Author, advisor and global commentator on digital financial services.
The U.S. 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 for regulating it.
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. If fintech gives people, particularly young men, an easy way to spend money on line then one of the things they will spend it on gambling. Kenya has M-Pesa, America has cryptocurrencies. 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?
This is a serious issue. 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 they're are problem gamblers and a gambling problems.
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 argument that cryptocurrency trading harms public health in a similar way to gambling. They suggest that just 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.
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 e-sports than they do with e-finance.
Similarly, European Central Bank board member Fabio Panneta 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.
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 both customers and the economy.
A differentiated approach means that simply "cracking down" with existing financial services regulation is unlikely to be optimal. We need some new thinking. Some of crypto might be better regulated as financial services, some as gambling and, as J.P Koning pointed out earlier this year, perhaps gambling's public health perspective could provide valuable ideas around identification and authentication, "safe to spend" and velocity checks, advertising and representation, support and guidance and so on in the crypto space.
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