Controversy Arises as UK Government and Lawmakers Debate Regulation of Unbacked Digital Assets

A cross-party lawmaker group in the United Kingdom has expressed concerns about investing in unbacked digital assets such as bitcoin (BTC) and ether (ETH), stating that it closely resembles gambling and should be regulated accordingly. However, despite these concerns, the government remains steadfast in its plans to regulate these assets as financial services.

The Treasury Committee, in its report on crypto, expressed worries that the government's proposal could create a false sense of security among consumers. They believe that classifying crypto investments as financial services may lead individuals to believe that these activities are safe and protected, when in fact they are not. The committee initiated an inquiry into the crypto industry in July and sought input from stakeholders and regulators.

The UK government recently sought feedback from industry members on its proposed regulations for the local crypto industry. In its consultation, the government outlined its intention to regulate crypto by extending existing financial market rules, thereby establishing an authorization framework for digital asset service providers. Additionally, a new bill currently going through Parliament aims to supervise crypto as regulated financial activities.

However, the Treasury Committee has expressed concerns about this plan. Harriett Baldwin, a member of Parliament and chair of the committee, stated that due to the absence of intrinsic value, significant price volatility, and the lack of discernible social benefits, consumer trading of cryptocurrencies such as bitcoin more closely resembles gambling rather than a financial service. Baldwin emphasized that consumers should be aware of the risk of losing all their money when betting on these unbacked tokens.

In 2021, the global crypto market was valued at approximately $3 trillion before experiencing a significant downturn triggered by the collapse of stablecoin issuer Terra and later by the fall of crypto exchange FTX, resulting in billions of dollars being wiped out.

Despite the committee's concerns, the country's finance ministry maintains its position to regulate crypto as financial services. A spokesperson for the ministry explained that the risks associated with crypto are similar to those found in traditional financial services, and financial services regulation has a proven track record in mitigating these risks. They further stated that while crypto offers opportunities, the government's approach is to robustly regulate the market in an agile manner, prioritizing the addressing of pressing risks while fostering innovation.

Crypto advocates have also voiced their disagreement with the committee's suggestion to regulate certain crypto assets as gambling. Richard Cannon, a partner at the UK-based Stokoe Partnership Solicitors, argued that modern regulated economies should embrace and engage with the evolution of finance. He emphasized the need for a sophisticated regulatory framework that does not dismiss crypto investments as mere gambling.

In its statement, the Treasury Committee called on the government to keep up with the advancements in the underlying technologies of crypto assets. They recognize the potential for productive innovations that may arise from these technologies and urge the government to stay abreast of these developments.