FCA Bans Retail Crypto Borrowing to Protect Investors

The United Kingdom’s financial regulator, the Financial Conduct Authority (FCA), has announced plans to prohibit retail investors from borrowing money to fund their crypto investments. This move is part of a broader set of upcoming regulations aimed at enhancing consumer protection in the crypto market.

David Geale, the FCA’s executive director of payments and digital finance, emphasized that while the crypto industry presents opportunities for growth, it also poses significant risks. He stated that the regulator aims to provide an appropriate level of protection for consumers, ensuring that the industry develops in a sustainable manner. Geale clarified that the FCA is not hostile to the crypto industry but recognizes the high-risk nature of crypto investments and the need for robust consumer safeguards.

The FCA’s decision follows a period of seeking feedback on regulating the crypto market. In a recent document, the regulator expressed its intention to explore whether it would be appropriate to restrict firms from accepting credit as a means for consumers to purchase cryptoassets. This move is driven by concerns over unsustainable debt, particularly if the value of the crypto assets drops and consumers rely on their value to repay loans. The ban would also extend to credit card purchases.

The FCA’s upcoming rules are designed to regulate various aspects of the domestic cryptocurrency market, including trading platforms, intermediaries, crypto lenders and borrowers, as well as decentralized finance (DeFi) systems. The regulator plans to introduce stricter rules for crypto services aimed at retail investors compared to those offered exclusively to professional or sophisticated investors. Geale explained that the agency aims to develop a framework that is both safe and competitive, attracting businesses to the UK market.

In addition to the lending ban, the FCA has identified several other concerns in the crypto market, such as market manipulation, conflicts of interest, settlement failures, lack of transparency, illiquidity, and unreliable trading systems. To address these issues, the regulator plans to require equal trade treatment by crypto trading platforms. Other potential rules include enforcing a separation between proprietary trading activities and those done for retail investors, demanding transparency on trade pricing and execution, and banning trading platforms from paying intermediaries for order flow. Users of staking services would also have to be reimbursed for any potential losses caused by third parties. The FCA plans to exempt DeFi systems without centralized operations, as long as they do not feature a “clear controlling person.”