Crypto Trading: Politicians Who Say It Should Be Treated Like Gambling Are Completely Wrong

Cryptocurrency trading should be regulated the same as gambling, according the UK’s Select Committee on Financial Control. The committee published a report arguing that this was necessary because digital assets such as bitcoin have “no intrinsic value, enormous price volatility, and no discernible social good”.

Statements like this remind many crypto enthusiasts that they are still way ahead of this space despite nearly 15 years having passed since the original Bitcoin was released. white paperwho set the technology vision in the first place.

If crypto trading has been designated Like gambling, platforms should follow additional regulatory measures such as licensing rules and customer due diligence requirements to protect vulnerable users. There could also be protections similar to recently proposed changes to traditional games of chance, such as wagering limits, as well as tighter control over advertising and promotion and a mandatory levy on participating businesses.

Chairman of the Treasury Select Committee, Harriett Baldwin.
Mark Kerrison/Alamy

The report, whose lead author is committee chair Harriett Baldwin, claims that gambling regulations are appropriate for crypto because these assets are “not backed by any underlying asset.”

The comparison would be betting on a roulette wheel, where you simply gamble the odds that a certain number will sometimes appear. Contrast that with buying a company’s stock, which may not always go up, but at least there is an underlying asset such as a customer base or store branch.

But concluding that cryptocurrencies have no value because they lack a traditional asset base fails to understand that intrinsic value can arise from a network. It is quite normal, for example, for companies to have a discrepancy between the value of their book assets and their overall market value.

For example, Meta total assets are currently valued on its balance sheet at US$184bn (£148bn), while the company’s stock market valuation is $630 billion. One of the reasons Meta is worth about 3.5 times more than its assets is that the market understands that there is a lot of intangible value in networks like Facebook and Instagram beyond what is on the balance sheet of the company.

Many alternative assessment methodologies have been developed to assess these networks. These use principles such as Metcalfe’s Law, which says that any network becomes exponentially more valuable with the number of users connected to it. Indeed, it becomes more useful to them, meaning they’ll use it more often and be less likely to defect to a rival that lacks critical mass – see how entrenched Twitter seems despite the fact that many people don’t like Elon Musk.

You can see cryptocurrencies as networks too, even though they are decentralized – meaning they don’t usually have a single company in charge – unlike a centralized network like Facebook. In short, the networks that underpin cryptocurrencies TO DO have valuable underlying assets.

Tortoises and hares

Treating crypto trading like a game would also mean taking a risk-based approach that focuses on mitigating downside risk. This is understandable, but it could come at the expense of potential upside opportunities. Great Britain aspire to be a leader in digital assets, potentially stealing a march on the United States at a time when it seems relatively hostile to space. Especially since financial services make 8% of the UK economy, there is a delicate balance to be struck here.

The British government said that he disagrees with the Treasury Select Committee that crypto trading should be treated as gambling. Earlier this year, the described treasure new principles to regulate crypto trading, which would essentially treat these assets the same as stocks or bonds.

This contrasts sharply with, say, China, which banned cryptocurrency to “reduce financial crime and prevent economic instability.” Yet, similarly, the scheme proposed by the UK is likely to be more robust than a country like Switzerland, which embraces crypto in a largely new framework for financial assets. The Swiss are so progressive that their financial regulator has even allowed the canton of Zug, near Zurich, to pay certain taxes in crypto.

Lake view in Zug, Switzlernad
Welcome to Zug, Switzerland, where you can pay your taxes in crypto.
Henna K, CC BY-SA

Such disparate views on crypto regulation around the world point to one thing: uncertainty. Not around the technology as it stands today – although a surprising number of even senior politicians don’t understand it – as much as what it might become. For example, with more than 4 million people in the UK who have owned or used cryptocurrencies, regulators are concerned that individuals could switch to a monetary system outside of their traditional currency by transacting in crypto instead. This could make it harder for central banks to control the economy.

The risk of this pivot is probably remote, but not impossible. But trying to predict how it will play out is like predicting the aviation industry when the Wright brothers first flew, or the importance of the internet and smartphones when Steve Jobs describes the computer in 1990 as a “bike for the mind”.

Overall, the UK’s approach to crypto regulation is cautious – perhaps you could cast it as a “fast follower” to countries that are leading the way, such as Switzerland and El Salvador. Given the existential economic importance of “what is money” and how it is used in an economy, this seems like the right balance to strike. When the consequences are so difficult to predict, it is probably better to take small measures than to “go fast and break thingsin the style of Silicon Valley. After all, the UK is a country, not a business, and the stakes are higher if a political choice does not bear fruit.

Nevertheless, it is certainly fair not to treat crypto trading as gambling. Hopefully future UK governments will stick to this approach. Gambling over time is the gambler’s road to ruin – the house always wins. In crypto, this is not true. There is no “home”, but rather a value proposition that may or may not come to fruition, but is often still misunderstood.

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