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Cryptocurrency regulation: When is taking a gamble gambling?

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The government’s rebuttal of a Treasury committee proposal to treat crypto trading as gambling is unsurprising, but the report raises several fundamental questions for the future, writes Andersen UK crypto director Dion Seymour.

2nd Aug 2023
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Back in May, the Treasury Committee released its headline-grabbing view that the government should regulate retail trading and investment activity in unbacked cryptoassets as gambling rather than as a financial service.

The committee’s argument for this new direction was that it would “better protect consumers from harm” and that regulating cryptoasset trading in a similar way to financial services would create a “halo effect”, leading to the belief that it is a safe activity. Regulating the activity as gambling would, according to the committee, reduce the risks involved whilst remaining consistent with the government's approach of “same risk, same regulatory outcome”.

‘Firmly disagree’

In response to the committee’s report, the Economic Secretary to the Treasury (EST) stated that they “firmly disagree” with the recommendation. Their response highlighted that treating trading and investing as gambling would be at odds with the general approach being taken elsewhere, for example, with supranational bodies such as the G20 Financial Stability Board or developing positions such as the EU or the US. This, in itself, is not a reason not to proceed with a recommendation, but the test must always be whether the recommendation achieves the stated objective.

The government is clearly of a similar mind, noting that some of the issues seen in the FTX failure, such as the commingling of customer and business assets, inadequate controls and poor governance, would not be resolved by regulating its activities as gambling. These are not matters with which gambling regulators have experience and are much more within the purview of the FCA.

Certainly, the need to increase protection is important, however, regulation needs to be fit for the purpose and the Committee's recommendation could move exchanges out of the UK. This could reduce consumer protection by, for example, preventing the use of English and Welsh courts thereby hampering individuals’ ability to seek remedy.

Crypto tax silence

Troublingly, the committee did not comment on the taxation implications of its proposal. Gambling winnings are tax-free, but capital gains are not. Perhaps the committee imagined a Remote Gaming Duty with a charge to the profits of the exchange or could it have been a charge on transactions, much like a Tobin tax? However, neither really fit here.

Then there is the unasked question as to when a gamble is an act of gambling — a topic that could be an article in itself.

While the buying and selling of cryptoassets can be a gamble (as they can be volatile, but less so recently), this is not the same as gambling. For example, there is no counterparty to this gamble (like a bookmaker) or a bet on an outcome (only the hope that the value will go up).

Neither do the assertions they are volatile and lack intrinsic value make it gambling. Other assets, for example AIM shares, are volatile and fiat money has no intrinsic value (not all are backed by the state in which they are used with its value mainly derived from the belief of utility) but these are not regulated as gambling. Ultimately, gambling is a question of fact and not one of degree or impression, otherwise we would have “badges of gambling”.

In short, it’s unsurprising the committee’s recommendation was not accepted. However, the report did have some relevant points. Nevertheless, the main recommendation has rightly been deemed out of touch not fully thought-through. HMRC will no doubt be pleased with the EST’s rebuttal, but, it has still left the question of why the report took such a view.

Replies (9)

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By Hometing
02nd Aug 2023 11:54

Those in favour probably hold crypto, let's be fair.

OR

Maybe they are fed up of people claiming capital losses (or trading losses in some instances)

But where do you draw the line? Is it any more of a gamble than other available investments that are charged to tax?

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By JustAnotherUser
02nd Aug 2023 13:28

Treating it as gambling was always silly, unless they can get clear definitions and enshrine it in law.

According to the SEC Chair Bitcoin Is Not A Security but everything else is, but wont say why :)

Lots of crypto that is 100% a gamble
Lots that's a scam
Lots that are fraudulent
Plenty of in-between

Buy low sell high, pay on gains...
what problem are they trying to fix?

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Replying to JustAnotherUser:
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By BrianL
03rd Aug 2023 15:42

See https://www.law.cornell.edu/uscode/text/15/77b for the SEC's definition of a security.

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Replying to BrianL:
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By Hugo Fair
03rd Aug 2023 16:32

Useful ... though a pain that the definition only applies within "Puerto Rico, the Virgin Islands, and the insular possessions of the United States".

Hence my earlier comment (which appears below - thanks Aweb) regarding a need for something "to work internationally" - especially when new 'forms' of security make it virtually impossible to track them, unlike 'cash and physical assets, in and out of dubious regimes'.

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Replying to Hugo Fair:
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By JustAnotherUser
04th Aug 2023 09:23

I have to ask is this real or sarcasm? This is a serious question.

"especially when new 'forms' of security make it virtually impossible to track them, unlike 'cash and physical assets, in and out of dubious regimes'"

I'm not sure what the suggestion is here, that crypto is virtually impossible to track unlike cash?

Regulation is needed, agreed but we have a vast difference in the regulation needed at one end of the market to the other, the regulation were discussing here has little do with Dubious regimes..

Some would say Archegos Capital Management was a dubious regime, a legit investment company using brokerage services such as Credit Suisse, Morgan Stanley and UBS. Using perfectly legitimate "custom basket swaps" to "unnamed counterparties" to the tune of many, many (up to) billion dollar trades, lets not talk about credit default swaps or anything 2007/8 related. Pretty dubious to me...

Need to be careful here and not assume all crypto is the same, but lets use bitcoin. Majority of exchanges have KYC, all trades are public to everyone and Exchanges report back to HMRC on gains over a certain threshold, with a rising market in on chain forensics.

Wont be a single 'dubious regime' using crypto on its own for its dubious activities when the traditional market and banks will happily facilitate it. And any of these regimes likely need to cash out its crypto somewhere... back into dubious traditional finance.

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Replying to JustAnotherUser:
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By Hugo Fair
04th Aug 2023 13:56

You seem to be conflating two distinct elements ... which is no doubt my fault for including them in one sentence (although if the Aweb technology actually printed comments in the order in which they were posted my meaning might have been clearer to you).

I quite agree with you that 'dubious regimes' is an accurate epithet for much of the financial products & services market (very much including a lot of the 'old school' within that and not restricted to crypto's involvement).

But if you truly believe that crypto is as easy (or at least not even harder) to trace as it transfers around the globe, then why do illicit trades (blackmailers, drug dealers, malware attackers, and so on) invariably choose to demand payment in crypto (which they will then need to launder - running the risk of being caught in that process per https://www.bbc.co.uk/news/technology-66390639 )?

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Replying to Hugo Fair:
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By JustAnotherUser
07th Aug 2023 08:32

agreed, formatting in general on here is awful, it still feels like a message board from the 90s :(

"then why do illicit trades (blackmailers, drug dealers, malware attackers, and so on) invariably choose to demand payment in crypto"

A few points on the linked article...
a) they were caught
b) use of the public ledger is the way they were caught
c) No one had ever really lost track of the $BTC
d) he used his own name in cash outs, these are not genius hackers
e) the couple had laundered the money via, among other things, purchasing $500 gift cards from Walmart, Uber, Hotels.com, and PlayStation
f) this is not the same as the automated ransomware we see in headlines a lot

These guys are a bit of a meme and its generally accepted they agreed to the claims as part of a plea deal, with the real party who committed the hack is still at large.

When it comes to automated ransomware where crypto is used as payment, this is actually on decline. ransomware stems from users on unsecure systems, using exploits or outdated systems. Security is simply a bigger business vs ransomware and as the world starts to take cyber security more serious it becomes harder to target.
Ransomware is also automated so cheap, the other issue with ransomware is that is creates great headlines, the output of this is that the % share of headlines about ransomware massively outweighs all other types of fraud and crime, making some people think it is a bigger issue than other types of crime.

https://blog.chainalysis.com/reports/crypto-ransomware-revenue-down-as-v...

Lets take a look at the size of crypto crime from one source...

https://blog.chainalysis.com/reports/2022-crypto-crime-report-introduction/

Crypto Crime Hit All-Time High of $20.6B in 2022

compared to the probable global figure for the total illicit drug industry would be approximately $360 billion

or better ...According to the UN, it is estimated that between 2% and 5% of global GDP ($1.6 to $4 trillion) annually is connected with money laundering and illicit activity.

Crypto is not easy or different, its just another tool used by criminals. It just gets more headlines and is less understood. Not Invariably chosen. And when it comes to laundering, they always need to cash out, which means another layer for them to get caught in traditional finance.

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Replying to JustAnotherUser:
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By JustAnotherUser
07th Aug 2023 08:34

And we go full circle...
And there's the nub of the issue:
1. Regulation is badly needed; and
2. It needs to work internationally (for which there is no enforceable solution).

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By Hugo Fair
02nd Aug 2023 21:02

".. regulation needs to be fit for the purpose and the Committee's recommendation could move exchanges out of the UK. This could reduce consumer protection by, for example, preventing the use of English and Welsh courts thereby hampering individuals’ ability to seek remedy."

And there's the nub of the issue:
1. Regulation is badly needed; and
2. It needs to work internationally (for which there is no enforceable solution).

It's shall we say unfortunate (if unsurprising) that there's little in the way of pan-global agreements for the 'old' systems - but at least there's a chance (when the desire exists and resources are provided) to track cash and physical assets in and out of dubious regimes.

Solving this (even if it requires controls that are anathema to crypto investors) is of far greater urgency than the philosophical question of 'when is taking a gamble gambling?'!

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