In the latest crypto news, security is one of the hottest issues being talked about. With regulations being passed in Australia to provide clarity for consumers, the United Kingdom appears to be following suit. Soaring values of major coins like Bitcoin have put pressure on the Financial Conduct Authority (FCA) to begin laying the groundwork needed for crypto to thrive in the UK.
With that being said, the FCA has proposed a ban on borrowing to fund crypto-related investments. Borrowing to invest in those funds, when there could be a drastic change in market value, means higher consumer risk than would normally be necessary.
This move by the FCA would provide an extra layer of protection for investors. With uncertainty about altcoins, users will no longer be able to fund those investments using borrowed funds.
Borrowing Increased
Investors have varying levels of knowledge when it comes to cryptocurrency. As values continue to rise, there has been an increase in crypto-related borrowing, especially in the UK. A YouGov survey noted that the percentage of people borrowing funds for crypto doubled from 6% in 2022 to just about 14% in 2023. Given that 12% of the adult population (7 million people) own crypto assets, it presented a growing challenge for the FCA.
The FCA has warned that investors should prepare to “lose all their money” when investing in crypto. With the introduction of new draft laws in the sector, the government noted that it aims to crack down on “bad actors” while still trying to support innovation in the crypto space.
Lending and Borrowing Crypto Assets
Also worthy noting in this proposal is that the FCA is considering potential restrictions when it comes to borrowing and lending cryptoassets. This includes things like testing investment experience and knowledge of investors and even running credit checks.
Currently, cryptoasset lending involves an owner of crypto lending it out in return for a yield. Borrowing is more traditional in that it sees customers get a loan in crypto that is eventually paid back with interest.
The FCA suggested that, though it is a small part of the market, cryptoasset borrowing and lending presents “risks of significant harm.” That includes liquidity risks, potential loss of ownership, lack of consumer understanding, and limited borrower credit checks.
The FCA would improve consumer understanding of staking and improve overall transparency within the cryptocurrency industry. A survey done by the FCA found that 27% of adults in the UK who own crypto have previously used staking.
Filling a Regulatory Gap
In addition to filling the gaps in crypto regulation, the proposal from the FCA aims to create a more robust framework for the crypto market as a whole. This also means not simply banning the act of borrowing for crypto investments.
The FCA wants to garner public feedback on other areas of decentralized finance, including lending and staking. They are taking a comprehensive approach, making sure that every aspect of the digital asset space is being given the necessary oversight. This is part of a broader consumer protection strategy while also providing a measure of stability to the financial system.
What are Crypto Loans?
Cryptocurrency loans are a type of secured loan. They are similar to certain kinds of auto loans where you pledge an asset – often cash – in order to secure financing. When it comes to crypto loans, the borrower gets a loan in order to purchase crypto currency and must pay those funds back within a certain period of time.
There are a litany of crypto lenders out there like Unchained Capital, Celsius, and BlockFi, all of whom have low annual percentage rates as well as loan terms of one to three years. These include fairly high loan amounts as well.
Terms and rates vary depending on the lender. It is also worth noting what the minimum loan amount is. You might find a lender that offers a favorable rate but requires much higher minimum loan amount.
Why to Borrow Against Crypto
Crypto borrowing can make sense, but typically if there is a seller with a substantial amount of crypto that wants to liquidate it without having to potentially pay taxes on any sales they make.
From an investment standpoint, borrowing to buy crypto could be ideal in order to buy tokens in bulk at a discounted rate. If you believe that a particular token is going to rise exponentially, buying in bulk could be a sound way of making a tidy profit in a relatively short period of time.
The Inherent Risks of Crypto Loans
Buyer protection is the main reason for the proposal of this FCA legislation. Prior to this proposal, borrowers could take out a loan from certain institutions in order to bulk-buy cryptocurrency. But the practice itself comes with several inherent risks.
Volatility
Without a doubt, the single biggest risk of investing in cryptocurrencies has to do with its natural volatility. Even Bitcoin, the longstanding King of Crypto, has had massive drops amidst even bigger rises. That presents inherent challenges for investors.
By taking out a loan to invest in crypto, you could find yourself getting into the market at the wrong time. Taking out a loan and eating the losses could be potentially devastating. It is as much of a “boom or bust” proposition as there is and the risk is rarely worth the reward.
Interest Rates
Far too many investors don’t take into account the cost of borrowing these funds. Even if a crypto play pans out, interest rates will ultimately cut into any profit margins experienced. Depending on your borrowing power, interest rates could become substantial enough to make the venture less than worthwhile.
Though there is room for big profit in a short period of time, it is too hard to gauge which token will take off. Creating a financial obligation to an institution means being tethered to a potentially losing play and having to make up the difference financially.
Regulation Challenges
A major driving factor behind the aforementioned volatility of crypto is a lack of solid regulation. Though there has been a move in the direction of stronger regulation across the board, nothing has been put into motion. Investors are speculating on a crypto-friendly second term for President Donald Trump, though nothing has happened yet.
Institutional investors hesitate to purchase crypto because of a lack of regulation. Though many institutional investors are getting behind Bitcoin currently, other forms of crypto remain a challenge because of a lack of certainty regarding regulation.
Final Thoughts
Though the move still enables borrowers to use funds to buy stabelcoins, it is a move that largely protects consumers. As safety and security continue to be a major concern within the cryptocurrency space, this is a move that clearly has consumer protection in mind.
What impact this will have on the crypto market at large remains to be seen. If anything, it could strengthen the move to stablecoins, showing them as the “safe” investment venture within the cryptocurrency space.
