UK Regulator Proposes Ban on Using Debt for Crypto Purchases

UK authorities intend to prohibit individual investors from acquiring crypto assets through leverage due to apprehensions regarding the volatile nature of digital assets and the risk they pose financially. The UK’s Financial Conduct Authority (FCA) published a document on May 2, outlining its proposed rules for crypto assets, which include this restriction. The FCA’s action aims to reduce the financial vulnerability of consumers who may struggle to repay loans incurred during aggressive markets.

Proposed Ban on Purchasing Debt in Cryptocurrency

The ban includes all forms of obtaining cryptocurrency via debt. In the preliminary draft for the new rules in the document from the FCA, the ban would cover the purchases via credit cards, e-money credit lines, and any other debt forms. Regulators explain that this policy, like many others, seeks to provide primary consumer protection, especially in cases when consumers run the risk of purchasing volatile crypto assets that may decline in value, making repayment of the borrowed amount nearly or altogether impossible. Other than the direct credit purchases with the ban, the proposal also states that retail investors will be prohibited from interacting with certain crypto lending platforms. The regulator considers these relatively new platforms to be high risk, probably due to the considerable likelihood of losing the entire principal amount or counterparty risks.

New Regulations for Crypto Platforms

The regulator has provided an additional detail arguing for a more specific ban on purchasing crypto with leverage. Also, there is now a rule explicitly directed at crypto platforms, which they have proposed. With these new regulations, there emerges a requirement for crypto companies to set up a legal representative body within the UK and categorically submit to British jurisdiction. This requirement is meant to address the situation where platforms servicing UK users are located outside the country and do not fall under local legislative and regulatory control. In addition, the regulations would impose on these firms specific operational requirements, such as transparent transaction pricing and separate custody of platform assets from user assets. In traditional finance, this type of segregation is a fundamental fiduciary obligation to ensure the protection of customer assets when a firm is bankrupt.

Restricting Payments Creators for Order Flow

Another proposed regulation in the document published by the FCA is an outright payment-for-order-flow prohibition; this revision relates to the cryptocurrency industry. This practice involves brokers passing on their clients’ trade orders to particular market makers, often receiving a fee for doing so. This can lead to a broker not having the best interest of the client and the client not receiving the best market execution because the order may not achieve the best price due to payment for order flow conflict of interest routing by the broker’s financial gain. Banning payment for order flow is expected to improve the integrity of the marketplace and guarantee the order routing is done with the highest degree of fidelity to the investor.

Geale’s Remarks

Geale noted that the frameworks are designed to furnish adequate safeguards for investors. David Geale, FCA’s executive director for payments and digital finance, has also provided insight regarding the implementation of new regulations. He commented on concerns regarding the UK implementing a harsh crackdown on crypto and stated, “There is room for the UK to grow as a potential contender in the crypto realm but it needs to be done carefully. To do that, we have to provide an appropriate level of protection.” He countered the arguments over disproportionate crackdowns, saying, “In some way I would liken this to any other high-risk investments, which, if anything, often have fewer protections… We are open for business.” Geale compared crypto investments with other high-risk assets and stressed that crypto markets are, relatively speaking, less guarded in their structure than other speculative investments. Geale pointed out that regardless of the assumptions regarding the regulations, the country is trying to foster an innovation-friendly environment in terms of crypto trade that balances aims for responsible advancement free from excessive constraints.