UK’s Financial Conduct Authority Proposes Ban on Buying Crypto with Debt

The UK’s Financial Conduct Authority (FCA) has proposed a ban on purchasing crypto assets with borrowed money, aiming to protect retail investors from the volatile crypto market while fostering responsible growth.

• FCA bans crypto purchases with debt
• Restrictions on high-risk lending platforms
• Crypto firms must establish UK legal entities
• Ban on payment for order flow to prevent conflicts

On May 2, the FCA announced these proposals, aiming to safeguard consumers from the financial risks associated with cryptocurrencies. Executive Director David Geale emphasized the need for appropriate protection while fostering growth, stating,

“Crypto is an area of potential growth for the UK but it has to be done right. To do that, we have to provide an appropriate level of protection.”

Under the new rules, retail investors will be barred from using credit cards and e-money (digital money stored on electronic devices) to buy crypto. This move is designed to shield them from the market’s volatility. However, consumers can still use borrowed money to purchase stablecoins issued by FCA-regulated companies, highlighting the regulator’s nuanced approach to different crypto products.

Crypto companies must set up a legal entity in the UK and comply with regulations such as transparent pricing and keeping company funds separate from customer funds. These measures aim to increase transparency and reduce the risk of fraud in a market often criticized for its opacity.

The FCA’s approach reflects a balance between consumer protection and fostering the burgeoning crypto sector. Geale compared crypto to other high-risk investments, noting that crypto often comes with even less protection, yet remains optimistic about the UK’s role in the crypto space, saying,

“I would in some ways compare this to any other high-risk investments, which if anything often have less protections…We are open for business.”

The crypto industry’s response has been mixed, with concerns that stringent measures might stifle innovation. Only 51 out of 368 applications for registration have been approved since 2020, indicating a cautious approach from the regulator. However, the FCA’s efforts to improve transparency and consumer understanding of practices like staking, which 27% of UK crypto owners have engaged in, show a commitment to fostering a safe environment for growth.

The FCA’s proposals come at a time when crypto trading in the UK is on the rise, with approximately 7 million people, or 12% of the adult population, holding crypto assets. This growth underscores the urgency of regulatory measures. The FCA’s approach is part of its 5-year strategy, which prioritizes smarter regulation and sustained economic growth while fighting financial crime.

Interestingly, while the use of credit cards for buying volatile crypto assets will be banned, consumers can still use borrowed money to purchase stablecoins issued by FCA-regulated companies. This nuance highlights the regulator’s attempt to differentiate between various types of crypto products. Additionally, the FCA is exploring credit checks and investment knowledge assessments for those engaging in crypto lending and borrowing, aiming to ensure that only well-informed investors participate in these riskier activities.

The FCA’s discussion paper follows draft legislation by the Treasury, which, once passed, will bring specific crypto activities within the FCA’s regulation. This legislative process is expected to be completed by 2026. The FCA’s Crypto Roadmap provides a clear timeline for consulting on future crypto regulation, covering areas such as market abuse, stablecoins, custody, and prudential considerations.

A survey commissioned by the FCA found that 14% of crypto investors had used credit to buy crypto last year, up from 6% in 2022. This highlights the increasing use of debt in crypto investments and supports the rationale behind the proposed ban. The FCA’s efforts to improve transparency and consumer understanding of ‘staking’ also add another layer to the regulatory focus on consumer protection.

Hannah Meakin, a partner at Norton Rose Fulbright, commented on the FCA’s efforts to balance innovation with oversight. She noted that achieving this balance is challenging, and the success of these measures will be evident in their implementation. The crypto industry has expressed concerns that the FCA has been too restrictive at times, yet the regulator’s commitment to fostering a safe environment for crypto growth remains evident.

Key Takeaways and Questions

• What is the main goal of the UK’s FCA proposed regulations?

  To protect retail investors from the financial risks of volatile crypto assets by banning debt-funded purchases and restricting access to high-risk lending platforms.

• What specific actions must crypto companies take under the new rules?

  Establish a UK legal entity and comply with regulations such as transparent pricing and segregation of platform assets from user assets.

• How does the FCA view the balance between crypto growth and investor protection?

  Essential to provide protection to consumers while fostering growth and innovation, maintaining that the UK is open for business.

• What is the significance of banning payment for order flow?

  Aims to prevent potential conflicts of interest and misuse by brokers directing client orders to selected market makers.

• How does the FCA’s stance compare to other high-risk investments?

  Crypto often has less protection than other high-risk investments, yet the UK remains open to crypto business and innovation.