UK ministers have been put under pressure over planned crypto regulations by a group of crossbench MPs who are seeking a more radical overhaul of the industry.
The Treasury select committee published a report on Wednesday in which members said crypto should be treated like gambling, given it had “no intrinsic value, huge price volatility and no discernible social good”.
MPs on the committee said the government proposals would create a “halo effect”, giving consumers the impression that assets were safe and protected.
What is the government doing to regulate crypto?
The Treasury set out in 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.
Crypto exchanges would be required to comply with rules governing traditional financial services, including having to ringfence customers’ money in the event of insolvency and to undertake 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 such as Celsius Network, FTX and Voyager Digital fell into difficulties over the past 12 months, sending the price of crypto down sharply and undermining investor confidence.
Where do the committee’s plans diverge?
Expert witnesses gave evidence that crypto trading and investment activity mirrored gambling, MPs said, as they contested the government’s view that crypto activity should be regulated like any other financial service.
The committee highlighted evidence from Charles Randell, former chair of the Financial Conduct Authority, who said “speculative crypto is gambling pure and simple”. He also called for tax receipts related to crypto to be used to support debt and addiction services.
The committee also said that the government should take a stronger stance on unbacked cryptocurrencies such as bitcoin and ether due to their price volatility and the risk that consumers will be exposed to significant losses.
How has the crypto industry reacted?
Crypto UK, the industry body, hit out at the committee’s proposals, arguing they had overlooked potential benefits and use cases. It said an appropriate regulatory framework would help mitigate any risks crypto assets posed 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 that gambling was exempt from capital gains tax, and changes would risk losing the Exchequer tens of millions of pounds.
Taylor added: “Equating cryptocurrency with gambling is both unhelpful and untrue.” Gambling companies must comply with consumer protection rules, but the FCA applies a more demanding set of regulations to trading and issuing securities.
What do proposals mean for those with losses or anyone who has been scammed?
MPs stressed that the government and regulator do not currently plan to compensate investors where they suffered significant losses. Harriett Baldwin, Conservative MP and committee chair, said: “By betting on these unbacked ‘tokens’, consumers should be aware that all their money could be lost.”
However, the committee’s proposals would not remove the risk of scams, volatility or address energy consumption, according to Dion Seymour, crypto and digital assets director at the tax consultancy Andersen LLP, and former HM Revenue & Customs policy lead on crypto assets.
Seymour said consumers were more concerned with being caught out by a scam. The Financial Services Compensation Scheme reported last month that more than half of all consumers expressed “fear of being scammed” while only 12 per cent said they were concerned about possible addiction.
I’m not interested in crypto, so how does any of this affect me?
Despite MPs expressing deep scepticism over crypto, they have said that technologies can be helpful in, for example, reducing the cost of payments. Meanwhile, the government is eager to turn the UK into a hub for the industry.
Separate to the reforms discussed in the committee’s report is the Bank of England and Treasury’s work exploring whether to issue a digital currency to protect sterling against stablecoins — types of crypto pegged against sovereign currencies — and to lower the cost of financial transactions.
Meanwhile, officials at HMRC have stepped up efforts to increase tax compliance for digital assets. From 2024-25, self-assessment tax returns will feature a standalone section for individuals and trusts which have disposed of crypto assets.