Calls have been made by MPs on the Treasury Committee for the government to classify cryptocurrencies as gambling, but critics have expressed their opposition to this notion.
The Treasury Committee released a report stating that digital currencies like Bitcoin hold “no intrinsic value and serve no useful social purpose.” It also emphasised their susceptibility to scams, fraud, and money laundering.
This report follows the proposals put forth by the Financial Conduct Authority (FCA) in February, suggesting that the crypto industry be regulated under financial services law.
However, the MPs on the committee argued that the government should adopt an alternative approach by acknowledging the risks associated with “unbacked” crypto assets, asserting that they resemble gambling more than financial services.
There were concerns among the MPs that if regulated crypto assets were treated as financial services under the FCA’s oversight, it could create a false sense of security for consumers, leading them to believe their assets were safer than they actually were – a phenomenon referred to as the “halo effect.”
Presently, gains from crypto assets are subject to taxation, including capital gains tax. The Committee’s report does not address how crypto assets would be treated if classified as gambling, which would potentially eliminate tax liability altogether.
Currently, there are over 23,000 crypto assets in various forms, with a combined global market value of £964 billion. HMRC estimates that 10% of the UK population has invested in some form of cryptocurrency.
The report cautioned that Bitcoin and Ethereum, which represent two-thirds of all crypto assets, are not backed by any currency or asset, making them susceptible to the risk of complete loss. This vulnerability was highlighted by the collapse of the crypto exchange FTX last year.
Harriett Baldwin MP, the chair of the Treasury Committee, emphasised the risks posed to consumers by the crypto asset industry, describing large portions of it as the “wild west.” Baldwin stressed the need for effective regulation to protect consumers and support innovation within the UK’s financial services industry.
Baldwin further stated that due to the lack of intrinsic value, significant price volatility, and absence of discernible social benefit, trading cryptocurrencies like Bitcoin resembles gambling more than financial services and should be regulated accordingly. She also warned consumers that by investing in these unbacked “tokens,” they should be aware that they risk losing all their money. The report’s lack of clarity regarding the tax implications of crypto gains was another point of concern.
Critics of the report argued that attempting to fit crypto assets into existing regulatory frameworks might not strengthen the regulatory environment.
Despite expressing concerns, the Committee acknowledged that this technology could offer benefits to the financial services industry, particularly in the realm of cross-border transactions and payments in developing countries.
Please contact Elaine Chapman if you would like to discuss the tax implications of holding crypto currencies.