UK to Restrict Credit Card Use and Lending for Crypto Investors in Push for Consumer Protection

LONDON, May 2 (Reuters) – The UK is preparing to impose new restrictions on the use of credit cards for purchasing cryptocurrencies and is set to tighten rules on cryptoasset lending, as regulators move to increase consumer protection in the fast-growing but volatile sector.

The Financial Conduct Authority (FCA), Britain’s financial watchdog, announced on Friday it is considering a range of new rules to limit the use of borrowed funds for crypto investments. These proposals form part of a wider government initiative to bring the crypto industry under formal regulation for the first time.

Earlier this week, the UK Treasury confirmed that it will incorporate cryptocurrencies into the existing financial rulebook, covering exchanges, dealers, and issuers. This regulatory shift aims to address the risks posed by the largely unregulated market, which now sees around 7 million UK adults—roughly 12% of the population—holding cryptoassets.

“Consumers should be prepared to lose all their money” when investing in crypto, the FCA reiterated, citing the sector’s volatility and lack of safeguards.

Under the FCA’s draft proposals, retail investors may soon be banned from using credit cards or e-money firm credit lines to directly purchase cryptoassets. However, purchases of stablecoins—digital currencies designed to maintain a steady value—would still be allowed if issued by FCA-regulated entities.

According to a survey commissioned by the FCA, 14% of crypto users in 2023 used credit to finance their purchases, more than doubling from 6% in 2022. The regulator said this rising trend highlighted the need for tighter controls.

The FCA is also evaluating tighter rules on crypto lending and borrowing. These activities, which involve either lending out cryptocurrencies for yield or taking out loans in crypto, carry heightened risks such as loss of ownership, liquidity issues, and limited borrower assessments. Though these practices represent a smaller segment of the crypto market, the FCA warned they pose “significant harm” to uninformed consumers.

Institutional investors would not be affected by the proposed retail restrictions.

Additionally, the FCA aims to boost transparency and consumer understanding around “staking”—a process where investors lock their digital tokens in blockchain networks in exchange for rewards. The regulator’s survey found that 27% of UK crypto holders had engaged in staking.

Legal experts say the FCA faces a delicate challenge. “The FCA is trying to balance innovation with appropriate oversight,” said Hannah Meakin, a partner at Norton Rose Fulbright. “Yet this is no easy feat and the proof will be in the pudding as to whether they can get this balance right.”

The FCA is seeking public feedback on the proposals before final regulations are introduced.