Crypto regulation and public health: Financial services and gambling

US Treasury Secretary Janet Yellen recently told Reuters that it is “critical” to put in place a strong regulatory framework (and I agree, because good regulation means a great opportunity for new fintech products and services), but evidence suggests that the crypto market is not a financial market as we currently understand it. Perhaps we should cast a wider net for ideas to regulate it.

Gamblification

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 transacting over £5 billion per month, and M-Pesa has a network of partners that allow 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 imagined by the people who created it.

But it also has its drawbacks. If fintech gives people, especially young men, an easy way to spend money online, one of the things they will spend it on is gambling. Kenya has M-Pesa, America has cryptocurrencies. The pressure to regulate crypto is increasing, and it should be regulated. But should it be regulated by the Securities and Exchange Commission or by the Gambling Commission?

This is a serious matter. Kenyans spent heading towards 200 billion Kenyan shillings on gambling through M-Pesa in the year to March last year (a quarter compared to the previous year), underscoring the scale of the problem. This is not a Kenyan problem, as in many other countries, smartphones and new ways of paying online are accompanied by what Jonathan Rosen calls “stubborn persistent viceof online gambling. Public Health England estimates the societal harm associated with gambling in England at around $1.5 billion, while Australian research estimates that the years lost to disability from gambling exceed diabetes! While many, many people enjoy gambling and for most of us it is a fun pastime, there is no doubt that they are gambling problems and a gambling problem.

Nathan Davies and Simon Ferris from the University of Nottingham Medical School in England, writing in the doctors’ journal “The Lancet”, come up with a rather interesting argument that cryptocurrency trading harms public health in the same way as gambling. They suggest that just as gambling harm is increasingly being assessed 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 by gambling. Otherwise, fintech can be an avenue for new dangers to step in and fill the space left by public health and regulatory measures against traditional gambling products.

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 this risks luring politicians into a “potentially catastrophic category error” because cryptocurrency markets are “gambling that emulates finance”. Frankly, he has a point. In many ways, cryptocurrency markets have more in common with esports than they do with e-finance.

In the same way, board member of the European Central Bank, Fabio Panneta, is informed that trading in unsupported digital assets should be treated by regulators as gambling. He has some strong words on the subject, saying that crypto assets “not perform any socially or economically useful function” given that they are not very good for payments and have no intrinsic value.

Good regulation thank you

JPMorgan’s December 2022 demographic analysis of US holdings of crypto assets 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 to the existing architecture for traditional markets (eg stocks and bonds)” to effectively protect both customers and the economy.

A differentiated approach means that “cracking down” with existing regulation of financial services is unlikely to be optimal. We need some new thinking. Some of crypto may be better regulated like financial services, some like gambling, and as JP Koning pointed out earlier this year, perhaps gambling’s public health perspective can provide valuable ideas around identification and authentication, “safe to use” and speed controls, advertising and representation, support and guidance and so on in the crypto space.

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