Fifteenth Report of Session 2022–23. Published on 17 May 2023 by authority of the House of Commons.
BACKS REPORT. JUNE 2023.
Index
A.- House of Commons Treasury Committee
-Introduction
-Cryptoassets are unbacked, therefore are gambling.
-Potential benefits of cryptoassets and their underlying technologies
-Risks from cryptoassets
-The Government’s ambition for cryptoassets in the UK
-The Government’s approach to regulating cryptoassets
-Key issues Approach to supporting innovation
-Approach to regulating retail activity in unbacked cryptoassets
-Conclusions and recommendations
B.- Backs considerations
-No all Cryptoassets are unbacked
-Bitcoin, Ethereum, and the internet rely on technology and users.
-Bitcoin’s detractors point out its volatility
-Fiat currencies are not backed by commodities.
-Ruling cryptoassets as gambling in the UK, is there an advantage?
A.- House of Commons Treasury Committee
Introduction
For the House of Commons Treasury Committee cryptoassets span a wide and constantly evolving range of digital instruments. Unbacked cryptoassets (also sometimes referred to as “cryptocurrencies”) are not supported by any underlying asset and so have no intrinsic value.
Unbacked cryptoassets remain the most prominent form of cryptoasset, with the largest two (Bitcoin and Ether) alone accounting for around two-thirds of the total market capitalisation of all cryptoassets. There are currently more than 23,000 cryptoassets of various forms in existence.
The total market capitalisation of cryptoassets currently stands at $1.2 trillion (0.2 per cent of the $487 trillion of total global financial assets6), down from a peak of $2.9 trillion in November 2021.
Cryptoassets are unbacked, therefore the approach should be gambling
Consumer speculation in unbacked cryptoassets such as Bitcoin and Ether is one area where the Committe have particular concerns, and therefore they think the Government needs to take a different approach in order to better protect consumers from harm.
Unbacked cryptoassets have no intrinsic value, and their price volatility exposes consumers to the potential for substantial gains or losses, while serving no useful social purpose. These characteristics more closely resemble gambling than a financial service, an impression reinforced by the evidence we have received of consumer behaviour.
The Committee is concerned that regulating retail trading and investment activity in unbacked cryptoassets as a financial service will create a ‘halo’ effect that leads consumers to believe that this activity is safer than it is, or protected when it is not. They therefore strongly recommend that the Government regulates retail trading and investment activity in unbacked cryptoassets as gambling rather than as a financial service, consistent with its stated principle of ‘same risk, same regulatory outcome’.
Potential benefits of cryptoassets and their underlying technologies
One of the most commonly cited possible benefits of cryptoasset technologies is their potential to improve the efficiency and reduce the cost of payments, particularly crossborder.
Cryptoassets also have the potential to improve the efficiency and reduce the cost of domestic payments.
Cryptoasset technologies have the potential to improve financial inclusion.
Risks from cryptoassets
For the Committee unbacked cryptoassets such as Bitcoin and Ether typically display considerable price volatility.
For them, the price volatility of unbacked cryptoassets exposes consumers to significant risks of losses. Research by the Bank for International Settlements (BIS) into the retail adoption of cryptoassets estimated that 73–81% of the users that entered the Bitcoin market over 2015–2022 were likely to have lost money on their investments.
There are also concerns around the corporate governance and controls within cryptoasset firms. There was a high rejection rate of 85 per cent for firms applying for registration under the Financial Conduct Authority (FCA) Anti-Money Laundering and Counter Terrorist Finance (AML/CTF) regime.22
The Government’s ambition for cryptoassets in the UK
In April 2022 the Government announced its plan to make the UK a “global hub” for cryptoasset technology.
The Government published a consultation paper in February 2023 setting out its overarching plan for the regulatory framework to be applied to cryptoassets used within financial services.
The Government’s approach to regulating cryptoassets
Prior to 2023, the regulation of cryptoassets in the UK had developed in a piecemeal way. In January 2020, an AML/CTF regime was introduced for businesses undertaking cryptoasset exchange or custody wallet services in the UK.
And the Government announced in April 2022 that it would legislate in the Financial Services and Markets (FSM) Bill to introduce a regime for the regulation of certain stablecoins used for payments.
By seeking to establish a regulatory framework for cryptoassets in the UK, the Government stated that it was pursuing four overarching policy objectives:
(i) encourage growth, innovation, and competition in the UK
(ii) enable consumers to make well-informed decisions, with a clear understanding of the risks involved
(iii) protect UK financial stability
(iv) protect UK market integrity.
In addition, the Government stated that it will be guided by a set of core design principles:
- Same risk, same regulatory outcome
- Proportionate and focussed
- Agile and flexible.
The Government’s proposed legislative approach is to bring cryptoassets within the framework established by the Financial Services and Markets Act 2000 (FSMA), which governs the regulation of a wide range of financial services. It will do this by expanding the list of specified investments in Part III of the Regulated Activities Order, made under FSMA, to include cryptoassets. Once the relevant legislation is made, the FCA would need to consult on the detailed rules it will apply.
Key issues Approach to supporting innovation
Financial technology firm Circle said: The years after the 2017 bull market were an ideal time for the U.K. to develop a holistic regulatory regime for cryptoassets. Unfortunately, the U.K. did not act on the [2018] recommendations of the Treasury Committee. To regain its footing and status as a global financial services leader, the U.K. must act now.
The crypto investment app company Luno told the Committee that “multiple jurisdictions across the world have implemented comprehensive regulatory regimes, with Singapore’s becoming law in early 2019. Meanwhile, the UK has repeatedly delayed taking action”. Luno argued that a “failure to tackle this issue at pace increases the risk of consumer harm and reduces the chances of the UK retaining its position as a world leading fintech hub”.
Fintech firm Curve UK Limited told the Committee: “… a number of cryptocurrency firms have taken the decision to move offshore owing to the delays in the FCA dealing with the cryptoasset firm registration regime, which had to be extended owing the huge backlog of firms that remained on the temporary register”.
Approach to regulating retail activity in unbacked cryptoassets
A 2022 survey showed that around 10 per cent of UK adults—five million people— hold or have held cryptoassets, with “cryptocurrencies” the most commonly held type (79 per cent).
The same report found that the most mentioned reason for holding cryptoassets was that they were a ‘fun investment’ (52 per cent).
The Government’s intention is that activities in cryptoassets will be regulated, rather than the specific assets themselves. Hence any form of cryptoasset—including unbacked cryptoassets—could be captured by the proposed regulation of the following activities:
- Issuance activities
- Payment activities
- Exchange (trading) activities
- Investment and risk management activities
- Lending, borrowing and leverage activities
- Safeguarding and/or administration (custody) activities
- Validation and governance activities
It is, therefore, disappointing that the government’s Consultation and Call for Evidence about the Future Financial Services Regulatory Regime for Cryptoassets proceeds on the false premise that speculative crypto is a “financial service”.
From this premise, it proposes that the issue and trading of speculative cryptoassets should be endorsed by regulating it as a financial service, even though it provides no useful service to consumers.
Some witnesses suggested that speculative activity in unbacked cryptoassets should be treated as gambling rather than as a financial service. The Gambling Commission regulates gambling in the UK under the Gambling Act 2005. It provides advice and guidance to individuals and businesses, including on the prevention of problem gambling, and applies safeguards such as AML/CTF measures on that industry.
Businesses regulated by the Gambling Commission include bingo halls, lotteries, arcades, betting shops, racecourse bookmakers, online betting companies and exchanges, and casinos.
Charles Randell told the Committee that “Speculative crypto is gambling pure and simple. It should be regulated and taxed as such, with levies to support the debt advice and addiction services for which it will fuel demand.”
Similarly, Dr Larisa Yarovaya said: “We urge the Government to regulate crypto-assets as any other highly speculative financial asset, while crypto exchanges, online trading platforms, and other crypto-asset businesses should be regulated with similar stringency as a gambling industry, since individual investors are often getting misinformed by crypto-asset businesses, particularly on social media platforms”.
Economist Dr Diarmid Weir told the Committee: “[…] creating, purchasing and holding cryptocurrencies is nothing other than a form of gambling–with a zero-sum outcome and mainly benefitting scammers and those with inside access. They are parasitical on the financial system, economic capacity, energy and thus the environment, and on human capacity and well-being. Like gambling, cryptoasset speculation can be addictive”.
The FCA told the Committee that “crypto gambling addictions are rising and there are limited controls in place to protect vulnerable consumers”.
The report also discussed the similarities between cryptoasset speculation and gambling with Nikhil Rathi, CEO of the FCA, who told us that, while many consumers invest relatively small amounts of money in cryptoassets, some people had lost “life changing sums of money”.
Regardless of the regulatory regime, their price volatility and absence of intrinsic value means that unbacked cryptoassets will inevitably pose significant risks to consumers. Furthermore, consumer speculation in unbacked cryptoassets more closely resembles gambling than it does a financial service. We are concerned that regulating retail trading and investment activity in unbacked cryptoassets as a financial service will create a ‘halo’ effect that leads consumers to believe that this activity is safer than it is, or protected when it is not.
The Committee strongly recommend that the Government regulates retail trading and investment activity in unbacked cryptoassets as gambling rather than as a financial service, consistent with its stated principle of ‘same risk, same regulatory outcome’.
Conclusions and recommendations of the Committee
1.- The Committee recommend that the Government takes a balanced approach to supporting the development of cryptoasset technologies. It should seek to avoid expending public resources on supporting cryptoasset activities without a clear, beneficial use case, as appears to have been the case with the Royal Mint NFT. It is not the Government’s role to promote particular technological innovations for their own sake.
2.- Consumer speculation in unbacked cryptoassets more closely resembles gambling than it does a financial service.
3.- The Committee strongly recommend that the Government regulates retail trading and investment activity in unbacked cryptoassets as gambling rather than as a financial service, consistent with its stated principle of ‘same risk, same regulatory outcome’.
B.- BACS considerations:
No all Cryptoassets are unbacked
Although the committee considers that Bitcoin and Ethereum are not backed by anything, it is incorrect. The same assertion can be made about assets like gold, which are not backed but rather serve as a measure. The internet is also not supported by a metal. It is supported by the millions of users who want to use its technology. Claiming that the internet has no value because it is not supported by a metal is as glaring a mistake as claiming that Bitcoin and Ethereum are not backed by a metal. Bitcoin and Ethereum have intrinsic value, not extrinsic value. That is why the U.S. Commodity Futures Trading Commission (CFTC) has classified Bitcoin as a commodity: “is Bitcoin a commodity? Yes, virtual currencies, such as Bitcoin, have been determined to be commodities under the Commodity Exchange Act (CEA)”[1].
Bitcoin, Ethereum, and the internet rely on technology and users.
The pre-internet era was based on materials, while the post-internet era is based on users. Users choose which technology they want to use. Bitcoin has been referred to as “the internet of money”[2]. It is not based on a commodity but rather on a decentralized system. If it has users, it has support. Without users, it loses support. Users choose Bitcoin because it is a reliable, decentralized payment system that cannot be manipulated. Additionally, it can fulfill the functions of money better than fiat money: a medium of exchange, a store of value, and a unit of account[3].
Bitcoin’s detractors point out its volatility
But historical data on fiat currency indicates that it tends to lose value, whereas Bitcoin tends to gain more and more value. The data from Bitcoin’s previous halvings support this stance: from 2012 to 2016, its value increased 55 times, and from 2016 to 2020, it increased thirteen times. What will happen from 2020 to 2024 remains to be seen, but if past patterns hold, the value of Bitcoin may increase by 3 to 7 times in the next halving expected in 2028.
Fiat currencies are not backed by commodities.
Since August 15, 1971, when the United States abandoned the gold standard, fiat currency has not been backed by any material. States have the power to create unlimited money and therefore generate inflation and increased poverty. This has been exacerbated since the COVID-19 pandemic. Some fiat currencies could be classified as pure gambling.
Ruling cryptoassets as gambling in the UK, is there an advantage?
The reason why the UK may want to regulate crypto assets as gambling could indeed be related to taxation advantages. By categorizing them as such, it could potentially attract companies and users to the UK, as they would benefit from zero taxes. However, it’s important to note that tax regulations and policies can vary and evolve over time, so it’s advisable to consult with a tax professional or relevant authorities for the most up-to-date and accurate information regarding crypto asset taxation in the UK.
[1] https://www.cftc.gov/sites/default/files/2019-12/oceo_bitcoinbasics0218.pdf
[2] Antonopoulos, Andreas M. 2016, “The internet of money”. CreateSpace Independent Publishing platform.
[3] Ammous, Saifedean. 2018. “The Bitcoin Standard”. John Wiley & Sons Inc.
