The UK can't figure out if crypto is gambling or a financial service. Why not both?

The UK is wresting with how to regulate crypto. Should it be treated as a financial service or as gambling?

The Conservative government wants to regulate crypto as a financial service. That is, it wants to bring cryptoassets within the framework established by the Financial Services and Markets Act, which governs the regulation of a wide range of financial services.

But a Treasury Committee made up a cross-party group of MPs criticized this approach yesterday, calling for consumer trading in "unbacked crypto" to be regulated as gambling. They say that regulating unbacked crypto as a financial service will create a halo effect that leads consumers to believe that this activity is safer than it is.

I don't think this needs be an either/or thing. The UK should regulate crypto as both a gambling product and a financial service. Here's how and why:

First, the argument for regulating it as financial service. Take a crypto platform like Coinbase. Coinbase does what regular investment dealers and stock exchanges do. It provides a set of order books, much like a stock exchange, and holds customers' crypto, much like a broker. The UK's existing financial services regulatory framework will be best equipped for ensuring these activities are safe, including having rules for custody, market manipulation, appropriateness, insider trading, and more.

Sure, in an effort to protect consumers you could in theory task the UK's Gambling Commission with regulating these sorts of capital markets activities, but it has no experience doing so and will be far out of its depth. Best to go with the closest-fitting regulator.

Second, here's why crypto should also be regulated as gambling. The Treasury Committee is right; much of the activity occurring on a venue like Coinbase is really just gambling. Unbacked crypto like bitcoin, dogecoin, ether, shiba inu, and floki are fast, fun, and potentially addictive 24/7 recursive betting games. (Not all crypto falls in the unbacked category. For instance, MKR tokens are backed, much like an equity.)

As a facilitator of unbacked coin betting, Coinbase should be subject to some of the same regulations as a casino or poker site, including rules surrounding gambling addiction, advertising, and underage access. The UK's Gambling Commission will be the best-equipped body for applying these requirements, certainly better than the UK's financial regulator. Furthermore, recognition of unbacked crypto trading as gambling would diminish any 'halo effect' brought on by bringing venues like Coinbase under the ambit of financial regulation.

So crypto shouldn't be either gambling or a financial service, but a one-two punch of both, with the appropriate regulator taking responsibility for that facet of crypto for which they have the best expertise.