Should crypto be regulated as gambling?
Put it all on red...or Bitcoin
This week, GreySpark noted with interest a June 2023 Financial Times story highlighting the existence of a Scotland-based addiction rehabilitation clinic that — in 2018 — became the first centre of its kind globally to offer behavioural treatment for addiction to “trading, spread betting, and the trading of cryptocurrencies such as Bitcoin, Ethereum, Ripple & Litecoin.” “We treat these as forms of gambling addiction,” the centre claims on its Web site.
In 2023, Castle Craig serves roughly 70 patients who were admitted for treatment related to a variety of different types of crypto trading addictions that have ruined and even threatened to take their lives, according to the FT.com story.
The story is of interest to readers of this blog because of the seeming disagreement that it highlights between a UK Parliamentary committee that plays a key role in overseeing the country’s financial services industry and members of the UK government, as well as the cryptocurrency trading technology industry.
Tracing the lineage of this story — In May 2023, the UK House of Commons Treasury Select Committee noted in a report that “consumer trading in unbacked crypto” trading should be regulated as gambling.
“The Committee concludes that cryptocurrencies pose significant risks to consumers, given their price volatility and the risk of losses. Given retail trading in unbacked crypto more closely resembles gambling than a financial service, the MPs call on the Government to regulate it as such,” the Committee said in a May 17, 2023 statement.
However, dissenting voices from within the UK government and from the cryptocurrency trading technology industry emerged one day later in an Insider.co.uk article arguing that the regulation of crypto-assets trading using rules designed to manage the gambling industry in the UK as opposed to the financial services industry mandates would be a mistake.
“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,” said a UK Treasury spokesperson said in the article.
Zumo CEO & Co-founder Nick Jones argued that:
“Given the recent turmoil in the traditional financial system, the UK should be looking to encourage alternative financial solutions, not discouraging them by likening them to gambling. A truly resilient future financial system shouldn’t be resistant to new ideas and structures, rather it should be supportive of them. And it should dare to integrate new ideas where they provide genuine value – not panic and revert to the perceived safety of failing methods,” Jones said.
Clearly, there is uncertainty toward the viability of crypto as an asset class, with its classification still up for debate.
The lack of clarity, from a UK perspective at least, is causing it to lag behind other jurisdictions in terms of establishing a regulatory framework.
As Financeology highlights, the EU is pressing ahead in establishing a crypto regulatory framework.
In May 2023, the EU approved the Markets in Crypto Assets (MiCA) regulations, which are set to come into effect in June 2024. Specifically, MiCA will lay down disclosure and authorisation requirements for crypto-asset providers, and implement tighter measures to combat market manipulation and insider dealings from these providers.
Such regulations could go a long way to instilling confidence toward crypto markets, which — from an institutional investor standpoint — remain relatively depressed, not only from Black Swan events such as the collapse of the FTX exchange in November 2022 but also, due to structural issues and deficiencies in crypto-asset clearing and settlement infrastructure.
In terms of volume transacted on a daily basis, the crypto-assets marketplace is characterised by its ability to service retail end-investor demand for brokerage- and leverage-related services. However, as institutional investors slowly make inroads into crypto markets and the trading of a wide variety of digital assets instruments on / off public blockchains, the development of the markets infrastructure needed for asset managers or pension funds to trade crypto must become more sophisticated.
GreySpark believes there are six requirements to achieving critical mass in the adoption of crypto-asset trading at an institutional level. These are:
A Deeper Understanding of the New Asset Class – Spanning the mass of different cryptocurrencies, digital assets, non-fungible tokens, smart contracts and other instruments created thus far, as well as a vision of the future of instrument type creation;
Standardisation and, with it product normalisation;
Trading & Settlement Protocols – Not just APIs, but also – fundamentally – workflows;
The Availability of Information, Freely or Otherwise – Specifically, market data;
Predictable Regulations & Rules – Minimising the arbitrage opportunities that are already emerging between different jurisdictions such as the EU, Germany, Switzerland, the US and the rest of the world, with each moving at varying pace in relation to one another in crafting new mandates governing crypto-assets trading broadly, and clearing and settlement specifically; and
The Availability of Front-to-Back Crypto-assets Trading Technology – Exchange-provided or independent technology vendor-provided to supply and deliver on all the above items.
To that end, investment banks began making efforts circa 2019 to build out crypto trading-related services for the institutional investor community globally, albeit at a reasonable amount of arm’s length, according to GreySpark research. For example, CIBs typically present themselves as a medium to institutional traders seeking to access crypto market liquidity via prime brokerage.
PB is a commonly-understood service that is widely used by CIBs and their buyside clients across a variety of different asset classes globally. Strictly speaking, it is a process wherein banks bridge the gap between exchanges and institutional investors by enabling access to liquidity from multiple exchanges across different jurisdictions without having to create accounts at each exchange.
PB brings a sense of familiarity to institutional investors, helping to facilitate participation and, crucially, boost confidence through an understood workflow. However, PB also typically infers the provision of leverage for market-making purposes, encouraging consumers of the service to speculate on market movements through the use of forwards, futures, options or other forms of specialised products that necessitate the use of mature risk management protocols by buyside firms. As with most brokerage-related services, the provider wears little to no risk when it comes to trade execution (although PB-provider banks typically do provide degrees of execution advisory services to their clients).
The extent to which institutional investors are utilising PB services offered by CIBs for crypto trading, specifically, in 2023 is unclear, as is the extent to which any CIB crypto trading PB business line is profitable. Nonetheless, the investment banking industry’s ‘buyer beware’ approach to offering institutional investors access to crypto-assets markets liquidity arguably speaks to a deep-seated understanding within capital markets that all trading is — inherently — gambling.
Do you think crypto should be regulated as gambling? Comment down below.