The Financial Conduct Authority (FCA) is looking to tighten the rules around cryptocurrency in the UK. A new discussion paper outlines measures aimed at mitigating risk for retail investors interacting with digital assets.
Growing UK Market
This comes alongside a spike in public interest in digital assets across the UK. Data from August 2024 reveals that 93% of UK adults are familiar with crypto. Meanwhile, about seven million people or twelve percent of the population, hold a form of digital currency.
Regulator’s Aims
Given the increasing engagement, the regulator intends to promote the adoption of digital finance that is safe, transparent, innovative, and fosters growth. FCA’s Executive Director for Payments and Digital Finance, David Geale, highlighted the need to provide a framework for responsible crypto growth, emphasizing that there are many risks crypto poses to novice investors.
Hannah Meakin, partner at Norton Rose Fulbright, stated that the focus on credit demonstrates FCA’s intent to advance consumer protection and market integrity. Meakin noted that FCA is trying to find the sweet spot between oversight and innovation. Meakin noted that the FCA is trying to find this sweet spot.
Crypto Lending Clampdown
Among the proposed measures are restrictions on crypto lending services. The FCA is worried about the convenience used by P2P lending platforms for offering lending/borrowing services to individual users.
Cited Lending Risks
The regulator cited bankruptcies like Celsius Network in 2022, reflecting risks. The FCA claimed this model possesses catastrophic risks, losing control of the crypto assets, counterparty risks, insider trading-type conflicts of interest, and so forth.
The FCA stated, “In cryptoasset lending, yield generation is highly speculative because yields are not guaranteed and empirically, consumers do not have sufficient information about the processes involved in retrieving the cryptoassets.” Even though only 9% actually participated in lending (between August 2023 and June 2024), the FCA still sees the risks as considerable.
Restricting Retail Lending
In light of the above risks, the FCA plans to remove retail access altogether. In their present form, these services are considered unsuitable for the average investor, at least for now.
Crypto Credit Limits
The regulator is looking at placing restrictions on credit use to purchase cryptos due to increasing prevalence. According to a YouGov survey, 6% of investors had used borrowed money to invest in 2022, a figure that rose to 14% in 2023.
Debt Risk Problem
The FCA noted this behavior could lead to unsustainable debt, particularly when repayment is linked to volatile assets. The FCA added, “The possibility of impulsive spending on crypto can also enable the risk of overindebtedness. Credit is also often provided with a cost in interest and fees, which can increase if the balance remains unpaid. Not repaying the debt could lead to a downgraded credit rating, which impacts one’s ability to obtain loans or access lower interest loans down the line.” While some businesses limited spending, a large number of crypto platforms encourage it.
Oversight of Trading Platforms
FCA plans to expand oversight of crypto trading platforms for retail client protection. The regulator pointed out the following concerns: lack of liquidity, lack of transparency, and possible self dealing.
New regulations require platforms to segregate the trade and non-trade activities of their clients. Proposed changes require verifiable submission of pricing/execution data and restrict payments to traders by sponsoring clients’ trades.
Mandatory Registration
All crypto companies servicing users in the UK are required to set up a local entity and follow local laws. This is also true for companies serving retail clients and those catering to institutional clients.
