Is Crypto Trading Gambling?

The UK’s HM Treasury has recently addressed the controversial proposal to regulate cryptoasset trading as gambling. The House of Commons Treasury Committee cited high volatility and ‘lack of intrinsic value’ in cryptoassets like Bitcoin and Ether. However, HM Treasury has firmly rejected this call.

The Proposal and HM Treasury’s Response

In May 2023, the Treasury Committee published a report arguing that the unpredictable nature of cryptoassets poses a significant risk to the public. They likened cryptoasset trading to gambling and called for it to be regulated as such.

However, in the Treasury’s response, they ‘firmly’ disagreed with this perspective. They acknowledged the risks but emphasised that measures were already in place to manage them, including plans to regulate cryptoasset-related activities under the Financial Services and Markets Act 2000 (FSMA). They also rejected the idea that regulating cryptoassets under FSMA would create a false sense of safety for consumers.

HM Treasury contended that the current regulatory framework for gambling would fail to tackle problems or control risks such as insider trading and market manipulation.

Furthermore, they noted that such a move would misalign the UK with globally agreed recommendations on the treatment of crypto trading:

Such an approach would run completely counter to globally agreed recommendations from international organisations and standard-setting bodies, including the International Organization of Securities Commissions (IOSCO) and the G20 Financial Stability Board (FSB). These recommendations are grounded in the principle of ‘same activity, same risk, same regulatory outcome’, meaning that any cryptoasset activity that performs a similar function, and poses similar risks, to those in the traditional financial system (for example, operating a trading platform or providing custody services) are subject to regulation that ensures equivalent outcomes.

Trading vs. Gambling

The comparison between cryptoasset trading and gambling is not straightforward. While both involve predicting outcomes and risking money, they are not the same. Trading involves buying assets with the hope of increasing their value, not placing a traditional bet.

The volatility of cryptoassets is what poses a risk to consumers. However, the Gambling Commission’s powers do not extend to stabilising the value of cryptoassets.

Applying the Licence Conditions and Codes of Practice (LCCP) to cryptoasset investment raises questions about who would be licensed and how it would work. The decentralised nature of cryptoassets makes regulation challenging.

The LCCP is tailored to traditional gambling businesses, and its requirements do not directly apply to cryptoasset trading. The anonymity provided by some cryptoassets also contradicts licensees’ social responsibility duties.

While cryptoasset investment can be likened to gambling, it does not fulfil the legal definition under the Gambling Act 2005. Regulating cryptoasset trading in a meaningful way would require significant changes to existing laws.

Expert View

Lee Hills, CEO and Founder notes: “We are in the midst a very interesting time for the UK cryptocurrency sector. We are seeing many moves towards solidifying interpretation and implementing regulation. It all seems to be happening very fast, but I would argue this is much needed and positive for the developing UK crypto sector.

The Crypto and Digital Assets All Party Parliamentary Group lays out a blueprint for the UK’s crypto future within its document ‘Realising Government’s Vision for the UK to Become a Global Hub for Cryptocurrency & Fintech Innovation’.

The suggested regulation of cryptocurrency trading akin to gambling contradicts the global regulatory trend and potentially puts the UK at odds with the rest of the world. Such a move would risk portraying the UK as an outlier rather than a progressive leader, thereby undermining the government’s ambitions of establishing the UK as the global crypto hub.

HM Treasury’s response is entirely rational and necessary. They are right to give a ‘firm’ rejection of the recommendation but let us also consider vested interests in relation to the enormous tax consequences.

The UK has instituted a policy where capital gains tax is applied to crypto profits. In certain rare situations, HMRC might classify an individual as a trader, thereby subjecting them to income tax instead of capital gains tax.

This tax policy implies that any disposal of crypto assets can potentially trigger a tax event, with rates reaching up to 45%. Now, consider this — gambling winnings in the UK are not taxable. If the UK were to categorise crypto trading as gambling, it’s challenging to determine the precise amount of tax revenue that could be lost, but it’s safe to say that it could be substantial. As such, it’s unlikely the Treasury would accept such proposals without putting up a robust defence.

If we were to draw parallels between crypto trading, financial services, and gambling, then it’s more fitting to associate crypto trading, particularly with altcoins, with binary options. This is because crypto trading shares more similarities with the risk profile of binary options than it does with sports betting or other betting activities.