The Financial Conduct Authority (FCA) is gearing up to implement stricter regulations for the UK’s crypto sector in an effort to mitigate risks for retail investors, as outlined in a recent discussion paper.
The surge in popularity of digital assets among the general public has prompted this move. Recent data indicates that 93% of UK adults are familiar with cryptocurrencies, with approximately 7 million individuals, or 12% of the population, currently holding some form of digital currency.
With this in mind, the financial watchdog aims to cultivate a digital finance environment that prioritizes safety, transparency, and innovation. David Geale, the FCA’s Executive Director for Payments and Digital Finance, stressed the importance of establishing a regulatory framework that facilitates responsible growth. He underscored the opportunities presented by crypto while acknowledging the significant risks, particularly for less experienced investors.
Hannah Meakin, a partner at Norton Rose Fulbright, highlighted the FCA’s commitment to consumer protection and market integrity in its considerations around the use of credit for purchasing cryptoassets. She noted that the regulator is striving to strike a balance between fostering innovation and implementing appropriate oversight measures.
Crackdown on Crypto Lending
One of the key proposals outlined in the discussion paper is a crackdown on crypto lending services. The FCA has expressed concerns about platforms that offer lending and borrowing products to individual users. The collapse of firms like Celsius Network in 2022 served as a cautionary tale, illustrating the risks associated with unregulated lending in the crypto space. The regulator emphasized the dangers of losing ownership of crypto assets, counterparty risks, and conflicts of interest inherent in this business model.
The FCA also raised concerns about the speculative nature of yield generation in cryptoasset lending, highlighting the uncertainty surrounding returns and the lack of transparency in how cryptoassets are utilized to generate profits. While only 9% of crypto holders engaged in lending activities in the past year, the regulator believes that the risks remain significant. As a result, the FCA plans to restrict retail access to these services, deeming them unsuitable for the average investor in their current form.
Crypto Credit Purchase
The FCA is also exploring limits on using credit to purchase crypto, citing the growing popularity of this practice. Data from a YouGov poll revealed that the percentage of investors using borrowed money to buy crypto rose from 6% in 2022 to 14% in 2023. The regulator expressed concerns about the potential for households to accumulate unsustainable debt, particularly when repayment is contingent on volatile asset values. It highlighted the risks of impulsive crypto purchases leading to overindebtedness and credit score downgrades.
To address these concerns, the FCA is contemplating a complete ban on using credit cards or e-money credit lines to acquire crypto assets. However, stablecoins issued by FCA-authorized entities may be exempt from this restriction.
Trading Concerns
In a bid to safeguard retail customers, the FCA plans to enhance oversight of crypto trading platforms. The regulator identified issues such as poor liquidity, lack of transparency, and potential conflicts of interest on these platforms. The proposed regulations would mandate platforms to segregate their trading activities from those of their customers and provide transparent pricing and execution data. Additionally, the FCA intends to prohibit firms from incentivizing intermediaries to direct trade orders.
Furthermore, all crypto businesses catering to UK users must establish a local legal entity and comply with domestic regulations. This requirement applies to firms serving both retail and institutional clients.
By implementing these stringent regulations, the FCA aims to create a more secure and transparent environment for crypto investors in the UK. The proposed measures seek to strike a balance between fostering innovation and protecting retail investors from the inherent risks of the crypto market.