I’m Investing in Haaland First to Score in the Champions League Final

The whole gambling vs. investing thing can be very confusing.

Dateline: Woking, 20th May 2023.

The U.S. Treasury Secretary Janet Yellen told Reuters that it is "critical" to put in place a strong regulatory framework for crypto, which I am sure we all agree with because good regulation means a great opportunity for new fintech products and services, but evidence suggests that (depending on what you mean by “crypto”) the crypto market is not a financial market as we currently understand it, so simply “cracking down” with existing financial services regulation is unlikely to be optimal. We need some new thinking and perhaps the public health perspective provides a valuable perspective.

Gambling

The Kenyan mobile payment service M-Pesa (by some measures Africa’s most successful fintech) transformed the national economy in incredible ways. There are now more than 200,000 SMEs using M-Pesa’s API, more than half a million businesses that transact more than £5 billion per month and M-Pesa has a network of partners that allows subscribers to send and receive money from more than 200 countries and territories. A non-bank payment system has changed people's lives in ways that could not have been envisaged by the people who created it.

But it has its downsides too. Kenyans spent heading towards 200 billion Kenyan Shillings on gambling through M-Pesa in the year to last March (up a quarter on the previous year), underlining the scale of the problem. This is not a Kenyan problem, as in many other countries, smartphones and new ways to pay online are accompanied by what Jonathan Rosen calls the “stubbornly persistent vice” of online gambling. Public Health England estimates societal gambling-related harm in England at around $1.5 billion while Australian research estimates that the years lost to disability from gambling exceeds that of diabetes! While many, many people enjoy gambling and for the majority of us it is a fun pastime, there is no denying that there are problem gamblers and a gambling problems.

with kind permission of Helen Holmes (CC-BY-ND 4.0).

JPMorgan’s December 2022 demographic analysis of U.S. crypto-asset holdings found that the median crypto user is more likely to come from a lower income background and is more likely to be young and male. With consumer protection in mind, they suggest that such assets “may therefore merit a differentiated policy approach—compared with the existing architecture for traditional markets (e.g., stocks and bonds)” to effectively protect investors and the economy.

If fintech gives people, particularly young men, an easy way to spend money online then one of the things they will spend it on is gambling. Kenya has M-Pesa and sports betting, America has debit cards and cryptocurrency exchanges. The pressure to regulate crypto is growing, and it should be regulated. But should it be regulated by the Securities and Exchange Commission or by the Gambling Commission?

Investing

Gambling isn’t only about the Vegas slots and a flutter on the ponies now and then. The idea that cryptocurrency trading, for example, is essentially nothing more than gambling in a casino (albeit one that makes up its own odds) is not new. Todd Baker challenged the view that cryptocurrencies are financial assets in a Colombia Law School blog, saying that this risks luring policymakers into a "potentially catastrophic category error” because cryptocurrency markets are “gambling emulating finance”. Frankly, he has a point. In many ways, the cryptocurrency markets have more in common with electronic sports than e-finance.

Similarly, European Central Bank board member Fabio Panetta is on the record saying that trading in unbacked digital assets should be treated by regulators like gambling. He has some strong words on the subject, saying that crypto assets “do not perform any socially or economically useful function” given that they are not very good for payments and have no intrinsic value.

Nathan Davies and Simon Ferris from the University of Nottingham Medical School in England, writing in the doctors’ journal “The Lancet”, make a rather interesting (and to me, at least, rather compelling) argument that cryptocurrency trading harms public health in a similar way to gambling. They suggest that as gambling harm is increasingly appraised through a public health lens, researchers and policy makers should also consider new financial instruments that have features of “gamblification” (a word I hadn’t seen before, but love) when seeking to research or reduce the burden of harm of gambling. Otherwise, fintech might provide a pathway for new dangers to step and fill the space left by public health and regulatory measures taken against traditional gambling products.

If we did adopt a public health approach, then we could learn from the ways in which gambling operators have been required to adjust. For example, in many jurisdictions, they are required to implement self-exclusion programs that allow customers to voluntarily ban themselves from betting sites. By regulating volatile cryptocurrencies in the same way, then changes would be required to set up exclusion programs of their own. They might also be pushed even further to implement “safe to spend” checks and so on.

Good Regulation Please

There is then, as I wrote about before, a view that the crypto market is not a financial market as we currently understand and regulate as such and the U.K. Parliament’s Treasury Select Committee has just come to a similar conclusion. It has called on the government to abandon plans to regulate crypto as a financial service and instead treat it as gambling. The report, which distinguishes between what you might call crypto assets (eg, “stablecoins” backed by fiat reserves, or what might be more accurately described as a digital currency board, as covered by European MiCA regulation) and cryptocurrencies, recommends that

“the Government regulates retail trading and investment activity in unbacked cryptoassets as gambling rather than as a financial service, consistent with its stated principle of ‘same risk, same regulatory outcome’. (Paragraph 52)”

My personal view is that there is real merit in this approach. One important factor to be considered is that because gambling winnings are not taxed, we can forget about the administrative burden of reporting cryptocurrency trades to the relevant authorities and paying capital gains tax, which might itself be enough to recommend this way forward.

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