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MPs’ report serves up crypto conundrum for the UK government

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A committee of MPs has issued a blistering report calling for consumer trading in unbacked cryptocurrency to be treated as gambling, stating the sector has “no intrinsic value”. However, experts have labelled the paper “confusing and contradictory” and warned that such a move could add further confusion about how crypto is viewed and taxed.

18th May 2023
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In its Regulating Crypto report released today drawing on a range of written evidence and interviews, the Treasury Select Committee (TSC) served up a wide-ranging selection of crypto criticisms.

The committee stated it did not consider “unbacked” cryptocurrencies such as Bitcoin and Ether to have any intrinsic value, that they served no useful social purpose, raised concerns over the large volumes of energy used by certain cryptocurrencies in transactions, and flagged its use by criminals in scams, fraud and money laundering.

According to 2022 HMRC research, around 10% of UK adults hold or have held cryptoassets, and the committee expressed concern that the government’s current plan to regulate consumer crypto trading as a financial service will create a “halo” effect, leading consumers to believe this activity is safe and protected when it is not.

“Consumer trading of cryptocurrencies like Bitcoin more closely resembles gambling than a financial service and should be regulated as such,” commented Harriett Baldwin MP, Chair of the Treasury Committee. “By betting on these unbacked ‘tokens’, consumers should be aware that all their money could be lost.”

While the committee acknowledged the potential benefits of financial innovations such as cryptoassets, it went on to state that the risks posed by cryptoassets to consumers and the environment are “real and present”. 

The TSC called on the government to take “a balanced approach” to supporting the development of cryptoasset technologies and to avoid using public resources on supporting cryptoasset activities without a clear, beneficial use case.

Is the government rowing back on its UK crypto-hub ambitions?

While the Treasury Committee exists to hold the Treasury to account, it does not create legislation and has no remit to amend it. The government is obliged to respond to reports such as this within two months but so far seems to be standing by its proposal to regulate crypto as financial services. 

Commenting on the MPs’ report, a Treasury spokesperson said: “Risks posed by crypto are typical of those that exist in traditional financial services and it’s financial services regulation – rather than gambling regulation – that has the track record in mitigating them.

“Crypto offers opportunities but we are taking an agile approach to robustly regulating the market, addressing the most pressing risks first in a way that promotes innovation.”

Since crypto’s emergence into the mainstream several years ago, the UK government’s approach to regulating the multifaceted industry has taken a fairly circuitous, sometimes contradictory path, with accountants often left to unravel the cryptoasset conundrum for themselves.

In April 2022, the government announced its plan to make the UK a “global hub” for crypto, with then-Chancellor Rishi Sunak stating that by regulating the sector effectively they could give crypto firms the confidence to invest long term. 

In February 2023, a consultation paper was issued setting out the government’s proposals for the financial regulation of a broader range of cryptoasset activities. This proposed to bring cryptoassets within the Financial Services and Markets Act 2000 (FSMA), which governs a wide range of financial services, with the Financial Conduct Authority (FCA) required to draw up specific rules for crypto once the legislation had been approved.

Crypto sector labels report ‘contradictory’ and ‘confusing’ 

Unsurprisingly, the crypto industry has responded forcefully to the TSC report. Trade association Crypto UK said it was “concerned and disappointed by these claims which are unhelpful, false, fundamentally flawed and unsubstantiated. The statement fails to reflect the true nature, purpose and potential of the crypto industry.”

Joe David, founder of specialist cryptocurrency accounting firm Myna, said the report seems “totally contradictory” to the government’s narrative has been so far. 

“I’m really disappointed to read [the report] and think it adds further confusion to the tax system, given that gambling is tax free. It seems much more like the US approach than a joined-up ‘crypto hub’ approach.”

Dion Seymour, crypto and digital asset technical director at Andersen in the UK and former head of cryptoassets at HMRC, told AccountingWEB it was unclear how classing crypto as gambling will actually solve the objectives stated in the report.

“This report shows little understanding of the sector, and it is doubtful that treating consumer transactions within the sector as gambling will provide consumer protection,” said Seymour.

“While consumers and businesses want certainty in this space around regulation, this report is a significant departure from the ‘global crypto hub’ ambition announced in 2022,” he continued. “The sentiment of this report is that cryptoassets have a limited existing purpose other than as a digital payment system, which is simply not the case.

“While investing in cryptoassets can be speculative, the TSC report specifically targets Bitcoin and Ether, disregarding an IMF report highlighting the correlation of Bitcoin with the stock market.”

Tax treatment uncertainty

Winnings from gambling are generally tax free and the TSC report fails to mention the potential impacts that treating crypto as gambling could have on the established approach to the taxation of cryptoassets. 

“If taken forward, this has major implications on how cryptocurrency transactions are assessed for tax purposes,” stated Blick Rothenberg CEO, Nimesh Shah. “HMRC should be concerned… as they have gone to great recent lengths to try to tackle tax avoidance and evasion around cryptocurrency transactions. HMRC has categorically confirmed in their guidance that trading in cryptocurrency should not be treated as gambling.

“Should the treasury committee’s recommendation be taken forward, it’s quite possible that the government will want to ‘have its cake’ and specific tax legislation could be introduced which continues to tax cryptocurrency activity,” added Shah. “If this did happen, it would dilute the overall direction that investing in cryptocurrency should be treated as gambling and send the wrong message around the objective to protect consumers.

“At present, there is uncertainty and lack of publicity around how cryptocurrency should be taxed and the Treasury committee’s report, albeit directed at a different purpose, doesn’t help with the continued lack of understanding around the tax treatment.”

The committee is considering central bank digital currencies as a separate piece of work.

Replies (25)

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By Justin Bryant
18th May 2023 15:33

It's crazy. We have to fill in all these ridiculously lengthy and pointless AML forms (for 70 y.o Mrs Jones for her single BTL in Brighton inherited from her mum) and yet this whole multi-£bn crypto laundromat goes almost totally unchecked. It's just complete madness.

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Replying to Justin Bryant:
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By JustAnotherUser
19th May 2023 08:12

You do know exchanges have KYC and report gains over certain limits to HMRC right?
And the ledgers are accessible to anyone, freely?

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Replying to JustAnotherUser:
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By Justin Bryant
19th May 2023 09:30

Eh? If it's so transparent and easy to police/monitor who's got what from whom and how, why is it so popular with criminals for money laundering etc?

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Replying to Justin Bryant:
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By JustAnotherUser
19th May 2023 12:05

who says its popular for criminals? or more popular than any other crime? or as a % of crime related activity is more or less than any other crime?

blockchain is a terrible place to launder money....

There's crime, corruption and fraud wherever there is money, globally. To say crypto at a global scale is just crime is silly.

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Replying to JustAnotherUser:
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By SafeAsHouses
20th May 2023 09:09

Exactly. Only people who don't understand blockchains think that they're anonymous. It's barely pseudo-anonymous these days.

Also there's almost no exchanges these days that don't mandate KYC, and even the couple of remaining offshore ones who don't mandate it, still encourage voluntary KYC with higher limits etc, and those ones don't have direct on ramps/off ramps into the banking system anyway. All exchanges that are domiciled in the US, UK, EU, HK, Singapore, Korea etc are very strict on KYC.

There's specialist blockchain forensic companies who are VERY good at tracing bitcoin. Let's face it, the vast majority of money laundering is facilitated by the traditional banking system.

As for those people who say cryptos have no intrinsic value, well they're right in that 98% will likely go to zero but the other 2% can and are changing the world.

bitcoin the asset and Bitcoin the network most certainly have instrinsic value. bitcoin is base layer hard money, it doesn't need backing, it DOES the backing.

People don't ask what backs gold do they? But those same people
mistakenly think that gold is backed by it's nice shiny yellow nature and use as jewellery or in industry, when the reality is that 90% the value of gold is its monetary premium (dervied almost entirely from it's durability, scarcity and fungability) and only 10% for it's uses in industry/jewellery.

bitcoin's monetary premium is 100% of it's value, it's better at gold at what gold does in terms of monetary attributes - scarce, fungable, portable, divisible, and durable.

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Replying to SafeAsHouses:
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By JustAnotherUser
22nd May 2023 12:46

they don't want to listen, or learn.

For anyone still actually wanting to learn anything, here is a 22 page report from JP Morgan and Boston Consulting Group and how Distributed ledger technology (DLT) could reshape capital markets.

https://media-publications.bcg.com/The-Future-of-Distributed-Ledger-Tech...

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Replying to JustAnotherUser:
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By Justin Bryant
23rd May 2023 13:51

If it's all so tickety-boo why is the EU et al clamping down on it?
https://www.eubusiness.com/news-eu/crypto-assets-rules.16pp

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Replying to Justin Bryant:
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By JustAnotherUser
24th May 2023 11:32

it says so in the article....

Tax authorities currently lack the necessary information to monitor proceeds obtained by using crypto-assets which are easily traded across borders. This severely limits their ability to ensure that taxes are effectively paid, which means European citizens lose important tax revenues.

Here's one of many simple websites showing the movement of money on the open blockchain... https://whale-alert.io/ this money is moving across state lines, between counties, between different tax districts, between block chains...

The total crypto market volume over the last 24 hours is $22.08B

Pretty sure this requires regulation , they're not clamping down, they've left it unchecked for a decade and now taking it seriously

Here's a wallet : could be one person, could be fraud, crime, could be a business, they could be an exchange.... its all public.

https://bitinfocharts.com/bitcoin/address/1LQoWist8KkaUXSPKZHNvEyfrEkPHz...

this wallet holds 2,037,649,412.97 USD
with 388,566,455.4 USD
pretty sure every government in the world would like to tax this

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By Hugo Fair
18th May 2023 17:10

Wow ... that's stuck a flaming torch right into the hornet's nest (it's almost as though my whispering campaign has been noted by those with responsibilities rather than agendas).

As you rightly say, Tom, the Treasury Committee exists to hold the Treasury to account ... so the fact that it doesn't formulate policy or create legislation doesn't mean it can be safely ignored by those from whom you've solicited feedback.

BTW I've seldom seen such a one-sided selection of objectors (who share little other than a pecuniary interest in a free market for crypto assets - and may be hot on the indignation meter but appear not to see this as an opportunity to explain precisely what benefits their desired approach would bring the nation or general population).

Phrases such as “Crypto offers opportunities but we are taking an agile approach to robustly regulating the market, addressing the most pressing risks first in a way that promotes innovation” ... may score highly on the bingo count of hot air 'business language' - but are wholly devoid of any discernible meaning or detail.

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Replying to Hugo Fair:
Tom Herbert
By Tom Herbert
18th May 2023 20:57

I felt the detractors had their say, both at the top of the piece and in the report itself, so added a bit of balance. I may have gone a bit OTT, but hey, so did the committee!

In my view, this was a missed opportunity. The crypto world has plenty of hucksters and snake oil salesfolk, which makes the snail's pace at which regulatory policy and consumer protection has moved pretty disgraceful.

However, rather than contributing in any meaningful way - and these committees can literally call anyone they like as witnesses - they decided to pull together a few soundbites from 2018, add a bit of FTX (which again, UK consumers weren't protected from) and then make the recommendation that crypto be considered gambling which they know is incredibly unlikely to ever happen for any number of reasons.

It all just felt like theatre rather than anything that will contribute to the wider debate. And in terms of the committee's influence, I'm afraid I've sat through enough sessions on MTD to know they don't really affect Treasury policy in any meaningful way.

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Replying to TomHerbert:
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By Hugo Fair
18th May 2023 23:21

All fair points - although when I said one-sided I was referring to the *number* of people quoted as complaining vs the dearth of those supporting the findings.

And I'm well aware (as no doubt are they) that the committee's direct influence on Treasury policy is, to put it kindly, limited and rare.
However, in a sad indictment of how politics now operates, that's why they are reduced to touting for main media hooks/headlines ... which can in turn result in cudgels being taken up that DO result in policy changes (possibly for the wrong reasons).

As you hint, the equivalent toothlessness of the PAC lies behind the difficulty of extracting even facts (let alone true commitment to change) from bodies such as HMRC who operate with both impunity and even less responsibility.
Those hoping to see the Harra show next week in order to see Jim boy squirm will be disappointed once again!

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By JustAnotherUser
19th May 2023 08:37

The same Harriett Baldwin was Minister of State for Africa, doesn't know that people in Africa can receive instant, low-cost remittance payments in local currency through Bitcoin's Lightning Network....

.... or they can use a remittance service which costs increased from 6.04 percent in Q4 2021 to 6.09 percent in Q1 2022.......

..maybe they can use the banks.....The median fee rate, or the cost of sending value across the Lightning Network, is 0.0029%, 1,000 times cheaper than that of Mastercard or Visa payment processors....

... maybe they cant use the banks as Around 57% of the population of Africa, around 95 million people, do not have a traditional bank account.

World Bank Bilateral Remittances Matrix suggests that outflows from the UK are close to GBP 23.6 billion.

Out of the 59.6 million usual residents in England and Wales in 2021, 49.6 million (83.2%) were born in the UK and 10.0 million (16.8%) were born outside the UK

An instant, traceable, auditable, KYC, low-cost remittance service sounds like a great benefit for the nation or general population.

Bitcoin=/= to Ether and Ether =/= to all other coins

One simple use case of many. Silly report by people either clueless but more likely who have an agenda.

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Replying to JustAnotherUser:
John Hextall
By John Hextall
19th May 2023 11:00

I'm happy to believe that 57% of the population of Africa don't have a bank account but that would be rather more than 95 million people as the overall population exceeds 1.4 billion. Also about half of those are under 18 and probably would not have a bank account anyway. What are you really saying?

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Replying to John Hextall:
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By JustAnotherUser
19th May 2023 12:21

Apologies if the numbers don't quite reconcile, the sentiment is that An instant, traceable, auditable, KYC, low-cost remittance service sounds like a great benefit for the nation or general population.

And its being used today, by millions

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Donald MacKenzie
By Donald MacKenzie
19th May 2023 09:42

There is nothing legal that you can do with cryptocurrency that you cannot do with normal currencies.
There is huge financial risk for no purpose. There is huge waste of power to "mine" them.

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Replying to Donald MacKenzie:
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By Justin Bryant
19th May 2023 10:08

Exactly. It's main use is for criminals per my ML point above.

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Replying to Justin Bryant:
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By JustAnotherUser
19th May 2023 12:13

are you gus talking about this from the report...

"the National Crime Agency’s estimate that “illicit cryptoasset
transactions linked to the UK in 2021 likely equated to at least £1.24 billion (~1% of total transaction value)"

less than 1 %???... estimated? funny

just a drip in the ocean when you stack it up against its competition, In 2022, financial institutions were fined over $8 billion for AML-related infractions, bringing the gross amount of AML fines since the global financial crisis (2007-2008) to an estimated $56.1 billion.

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Replying to Donald MacKenzie:
By Duggimon
25th May 2023 09:31

Ironically, despite the (incorrect) thrust of your point, what you can do with currencies on blockchain technology that you can't do with normal currencies is read the publicly available audit trail of every single transaction, making it considerably more transparent than the current financial system.

While wallets are anonymised on the ledger, there is no way to cash in cryptoassets into other currencies without submitting to the reasonably rigorous AML/KYC processes of an exchange.

Personally I think the current world of cryptocurrencies is quite quite silly and essentially is gambling, but the "only useful to criminals" retort has been out of date for ten years or more at this point.

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By Kentwillumsen
19th May 2023 09:51

Crypto is a threat to CBDC, hence crypto must be stopped

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By listerramjet
19th May 2023 11:05

Crypto is no more than a generic lable for a form of currency based on a particular technology. Like all such things its "value" can and does change, but unlike other "currencies" government seems to think it can tax gains on trading in the stuff. Which tends to confirm that politicians have no grasp of the real world. The bit that is really stupid is the idea that in some way the government can protect us from ourselves!

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Replying to listerramjet:
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By moneymanager
20th May 2023 00:16

The bit that is really stupid is the idea that in some way the government can protect us from themselves!

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By ireallyshouldknowthisbut
19th May 2023 11:07

Making Crypto gambling is actually quite smart.

Most of the gains on the way up the bubble have been taxed

On the way down to oblivion, no relief.

Genius.

I doubt anyone in the committee saw it like that, but hey. Enough monkeys on enough typewriters......

Sat here looking a client with cyrpto...............losses. What a surprise.

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By unclejoe
19th May 2023 11:34

"...unbacked ‘tokens’..." Sounds like regular money then. And I am well on the way to losing all the money in my wallet with inflation as it is.

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Replying to unclejoe:
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By JustAnotherUser
19th May 2023 12:14

don't worry, they will just print more money /s

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By moneymanager
20th May 2023 00:14

"“By betting on these unbacked ‘tokens’, consumers should be aware that all their money could be lost.”

Polly Peck (ftse100 listed one day - toilet papper the next)
BICC (weren't the Royals involed in that?)
The Icelandic krona and British Local Authority depositors

and a bit more recently, "our" government is so inept at spending and procurement that "putting it all on red" would seem like a diversified strategy, we are being robbed blind anyway, the current inflation hasn't just "happened", it is the totally forseeable and logical outcome of the financial war to which we are subject, crypto currencies would have no role if government actually did protect currency values and kept its nose out of people's business.

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