HM Treasury has rejected a call from the House of Commons Treasury Committee (the “Treasury Committee”) for retail trading and investment activity in unbacked cryptoassets, such as Bitcoin and Ether, to be regulated as gambling. In a report published in May 2023, the Treasury Committee argued that the price volatility and lack of intrinsic value in cryptoassets pose a significant risk to the public, given the high likelihood of losses.

However, in a response published last week, HM Treasury firmly disagreed with this suggestion. It accepted that there are significant risks associated with cryptoasset markets but noted that steps were already being taken to manage these, including plans to regulate cryptoasset-related activity under the Financial Services and Markets Act 2000 (“FSMA”). HM Treasury rejected the Treasury Committee’s suggestion that bringing cryptoassets under FSMA would create a “halo” effect, leading consumers to believe that cryptoasset trading is safer than it truly is, and referred to a February 2023 consultation which proposed measures to ensure consumers understand the risks involved in such trading.

HM Treasury further noted that initial findings about the failure of FTX, which has informed its approach to cryptoasset regulation, indicated that key issues contributing to FTX’s collapse were a lack of risk management capabilities and insufficient corporate governance. HM Treasury states that the gambling regulatory system would be unlikely to address these issues, nor to manage risks such as insider dealing and market manipulation.

This, at face value, is entirely logical: cryptoasset markets resemble financial markets, so it makes sense to regulate them under purpose-built legislation. Conversely, when we try to fit cryptoasset regulation into the gambling regulatory framework, a number of incompatibilities become clear.

Gambling in the UK is regulated by the Gambling Commission (the “Commission”), under powers set out in the Gambling Act 2005 (the “Act”). The Act defines gambling as betting, gaming or participating in a lottery. As trading is the buying and selling of assets with the aim of making a profit, it doesn’t fit neatly into the definition of gaming (which refers to playing a game of chance) or a lottery (an arrangement where people pay to participate and prizes are allocated to entrants by a process relying wholly on chance).

The Act’s definition of betting bears some parallels with trading. Section 9 states that betting means making or accepting a bet on:

• the outcome of a race, competition or other event or process;
• the likelihood of anything occurring or not occurring; or
• whether anything is or is not true.

While both cryptoasset trading and betting rely on individuals attempting to predict the outcome of an event, with the risk of gaining or losing money as a result, they aren’t strictly the same. Trading and investment involve a person purchasing a cryptoasset with the hope that it will increase in value over time and that they can sell it for more than they initially spent. In doing so, that person takes a risk but they aren’t ‘making a bet’ in the traditional manner – they may have a sense of trends in the cryptoasset market but not the ‘odds’ of a cryptoasset’s value going up or down, and they won’t be placing a wager on the likelihood of that happening.

Arguably, what poses a risk to consumers is the volatility of cryptoassets. As the Treasury Committee has noted, cryptoassets have no intrinsic value – there is no enforced use of cryptoassets as currency and they are not backed up by any physical asset. As such, cryptoassets’ value is influenced primarily by speculation and supply/demand (with a degree of exception for stablecoins, the value of which is pegged to fiat currency or a commodity price). In order to reduce risk to consumers, the obvious step is to reduce volatility. However, while the Commission holds an array of regulatory and enforcement powers, these do not extend to influencing financial policy or any matter which could stabilise the value of cryptoassets.

Unsurprisingly, the Commission’s licensing approach is tailored to gambling businesses such as remote or land-based casinos and bookmakers. It is difficult to see how the Licence Conditions and Codes of Practice (“LCCP”) could apply to cryptoasset investment, especially in their current form, and attempting to do so raises more questions than it answers. A major issue is who would be licensed and how that would work – a key element of cryptoassets is that they are decentralised, meaning no single entity controls them, and attempting to regulate every individual who trades cryptoassets would be unworkable.

The LCCP is highly specific to traditional gambling businesses. For example, LCCP 4.1.1 requires licensees to hold customer funds (e.g. funds deposited by customers to pay for gambling stakes or participation fees) in bank accounts separate to their day-to-day business accounts. This isn’t directly applicable to the cryptoasset trading model, where individuals take ownership of cryptoassets rather than wagering on them. Further, a particular attraction of cryptoassets is the degree of anonymity that they provide, which would be at odds with licensees’ duty of social responsibility to those who engage with their products – it is unclear how any meaningful behaviour monitoring could be carried out to check for signs of harm.

While cryptoasset investment can be seen as gambling in the sense that an individual puts their money at risk in the hope of making more, it doesn’t fulfil the legal definition of gambling under the Act. This means that, short of a wholesale rewrite of the Act and significant changes to the Commission’s approach (which would already be second in line behind the overhaul arising from the White Paper), it is unclear how the Commission could regulate cryptoasset trading in any meaningful way. HM Treasury’s existing plan to bring particular cryptoassets into the scope of FSMA, making cryptoasset promotions subject to Financial Conduct Authority rules, is likely to be the best way forward. However, while cryptoassets remain volatile and without intrinsic value, it is unclear how far regulation can go in terms of protecting consumers.