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The UK financial watchdog plans to stop retail investors borrowing money to invest in cryptocurrencies like bitcoin as it seeks to bring much of the fast-growing digital assets market under regulatory supervision for the first time.
The restrictions on lending for crypto purchases are part of a sweeping set of rules outlined by the Financial Conduct Authority on Friday, a few days after the government presented its plans to legislate for the digital asset market.
“Crypto is an area of potential growth for the UK but it has to be done right,” David Geale, FCA executive director of payments and digital finance, told the Financial Times. “To do that we have to provide an appropriate level of protection.”
Dismissing claims by some crypto asset companies that the FCA is hostile to their industry, Geale said: “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 FCA proposals aim to bring much of the crypto market under its regulatory remit, including trading platforms, intermediaries, crypto asset lenders and borrowers, and decentralised finance systems. The plans apply a much tougher set of rules to crypto services provided to retail investors than to those dealing only with professional, or sophisticated investors.
“We started from a position of wanting to develop something that is safe and is competitive,” Geale said. “If we can get the regulatory regime right it actually becomes attractive for firms. That is what we are trying to achieve.”
The FCA said it planned to restrict firms from lending to consumers to fund their crypto purchases — including via credit cards — due to the regulator’s concern about “unsustainable debt, particularly if the value of their crypto asset drops and they were relying on its value to repay”.
The proportion of people in the UK funding crypto purchases by borrowing has more than doubled from 6 per cent in 2022 to 14 per cent last year, according to a recent YouGov survey.
The FCA also said it planned to block retail investors from accessing specialist crypto lenders and borrowers such as Celsius Network, which collapsed in 2022 amid a wider crisis in the sector.
The regulator listed a number of concerns about the market for trading crypto assets including market manipulation, conflicts of interest, settlement failures, a lack of transparency, illiquidity and unreliable trading systems.
To tackle some of these, the FCA will require crypto trading platforms to treat all trades equally, to separate their own proprietary trading activities from those done for retail investors and to provide transparency on pricing and execution of trades.
It will ban trading platforms from paying intermediaries for order flow and require all companies offering crypto trading to UK consumers to operate through an authorised legal entity in the country.
Consumers who park their crypto assets with “staking services” in exchange for a return will have to be reimbursed for any losses caused by third-party actions.
Decentralised finance systems, which have no centralised operation and run purely on lines of computer code, will be exempt from the new FCA regulations unless they have a “clear controlling person”.
While warning “the majority of crypto assets will remain high risk — speculative investments and consumers should be prepared to lose all their money if they buy them”, the FCA said its aim was “encouraging growth as far as reasonably possible”.
Crypto companies have grown frustrated with the FCA over the high level of rejections in the regulator’s registration scheme for compliance with its anti-money laundering rules.
The regulator rejected 86 per cent of such applications in the 12 months to April 2024, but in the latest fiscal year that proportion fell to 75 per cent.
Crypto executives supported the FCA’s focus on consumer protection.
“As such an internationally influential regulator, as soon as the FCA starts to regulate the crypto market they are giving it a massive stamp of approval — so I understand their caution,” said Joey Garcia, head of public affairs at Xapo Bank, a Gibraltar-based crypto custodian.
Riccardo Tordera-Ricchi, director of policy and government relations at the Payment Association, a trade body, said: “The government says it is open for business, but in practical terms it will be difficult for the FCA to implement this — they don’t have an easy job.”
Companies have until June 13 to respond to the FCA’s proposals.