Bitcoin, ether and other cryptocurrencies should be regulated as gambling given they are potentially used by fraudsters and pose significant risks to consumers, a panel of UK lawmakers said in a report on Wednesday.
Britain is planning its first rules for cryptoassets, which currently only comply with anti-money laundering safeguards.
Bitcoin and ether account for two-thirds of all cryptoassets and are not backed by any currency or asset, leading to volatility in prices and the potential for all money invested in them to be wiped out, the report from parliament's treasury committee said.
Regulating retail trading and investment in unbacked cryptocurrencies could create a 'halo' effect that leads consumers to think the activity is safer than it is, or protected when it is not, it said.
"We therefore strongly recommend 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"," the report said.
The Financial Conduct Authority has repeatedly warned consumers they could lose all of their money invested in cryptocurrencies.
Cryptoassets globally have a total market capitalisation of about $1.2 trillion, a tiny part of the financial system, but the collapse of crypto firm FTX exchange last year introduced greater urgency into regulating the sector.
"The events of 2022 have highlighted the risks posed to consumers by the cryptoasset industry, large parts of which remain a wild west," said Harriett Baldwin, chair of the treasury committee.
Around 10% of UK adults hold or have held cryptoassets, according to official figures.
The European Union approved the world's first set of comprehensive rules for crypto markets on Tuesday. International regulators are due to propose global norms shortly.
The underlying technology used by cryptoassets has the potential to improve efficiency in payments, the report said.
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