The Pros and Cons of Regulating Crypto as Gambling

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Following the shocking collapse of FTX, a new idea for regulating crypto began to take shape: Let’s regulate crypto like we regulate gambling.

Todd Baker, senior fellow at the Richman Center for Business, Law and Public Policy at Columbia University, recently wrote that “cryptocurrency trading should be regulated for what it plays in mimicking finance and not for what what his defenders say he is or what people think he is.”

This opinion piece is part of CoinDesk’s Policy Week.

Fabio Panetta of the European Central Bank suggests that “regulation should recognize the speculative nature of unbacked cryptos and treat them as gambling activities.” And here is a recent article from American Banker on the subject.

There are good things about regulating crypto as a game, and bad things.

First, the bad.

Crypto is too diverse for a single regulatory framework

Any assertion that we should regulate crypto as X isn’t very helpful, and that’s because what we call “crypto” has long since ceased to be a single problem commodity that can be easily integrated in any setting. Maybe in 2012 and 2013 it could have been. And gambling could very well have been the best solution at the time.

But, at its core, crypto is a set of programmable databases, which means they can host all sorts of applications, not just gaming apps. Zoom in on 2022 and the range of activities unfolding in the crypto space has become quite large and diverse.

Take MakerDAO, for example. MakerDAO is built on a blockchain, and so it falls under the crypto umbrella. But it is not a gambling product. Functionally, MakerDAO is a bank that provides loans by issuing deposits in the form of dai (DAI), a stablecoin.

To complicate matters, MakerDAO ownership is represented in the form of MKR tokens, also residing on a blockchain, which allow holders to vote on the operation of the bank. MKR also offers holders a claim on bank earnings. In effect, MKR tokens are like shares of Wells Fargo or Bank of Montreal. These are investments.

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Read more: Jesse Hamilton – After FTX: How Congress is Preparing to Regulate Crypto

Regulating MakerDAO and its associated tokens DAI and MKR as gaming products would simply not make sense, for the same reason that regulating Wells Fargo or its underlying actions as a casino would be a clumsy solution.

Or take the decentralized tools Aave and Compound, which were built on blockchains. Both are lenders. While both of these tools certainly cater to gamers, they are not gaming apps themselves and shouldn’t fall into that category.

Or consider centralized exchanges such as Coinbase. Coinbase allows customers to directly buy and sell crypto with cash, combining the roles of a traditional broker like E-Trade with a trading platform like Nasdaq in one platform. However, we apply securities regulation to e-commerce and the Nasdaq, not gambling regulation, and probably should do the same for Coinbase.

In sum, regulating crypto will require more nuance than throwing everything into the gambling category. There are many existing regulatory frameworks that can be applied to emerging blockchain-based products, of which gambling is just one.

Then here’s what’s good about regulating crypto as gambling.

A Long-Awaited Recognition of Crypto Compulsive Gambling

Dai, MKR, Aave and Compound may not play. But a big part of crypto is gambling. Indeed, a large chunk of people who engage in blockchains do little more than bet on the highly volatile prices of first-generation unbacked volcoins like dogecoin, floki inu and the shiba inu. Let’s not forget bitcoin, bitcoin cash, litecoin, xrp and ether.

The crypto industry has done its best to shift volcoin betting from gambling to “investment”. Coinbase, for example, haughtily views its mission as “to increase economic freedom around the world.”

But if you look under the hood, a volcoin such as dogecoin is little more than a 24/7 endless lottery on what the average opinion thinks the price of dogecoin will be. This same recursive betting process is what drives the prices of bitcoin, litecoin, and other volcoins. Users can sell their position in these endless lotteries to other players, and in some cases casino chips are used as a payment token, but the payment functionality of volcoins has always lagged far behind their main lottery function. .

Read more: Amitoj Singh – India cracked down on crypto. What will he do with his G-20 power?

The advantage of officially recognizing volcoin-based betting as a form of gambling is that it would import already existing protections for problem gamblers and children into the world of crypto companies.

Compulsive gambling is a disorder characterized by a persistent and uncontrollable urge to gamble despite negative consequences or attempts to quit. This can lead to financial difficulties, relationship issues, and mental health issues such as depression and anxiety.

In many jurisdictions, gambling operators are required to address problem gambling by implementing self-exclusion programs that allow patrons to voluntarily ban themselves from gambling establishments or sites from Paris. By regulating volcoins as gambling, sites that offer these products, such as Coinbase, PayPal, and Kraken, would be required to implement their own opt-out programs.

Gambling sites are often required by law to display responsible gambling messages such as “Gamble responsibly. Remember it’s just a game.” MegaMillions’ Responsible Gambling page, for example, provides problem gambling information and a confidential 24-hour helpline.

By applying these messaging standards to crypto, it would no longer be permissible to present volcoin purchases to customers as a form of investment. Instead, sites like Coinbase and PayPal should provide disclaimers like, “Play bitcoin responsibly. Remember, it’s just a game.”

In many jurisdictions, recognition of volcoins as gambling would limit opportunities for public advertising. In 2021 adverts for floki inu flooded London. “Missed Doge? Get Floki,” the ads read, appealing to people’s deep-seated fears of missing something. However, the UK has a very strict code regarding gambling advertisements. If flokis and other volcoins had been correctly classified initially as gambling games, the flokis ad campaign would have had to overcome many more hurdles.

Or take Matt Damon’s famous “fortune favors the brave” ad for Crypto.com from early 2022. The ad attempted to equate volcoin buyers with intrepid explorers. By regulating volcoins as bets, ad makers could no longer draw such dubious analogies in an attempt to lure bettors onto their platforms.

In particular, gambling regulatory frameworks in places like the UK explicitly prevent gambling operators from reaching children through advertising. If betting on volcoin were to be considered a form of gambling, then crypto platforms that court users under the age of 18 (like Block and Kraken have done in the past) would be required to end this. convenient.

Finally, some US states limit the ability of players to finance their activities by credit, as the United Kingdom does. The idea is to prevent a compulsive gambler’s addiction from snowballing into a much larger crisis for the family’s finances. Translating this rule to crypto could mean no longer allowing customers to buy volcoins with credit cards and/or restricting access to margin.

To sum up, the idea of ​​applying crypto regulation to crypto needs to be fleshed out. There are many blockchain-based activities that are not gambling and should not be regulated as such. But a lot of what happens on blockchains is gambling, and it’s time we recognized it as such and regulated it accordingly.

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