Government officials in the UK are in the midst of a new push to reform the cryptocurrency industry. Recent actions over the last several months indicate that regulators are serious about protecting UK consumers from what they believe are the shortcomings, and sometimes evils, of cryptocurrency.
No one knows how all of this will affect crypto in the UK, particularly where online gambling is concerned.
The online gambling industry was one of the first embrace cryptocurrency as a retail payment system. These days, the most ardent supporters of the relationship between the two are proposing building entire online gambling operations on blockchain, with cryptocurrency tokens being the funding engine.
Calls to turn online gambling into a blockchain enterprise make sense on many levels. But there is concern that the push to regulate could hamper any such plans to do so. Are those concerns legitimate? Among those who have little trust for government, there is always cause for concern when regulators get worked up about something.
Banning derivatives at the retail level
The most recent anti-crypto action in the UK comes by way of a prohibition against the sale of cryptocurrency derivatives at the retail level. Announced in early October 2020 by the Financial Conduct Authority (FCA), the ban will take effect in early January 2021.
In simple terms, a derivative is any financial asset traded by way of a contract between two parties and based on future price. As such, derivatives have no inherent value at the time contracts are agreed on. Contract prices are determined solely by speculation. Buyers and sellers speculate what they feel the price of the asset might be at some point in the future and agree to trade at that price, on that date.
Derivatives are not unique to cryptocurrency trading. Traditional markets offer derivatives as well. The difference in the cryptocurrency universe is that the asset being traded may not have any inherent value beyond the derivatives themselves.
A good way to understand this is to compare it with oil. We have all heard news anchors talk about oil futures. What are they? They are essentially petroleum contracts. Buyers and sellers agree to an oil transaction at a speculative price and for some point in the future. Unlike cryptocurrency, the oil being traded has value as a worldwide commodity irrespective of the contract price. So even if the speculators get it wrong, oil still has value on the open market.
UK regulators see no inherent value in cryptocurrency assets other than the willingness of investors to buy them. As such, they see cryptocurrency futures and other derivatives as to risky for the retail investor. There are four types of crypto derivatives that appear to be covered by the UK regulations:
- Coin swaps
- Coin options
- Coin futures
- Contracts for difference.
According to the FCA, all types of crypto derivatives pose a special threat to retail investors due to the potential for significant losses. As a side note, the FCA sees spread betting as equally risky. The Authority is now warning consumers to be on the lookout for derivatives offers from January 6, 2021 forward. Any such invitations will be considered scams by the FCA.
Its effect on gambling
This particular regulatory move should have little to no effect on the gambling space. While derivatives are considered a gamble in and of themselves, they are completely unrelated to what we know as online gambling - at least directly. You could make the case that cracking down on spread betting could limit operators looking to make money that way but spread betting on crypto in an online casino environment is virtually unheard of.
It is ironic that the FCA, in a 2019 report on cryptocurrency trading, likened derivatives to gambling. A recent Authority survey among consumers shows that nearly half purchased cryptocurrency assets "as a gamble that could make or lose money." So both the FCA and consumers agree that buying and selling cryptocurrencies is akin to gambling.
Gambling is legal in the UK. It is highly regulated, but it is legal. What makes all of this ironic is that regulators want to keep roulette wheels spinning and slot machines turning but still want to ban derivative trading.
New anti-money laundering rules
While the regulations banning retail derivatives are unlikely to have any direct effect on gambling, anti-money laundering (AML) rules announced a month earlier will make a difference. Those rules will force crypto-based businesses to do many of the same things required by businesses dealing in large amounts of fiat.
For example, UK banks must submit regular anti-money laundering reports to prove they are not knowingly laundering the ill-gotten gains of criminals. So do securities exchanges, brokers, and so forth. Their counterparts in the cryptocurrency world will have to start doing the same as a result of the new rules.
The FCA expects to begin receiving information from as many as 4,500 crypto-based businesses as a result of the rule change. They hope annual reports will help them spot the signs of money laundering, especially where loosely regulated exchanges are concerned. It is assumed that gambling operators will have to submit reports as well.
Its effect on gambling
Applying stricter AML rules to crypto-based businesses should directly impact gambling in a number of ways. Most directly, any gambling operators forced to submit AML reports will have to make sure they are doing everything they can to prevent themselves from being used as money-laundering vehicles. That in itself should clean up some of the unscrupulous behavior that currently exists in the industry.
AML reporting for payment processors will force them to tighten things up as well. This should create a better and more secure environment in which payment processors and online casinos can do business. Both should benefit.
Most important is the effect AML rules will have on exchanges. This is where the FCA hopes to have the greatest impact on curbing money-laundering. How so? By limiting the opportunities criminals have to use exchanges to cover their tracks.
A typical crypto laundering scheme relies on exchanges at both ends. Fiat is used to purchase crypto assets on an exchange. The assets are then removed from the exchange and funneled into a variety of transactions to spread them out. Some of the funds might go to gambling, for example. They eventually all wind up back on exchange where they are sold for fiat.
Cleaning up exchanges limits the starting and ending points for criminals. If they are putting fewer coins into the system, they are less likely to rely on online gambling operations to launder for them. And if their opportunities for cashing out at the end of the laundering process are limited, they are less likely to put money into the system at all.
This helps the gambling industry tremendously by getting the money-laundering monkey off its back. If the FCA's efforts succeed to the extent that regulators believe they will, it will not be long before critics can no longer point to cryptocurrency and gambling as major vehicles for money-laundering.
Regulating digital currency ads
One other area of interest is action taken by the FCA over the summer of 2020 in relation to digital currency advertising. In July, it was made clear that digital currency marketing would be treated like any other kind of financial marketing, bringing it under the purview of the FCA. In essence, the FCA will begin regulating digital currency ads.1
The thinking now is that investors should only deal with companies registered with the FCA to sell digital assets. They should stay away from firms appearing to market digital assets with misleading statements or without fully revealing the risks.
In the meantime, the FCA now has the authority to go after crypto companies whose marketing is not fully transparent and forthright. The Authority will be able to apply the same enforcement powers it has long held over other financial sales and marketing.
How it will affect gambling
Like the ban on cryptocurrency derivatives, tighter regulations on financial marketing will not impact online gambling all that much. Rules intended to control how financial products are marketed are aimed mainly at protecting investors from investment scams.
Cleaning up the crypto space
It is evidently clear that UK regulators are intent on cleaning up the crypto space. Whether consumers agree or not, regulators believe that the industry has been allowed to operate too freely for too long. They are intent on bringing the same kind of regulation to cryptocurrency the traditional financial services sector has been subject to for decades.
The good news for online gamblers is that the new regulatory push is not going to affect their day-to-day gambling sessions much, if at all. By comparison, the FCA's regulation of financial services marketing does not prevent the consumer from visiting a gambling site and playing the slots. Similar regulations for cryptocurrency firms will not affect gamblers either.
In the long run, a successful effort to clean up the crypto industry should give platforms like BTC and LTC more legitimacy in the eyes of consumers. Maybe all of this regulation will help more people start viewing cryptocurrency as a legitimate alternative to fiat. In turn, this might convince more gambling operators to open up to cryptocurrency deposits. That would definitely be a good thing.