Cryptoassets Should be Regulated as Gambling, Say MPs

Hinesh Shah of Pinsent Masons, who specialises in forensic investigations, including those concerning cryptoassets, said that while there has been discussion for years over whether and how cryptoassets should be regulated, the recommendation made by the MPs is the first time he has seen it advocated that cryptoassets be regulated as gambling.

According to Shah, if cryptoassets were regulated as gambling then firms would likely face increased compliance burdens. He said it could also spur market consolidation.

“If crypto firms were regulated similarly to the gambling industry in Britain, they would likely face a significant increase in compliance requirements,” said Shah. “This could include licensing, customer due diligence, and responsible gambling practices. Compliance costs could rise, potentially impacting smaller crypto firms with limited resources. Regulation akin to the gambling industry would aim to protect consumers participating in the crypto market. Safeguards such as mandatory customer fund segregation, dispute resolution mechanisms, and strict advertising standards could be introduced.”

“Bringing crypto within the regulatory framework for gambling could lead to market consolidation within the crypto sector. Compliance costs and requirements might be easier for larger, more established firms to bear, leading to smaller players struggling to compete and restricting their access to markets. This could result in a concentration of power and market share among a few dominant crypto firms,” he said.

Shah said that regulating crypto as gambling would need to strike the right balance between addressing potential risks and fostering innovation. Getting the balance right would, he said, “be crucial to ensure that the industry continues to thrive and innovate while protecting consumers and minimising illicit activities such as money laundering or fraud”.

The MPs’ recommendation comes just weeks after Sarah Pritchard, an executive director at the UK’s Financial Conduct Authority (FCA), called for “an open debate about risk, mitigation and the limits of regulation”.

In her speech, Pritchard highlighted that the FCA’s remit over cryptoassets is currently limited to ensuring firms comply with anti-money laundering and counter-terrorism legislation, but said that as the cryptoasset industry matures “so must the firms that offer it and the rules that underpin it”. She warned firms to prepare for planned legislative intervention by the government which will give the FCA regulatory oversight of cryptoasset-related financial promotions, and addressed the prospect of further potential reforms in future, calling on the industry to help shape the “future regulatory regime”.

Pritchard said: “We cannot develop the regulatory regime alone – we need input from industry. But we also need input from policymakers – here and abroad – and consumers. We need a conversation about the risks of crypto and the appetite for not just wins, but losses. Do consumers appreciate the risks of the firms they are dealing with, the investments they are making? Do they – or policymakers or institutional investors – have an appetite for that risk, even if it entails losing it all? Regulation may be able to mitigate some of the harm, but it will not be able to stop all risk – in particular risk of financial loss.”

By: Hinesh Shah