Crypto: Is It Gambling Or A Financial Service?

• Law Firm: Herbert Smith Freehills
• Subject Matter: Finance and Banking, Technology, Financial Services, Fin Tech
• Author: Marina Reason and Patricia Horton
• Published date: 12 June 2023

This article first appeared in The Banker and is re-published here with its permission.

A recent UK Treasury Committee report on crypto assets regulation has reignited the debate over crypto.

Contrary to government proposals in February to regulate the crypto industry as a financial service, the cross-party group controversially recommended regulating retail trading and investment activity in unbacked crypto assets as gambling.

In their view, the characteristics of unbacked crypto assets - price volatility, lack of intrinsic value or social purpose - more closely resemble gambling than financial services.

It is true that the line between gambling and certain types of financial services is not always clear-cut; for example, the Gambling Commission and the Financial Conduct Authority (FCA) recognise that there are areas where their remits overlap.

A memorandum of understanding between them provides a framework for consultation on areas of mutual interest, such as the promotion of contracts for differences (CFDs) and other high-risk retail derivatives.

Let us also remember that binary options were regulated by the Gambling Commission before they came to be regulated as CFDs by the FCA. And spread betting is taxed as if it were gambling, but it is also regulated by the FCA. The line is thinly drawn indeed.

So long as consumers are appropriately protected, whether that protection originates from financial services rules or from gambling rules should arguably be irrelevant. Yet there are good reasons why regulating crypto within the financial services framework could provide a better fit and why the government is unlikely to move away from its February proposals.

Existing financial services framework

The UK government has been vocal about its ambitions to make Britain a global hub for crypto assets technology and investment. One of the policy objectives behind the UK government seeking to establish a regulatory framework for crypto assets in the UK, as set out in HM Treasury's February consultation, is to encourage growth, innovation and competition in the UK.

Categorising crypto assets as gambling is unlikely to further either of these goals and may instead alienate an industry it is hoping to woo. To do so would also be swimming against the tide of international regulation, and the UK's place in international regulatory circles has generally been that of flag-bearer rather than outlier.

Indeed, the International Organization of Securities Commissions is...