White Paper Series: Cryptoassets
Adopting the term cryptoassets as opposed to cryptocurrencies[i], the White Paper devotes little time to the fast growing consumer demand in the online gambling sector. The Department for Culture, Media and Sport (“DCMS”) acknowledges that there are no specific laws which preclude a customer’s use of cryptoassets to fund gambling, but indicates that it has thus far relied upon the Gambling Commission taking a “rigorous stance” against their use to date where: (i) they are used by end users as a means of depositing into online gambling accounts; (ii) the operator accepting the cryptoasset payment has raised funds via the issue of cryptoassets; or (iii) the business owners’ source of funds includes ownership and trading of cryptoassets. The net result, unsurprisingly, has been that currently the Government does not feel the need to intervene further with legislative changes, because there already exists a de facto ban for gambling usage. Sadly, this was a missed opportunity to oversee and probe the Gambling Commission’s application of its discretion, all the more so given that cryptoassets will be fully financially regulated in Great Britain in the not-too-distant future, and where their burgeoning use in offshore gambling will be another deterrent for end users in Great Britain to only wager with Gambling Commission licensees.
Plainly, the discretion afforded to the Gambling Commission on licence applications can give it a multitude of reasons to decline licence grant, only one of which may be a business plan/funding which includes cryptoassets. To that point, the Gambling Commission states in its Blockchain technology and cryptoassets guidance that its approach to assessing a licence applicant’s source of funds is to be sure that the business is not being funded by proceeds of crime and it needs the same level of assurance for all licence applications. The Gambling Commission further emphasises its position in this guidance:
“If you are considering using [cryptoassets] to fund a gambling business, we recommend that unless you are able to provide a full and complete history of [source of funds] with your application, do not submit as we will not consider Operating Licence applications with a crypto funding element without this evidence provided in full at application stage”
For existing licensees, the Gambling Commission’s controls are set out in licence conditions (“LCs”). LC 5.1.1 requires that:
“Licensees, as part of their internal controls and financial accounting systems, must implement appropriate policies and procedures concerning the usage of cash and cash equivalents (e.g. […] digital currencies) by customers, designed to minimise the risk of crimes such as money laundering, …”
“Licensees must ensure that such policies and procedures are implemented effectively, kept under review, and revised appropriately to ensure that they remain effective, and take into account any applicable learning or guidelines published by the Gambling Commission from time to time”.
In addition, licensees are required by LC 15.2.1(8) to notify the Gambling Commission as soon as reasonably practicable, and in any event within five working days, in circumstances where there is: “[a]ny change in the licensee’s arrangements as to the methods by which, and/or the payment processor through which, the licensee accepts payments from customers using their gambling facilities…”. This is a notification, and not a clearance requirement, albeit there is no doubt that the Gambling Commission would investigate notifications that relate to licensees’ acceptance of cryptoassets. The DCMS assert that on data provided by the Gambling Commission that there have been “no instances” of licensed operators making a key event filing regarding cryptoassets. This is hardly surprising when the known response would be negative.
The implication suggested by DCMS/the Gambling Commission in the White Paper[ii] that licensees may have no desire to accept cryptoassets because of inherent volatility/bet closing values and transparency issues, is unlikely to be the root cause of this reluctance. It is far more likely to be due to their concerns about the negative attention they would attract from their regulator and potential for licence review. In this regard, most licensees remain painfully aware of a fine meted out to one operator in circumstances where it did not accept cryptoassets as payment but allowed a customer with a regulated (as a financial service) digital wallet to deposit with fiat, in which wallet there was a risk that cryptoassets may have been (but not necessarily had been) deposited. The Gambling Commission justified the censure as a demonstrable lack of AML due diligence by the operator on the payment service provider, merely because it allowed deposits in fiat and cryptoassets, in circumstances where the wallet was, as stressed, regulated and there was nothing to preclude its commercial offering of the product. If that comprises a gambling regulatory benchmark, then on a broad application surely it should also preclude a relationship with any number of banks/payment service providers, many of whom offer cryptoasset trading services? One has to ask, the funding and suitability issues aside (of which more below), what is the real concern? Most gambling operators who accept cryptoassets do not do so anonymously as all require a form of KYC/CDD/EDD to open an account. The larger operators also tend to only accept stable coins, and do not allow any form of trading exchange within the gambling ecosystem i.e. USDT in, USDT out. In short, a very limited scope for anonymous money laundering.
The Gambling Commission’s antipathy seems to be primarily rooted in cryptoassets’ opaque nature, having stated “the anonymity afforded by some [cryptoassets], along with any weaknesses in the process of obtaining them, have consistently caused problems for applicants….”[iii]. However, this suggests that the cryptoasset itself can be tainted by a previous illegal use, despite the fact that the current cryptoasset owner would be fully disclosed to the operator and by extension (if requested) the Gambling Commission. Meanwhile, back in the real world, none of us can account for prior uses of all money in our bank accounts since the creation of that currency. For proceeds of crime/AML purposes one can understand that fiat monies can taint other fiat monies in a single account (where they cannot be separately identified) but not cryptoassets where each unit is separately reported in the blockchain. In addition, as can be inferred from Europol’s December 2021 report, the early adoption by criminals for payment in non-private cryptoassets for illegal activities (e.g. human trafficking and money laundering) through such transactions is actually on the wane. The report observes that unlike private coins where the ledger is obfuscated, there is with most types of reputable cryptoassets a public blockchain ledger, so that all trades are recorded: the detail retained therefore leaves a trail that cash could not. Indeed, as Europol emphasises, that ledger was key to unlocking the source of funds in several prosecutions, demonstrating that the prior users were neither truly anonymous nor untraceable. In any event in its conclusion, it points out: “….., the use of cryptocurrencies for illicit activities seems to comprise only a small part of the overall cryptocurrency economy, and it appears to be comparatively smaller than the amount of illicit funds involved in traditional finance.”
Both the DCMS and the Gambling Commission also allude to cryptoasset volatility and that such issues would impact gambling because of the problems of establishing financial limits and affordable gambling. However, again the criticism does not seem to be well thought through. A customer who has bought cryptoassets has presumably had the wherewithal to do so, affordability issues aside. If they then gamble with an element of the cryptoasset that goes up in value after the deposit but before any wager, then any safer gambling (“SG”) limits pegged to fiat (which could be easily imposed as a LC) would still snag before the sums were wagered, as the exchange rate could take place before play. If the volatility is in the licensee’s favour on pay-out (and it could go either way) the customer has still not lost any more than the SG limit set, which is entirely in line with the current loss limit philosophy that underpins the White Paper’s approach to consumer protection. In any event, the Gambling Commission should not ignore that cryptoassets are fast becoming a real and critical part of the world’s economy, and certainly the case for continued objection to licensees accepting deposits in fiat, where the known source is cryptoassets or there had been a digital wallet intermingling cryptoassets traded via a licensed exchange, seems antiquated. Meanwhile other regulators appreciate the need to accommodate change. The Markets in Cryptoassets (“MiCA”) regulation was passed by the European Union (“EU”) in May 2023. MiCA has four objectives:
- to provide a legal framework to regulate cryptoassets;
- to support innovation and fair competition;
- to protect consumers, investors and market integrity; and
- to guard against the financial uncertainty
These regulations will sit alongside the existing cryptoasset travel rule which requires entities enabling the exchange , transfer, sale or related financial services and safeguarding (the so called “VASP” services) to let the sender and recipient of cryptoassets have personal identifiable information of the other (legal name, address and account number) for all transactions over USD 1,000, or as determined by each Financial Action Task Force (“FATF”) member state (by way of example, the current U.S. rule is USD 3,000).
Whilst Great Britain is no longer part of the European Union, it is expected that it will ultimately pass legislation which will address the high risk nature of cryptoassets, to reach parity with high risk investment services (e.g. those requiring a consumer cooling off period) and to attach criminal offences to non-compliance (currently British-based firms providing cryptoasset services are obliged to register with the Financial Conduct Authority (“FCA”) and to comply with existing money laundering regulations and obligations). It is also notable other gambling regulators already have well advanced regimes for the acceptance of cryptoassets for gambling, albeit that the majority of the operators accepting cryptoassets have tended to cluster in traditional grey-market licensing hubs.
Despite this, and the moves for financial services regulation of cryptoassets already in motion, the Treasury Committee’s report Regulating Crypto, published on 10 May 2023 (the “Fifteenth Report”), instead called for cryptoassets to be regulated as gambling, emphasising that:
“… their price volatility exposes consumers to the potential for substantial gains or losses, while serving no useful purpose. These characteristics more closely resemble gambling than a financial service…”
Whilst one can understand there being a false sense of security for a volatile, albeit financially regulated asset (the so called “halo” effect) this proposal would put Great Britain out of step with the vast majority of other jurisdictions. Moreover, it would be the ultimate irony were the Gambling Commission be called upon to regulate an industry for which it plainly has the greatest mistrust Mercifully, the proposal does not have the support of Government and on the 19 July 2023, it made its response to the recommendations contained in the Fifteenth Report clear; cryptoassets would remain financially services regulated:
“Such an approach would run completely counter to globally agreed recommendations from international organisations and standard-setting bodies… …These recommendations are grounded in the principle of ‘same activity, same risk, same regulatory outcome’, meaning that any cryptoasset activity that performs a similar function, and poses similar risks, to those in the traditional financial system (for example, operating a trading platform or providing custody services) are subject to regulation that ensures equivalent outcomes.
The Committee’s proposed approach would therefore risk creating misalignment with international standards and approaches from other major jurisdictions including the EU, and potentially create unclear and overlapping mandates between financial regulators and the Gambling Commission.”
In conclusion, the dithering over cryptoassets and gambling needs to stop. Again, time has been lost with the distraction over the Fifteenth Report. Some online casinos accepting cryptoassets have reported gross gambling revenue of USD 2.6 billion for 12 months trading alone, so the product is clearly of appeal. One cannot simply assume that all or a majority of those end users have nefarious intentions. Given the ongoing profits of fiat-only operators too, one must also assume they are reaching an as yet untapped gambling demographic. The Treasury Committee report noted that in Great Britain alone 10% of adults hold or have held cryptoassets, with the majority of those concluding that it was a “fun” asset and where the transaction costs were considerably less than with fiat transfers. Given this is no longer: (a) a niche pastime; or (b) the preserve of criminals only, the Gambling Commission would be advised to give priority to what would comprise adequate safeguarding for cryptoasset usage in gambling rather than de facto fettering its discretion and imposing an outright ban. In addition, the longer the wait the less likely it is for governments and regulators to adequately anticipate/safeguard against the next wave of technology advancements in the cryptoasset space. The sooner the dialogue and the desire to find middle ground starts, the better.
[iii] In this regard DCMS is using the terminology also used by the Gambling Commission, which had in turn adopted that used by the Treasury Committee (see its Twenty-Second Report of Session 2017-19 published September 2018).