Is Crypto Trading Essentially A Gambling?

Davis, a member of the 2014 Financial System Inquiry Panel, states in his brief that buying a cryptocurrency such as Bitcoin is “primarily (if not exclusively) a form of gambling/speculation.”

He says that when you buy bitcoin, chances are you’re not doing it to make a payment, but because you think someone will be willing to pay you more for bitcoin in the future. Davis admits it’s different from other forms of gambling, where the outcome of a horse race or sports match determines the win or loss. But he still sees it as gambling and compares the digital currency exchange that let you buy Bitcoin to a newsagent selling lottery tickets.

“These things are highly speculative. Where do you dominate the line? »

Former ASIC President Greg Medcraft

Why is the distinction important? Well, he thinks there is a risk that referring to Bitcoin as a “financial product” could lead consumers to believe that crypto products are safer and more useful than they actually are.

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Instead, Davis says only cryptos that clearly act as financial products should be regulated as such. The most notable example is stablecoins, which are crypto assets pegged to other assets for the purpose of stabilizing their value. While some stablecoins have proven to be anything but stable lately, these products can look a lot like bank deposits, so there is clearly room for regulation.

“They should think very carefully about the pieces of [the crypto sector] are treated as a financial product, and which elements are just pure gambling,” says Davis.

Davis is clearly a crypto skeptic. But he is not alone in pointing out the highly speculative nature of cryptos and the implications this could have for how we regulate them.

The Bank for International Settlements published research last week suggesting that retail investors may not fully realize the risks of investing in crypto, pointing to evidence that new crypto investors were “chasing increases.” of past prices. His modeling revealed that for every 10% increase in the price of Bitcoin, there was a 3% increase in the number of crypto app users.

Bitcoin prices have fallen around 60% this year.Credit:Bloomberg

He said the largest group of crypto app users are men under the age of 35 – a group known for their risk-taking, who may be motivated by “fear of missing out”.

How far should regulators go to try to protect these traders from risk?

People should be free to invest in risky assets if they choose, but the BIS has said there needs to be “adequate” risk disclosure and regulation of crypto firms’ advertising claims.

In Australia, regulators have also begun to require financial firms to show that their products are “likely to be compatible with consumer objectives, financial circumstances and needs”. If cryptos were regulated as financial products, they would also have to encounter this hurdle.

Greg Medcraft, the former chairman of the Australian Securities and Investments Commission, who also led the financial services directorate of the OECD, where digital finance was a key priority, is someone with great expertise. both in digital finance and regulation.

Medcraft doesn’t go so far as to say that crypto trading is outright gambling, pointing out that there are plenty of other high-risk financial products out there. “These things are highly speculative. Where do you dominate the line? he told me this week.

On the contrary, he says cryptos have become “too big to ignore” and that regulating them is a way to provide the same kinds of consumer protections that apply to risky financial products. While Medcraft ran ASIC, for example, the regulator banned prime-time advertising of certain high-risk derivatives known as contracts for difference.

Whatever the final decision of regulators, the extreme volatility of cryptocurrencies puts traditional financial institutions in an attractive position.

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While most Australian banks are not prepared to take on the risks of facilitating crypto trading, Commonwealth Bank announced last November that it would launch a trial allowing customers to trade crypto-assets through its application.

CBA’s foray into crypto trading was halted recently as it deals with regulators, but the bank maintained its intention to continue with the pilot project. But if or when the product is finally launched, the bank is expected to be careful about which customers it allows to access crypto trading through its app.

The price declines of Bitcoin and other cryptocurrencies have been steep, and there are many tricky regulatory issues hanging over the crypto industry.

It will be interesting to see how the largest bank in the country reconciles all this with the desire of many customers to get into crypto-assets.

Ross Gittins is on leave.

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