Press Room

8 Jun 2023

The UK Treasury Committee Approach Would Kill the Crypto Industry – Zoe Wyatt and Laura Knight

Partner and Head of Crypto Tax and Accounting, Zoe Wyatt, and International and Crypto Tax Director, Laura Knight, discuss why the TC’s report recommending cryptocurrency be regulated as gambling is an attempt to bring down the UK crypto industry, in Bloomberg Tax.

Zoe and Laura’s article was published in Bloomberg Tax, 8 June 2023.

For anyone working in and around the UK crypto sector, the views from the recent report by the Treasury Committee, appointed by the House of Commons and composed of 11 MPs, have come as an unwanted bolt from the blue.

Strident in their criticism of crypto investment, the group of British Members of Parliament who compiled the paper, titled “Regulating Crypto,” did their utmost to ensure cryptoassets struggle to prosper in the years ahead.

Treating Crypto as Gambling

The headline from the report was that they have urged the UK government to abandon plans to regulate crypto as a financial service, and they also recommended that cryptoasset investment should be treated as gambling.

Harriet Baldwin, the committee’s chair, said: “With no intrinsic value, huge price volatility and no discernible social good, consumer trading of cryptocurrencies like bitcoin more closely resembles gambling than a financial service, and should be regulated as such.”

We have met with and engaged with MPs over the last five years and were shocked by these words. We have been left with little doubt that this report was a deliberate move aimed at reducing the credibility of the crypto sector in the UK.

Throughout the process, we espoused the many virtues of cryptoassets. More than that, we listened to MPs’ concerns, we provided answers, and we drew their attention to how the industry has evolved far beyond its initial reputation as “the Wild West.”

Our impression, having devoted so much attention to the crypto industry, is that the committee members have not fully understood the market. We are firmly of the view that the committee’s recommendations are divorced from reality, and suggestive of a predetermined outcome to the inquiry.

A Focus on the Negative

After all the evidence hearings from industry, as well as the investment from both retail and high-profile institutions, it was extremely dispiriting to note that the overall sentiment of the report was that cryptoassets have limited existing purpose, other than as a digital payment system.

The committee’s findings were entirely focused on the negative aspects of crypto.

In drawing her conclusions, Baldwin referenced how UK-based crypto holders lost hundreds of millions of pounds to fraud, scandals such as FTX, and wild swings in the value of cryptoassets. Yet the committee barely touched on the opportunities that cryptoassets provide, and the use and transparency of blockchain technology.

For those of us who have spent so much time working within the crypto industry, it is impossible to envisage how classifying it as gambling solves issues raised in the report, notably volatility and energy usage.

Whilst some aspects of cryptoassets feel more like a gamble in that they are hugely speculative—and the latest craze in meme coins helps the committee’s case—this generalisation cannot be made across the entire market.

The report specifically targets “unbacked” cryptoassets such as Bitcoin and Ether, but Bitcoin, as an example, has a multi-billion-pound trading volume per day, and an International Monetary Fund report highlighted the correlation of Bitcoin with the stock market.

Regulation Fit for Purpose

MPs on the committee know that we have called for, and welcome, regulation of the industry, because consumers and businesses want certainty and protection. Regulation, however, needs to be fit for purpose to achieve desired outcomes, and that is not what the committee is suggesting.

Furthermore, the committee’s approach is a significant divergence from the government’s stated ambition to make the UK a global crypto hub.

Ministers have just closed a consultation on proposals for the Financial Conduct Authority to regulate crypto, in much the same way as it oversees the issue and trading of stocks and bonds.

The headline for this sector to be treated as gambling is also at odds with international approaches. The report does not consider how the Gambling Commission would regulate the sector in practice nor how this would solve the report’s stated issues with Bitcoin criminality, volatility and energy usage. While it certainly grabbed headlines, the report does little to guide those hoping to resolve its recommendations.

Whilst bringing crypto under the auspices of the gambling authority might initially sound like great news for investors in terms of tax, with “winnings” considered as tax free, it would create uncertainty to what is a taxable cryptoasset. A further obstacle is that winnings from gambling are generally tax free. The report is conspicuously silent on the possible impacts that this may have on the established approach to the taxation of crypto assets, about which the UK tax authority, HM Revenue & Customs, has reached an opposing viewpoint.

Also, any move to try and regulate some cryptoassets as gambling and other cryptoassets as financial assets regulated under the financial conduct authority will create further uncertainty and more red tape for businesses who will not operate in the UK.

What is and isn’t taxable may be a moot point if you cannot invest in crypto assets where banking restrictions can be used to curb investment.

After the committee’s report emerged, it was pleasing to read that the Treasury itself takes a more pragmatic approach to crypto, acknowledging that there are risks in crypto investment, but that these are the same risks that exist in traditional financial services.

Promising to take an “agile approach to robustly regulating the market,” the Treasury says it will address risks but also promote innovation.

Whilst the treasury committee is just one voice in a much larger machine, and the recommendations in the report are unlikely to be implemented, it nonetheless sends a message to young talented Web3 professionals eager to flourish in this exciting growing sector that the UK is closing its door on attracting such talent.

So, in short, the treasury committee’s report is more than disappointing.

Zoe Wyatt

Zoe is a Partner at Andersen Tax in the United Kingdom. Specialising in international tax, she develops the blue-print solution to her clients’ cross-border needs.

Email: Zoe Wyatt

Laura Knight

Laura is International & Crypto Tax Director and has over 20 years’ tax adviser experience with nearly 10 years in a top tier UK/US firm gaining extensive experience over a broad range of UK private client advisory and compliance requirements with an international angle.

Email: Laura Knight