provides no certainty to the participants in the sector and sends a troubling message to the talented professionals who are eager to flourish in the UK. Furthermore the message that it is gambling may hamper HMRC’s efforts to collect tax.
Worse still, the report is tone deaf to the actual issues raised by consumers; that it is scams they need protection from. No doubt lead to a new line for unscrupulous social media scammers stating that the investment is tax free as endorsed by the TC themselves.
