UK regulators move to ban crypto loans, citing systemic economic risks

• UK regulators have proposed a nationwide ban on crypto-backed loans amid rising concerns over macroeconomic risks.
• The FCA flagged lending growth in decentralized finance (DeFi) as a threat to consumer protection and financial stability.
• The proposed measures follow months of consultation with central banks, policymakers and crypto market participants.
• Total DeFi lending and staking TVL has crossed the $101 billion mark as of Friday. 

United Kingdom (UK) regulators plan to ban crypto loans nationwide, citing systemic risks, threatening DeFi markets and Ethereum’s dominance.

UK regulators unveil plans to outlaw crypto lending 

The UK’s Financial Conduct Authority (FCA) proposed a sweeping ban on crypto-backed loans, citing escalating risks to the country’s economic system. In a joint statement, officials said the policy aims to “contain systemic threats posed by the unregulated growth of digital asset lending platforms.”

The move follows months of behind-closed-doors consultation with the Bank of England and global financial watchdogs.

The FCA pointed to the proliferation of under-collateralized loans and the rising role of decentralized protocols in issuing credit.

“The pace and scale of crypto lending is outpacing regulatory controls. We cannot allow unregulated financial channels to compromise economic stability,” said Sarah Pritchard, Executive Director of Markets at the FCA.

Under the proposed regulation, platforms operating in the UK will be barred from issuing loans backed by crypto assets, including stablecoins and tokens such as Ether or Bitcoin. The draft policy will undergo a 90-day public feedback period before final parliamentary review in Q3 2025.

Market impact: Ethereum could cede more market share if DeFi markets take a hit

The proposed UK crypto loan ban could significantly disrupt the decentralized finance (DeFi) ecosystem, particularly staking and borrowing protocols operating on Ethereum and other Layer 1 networks.

According to DeFiLlama, total value locked (TVL) in DeFi stands at $101 billion as of Friday. Towering above, BNB chain and Tron, Ethereum’s $51.9 billion TVL currently accounts for 52% of the market share, down from its 71% dominance during the 2021 bull cycle.

Total DeFi Market Cap | Source: DeFiLlama

Major Ethereum-hosted protocols like Aave, Compound, and Lido could face reduced UK participation and tighter liquidity flows if the rules are enacted. Institutional DeFi access may also shrink as UK-based platforms reevaluate their exposure. 

More importantly, staking yields could fall sharply if borrowing volumes drop under the newly proposed UK regulatory tweaks, potentially triggering cascading loss impact across the DeFi sector.