In a decisive response to the Treasury Committee's report on Regulating Crypto, the UK government has firmly disagreed with the recommendation to regulate "retail trading and investment activity in unbacked crypto assets as gambling rather than as a financial service."
The Economic Secretary to the Treasury, Harriett Baldwin, expressed gratitude for the Committee's inquiry and recognized the pressing need for robust and effective regulation in the crypto space.
The recent failure of FTX has influenced the UK's proposed strategy to safeguard its consumers. The findings and statements about the causes of this failure point to several factors, including the mixing of customer and firm assets, insufficient transaction documentation, weak information controls and cybersecurity measures, unresolved conflicts of interest between the main trading platform and proprietary trading arm, inadequate financial and risk management capabilities, corporate governance deficiencies, and excessive leverage.
Addressing these risk factors solely through a gambling regulation system would be inadequate. Such a system would not be equipped to handle issues like insider trading, market manipulation, predatory short selling, and other behaviors that can occur in both crypto asset markets and traditional financial services markets.
The Gambling Commission has a strong track record in ensuring the safety and fairness of gambling activities for consumers and the public. However, overseeing financial risks similar to those in financial markets is beyond the expertise and mandate of the Gambling Commission.
The crypto asset industry operates on a global scale and is often borderless, with UK consumers accessing products and services from overseas firms or applications without a clear geographic connection. If the UK were to unilaterally adopt a regulatory system that differs significantly from global approaches, it could lead to crypto asset activities moving offshore, reducing the UK's ability to make it safer and benefit from potential advantages, while leaving consumers exposed to residual risks.
While the government welcomes the Committee's recommendation for a "balanced approach" to support crypto asset technologies, it firmly contends that a financial services regulatory framework is more appropriate to address the risks of unbacked crypto assets and promote safe innovation.
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