The UK financial regulator is preparing to ban retail investors from using borrowed funds such as credit card balances to invest in cryptocurrency as it seeks to overhaul supervision of the fast-growing digital assets market.

The soaring values of virtual currencies such as bitcoin after Donald Trump’s election have put pressure on the Financial Conduct Authority (FCA) to take a tougher line while it also lays the groundwork for the industry to flourish in the UK.

According to a recent YouGov survey, the proportion of people in the UK using borrowed funds to make crypto purchases more than doubled from 6% in 2022 to 14% last year.

Borrowing to fund investments, when asset values could change dramatically, meant consumers risked losing their entire investment and potentially other assets, such as their home. These characteristics closely resembled gambling, the Treasury committee found.

The proposed ban is expected to face resistance from some fintech firms. Meanwhile, ministers have presented draft laws that will extend existing financial regulation to companies involved in crypto, aligning the UK with the US rather than the EU.

The chancellor, Rachel Reeves, said after a recent visit to Washington she had discussed crypto regulation with the US Treasury secretary, Scott Bessent, and that the two countries planned to discuss the subject further in June.

Bessent is known to be pro-crypto and, along with Trump, is against proposals for a central bank digital currency. Dismissing concerns that private companies such as Meta, Google and Apple might control digital currencies in the future, he told a Senate finance committee hearing in January: “I see no reason for the US to have a central bank digital currency.”

Eurozone finance ministers said last month they were concerned the US stance could affect eurozone monetary sovereignty and financial stability.

In the UK, the Starmer government has come under pressure from within the Labour party to take a tougher line. In 2023, MPs on an all-party parliamentary committee urged ministers to treat retail investment in cryptocurrencies such as bitcoin as a form of gambling.

As part of her growth strategy, Reeves has called for an easing of regulations in some areas, an approach backed by the FCA chief executive, Nikhil Rathi, who has suggested that rules in the Square Mile could be simplified to spur innovation.

David Geale, the executive director of payments and digital finance at the FCA, said clear crypto regulation would increase confidence in the sector, supporting growth.

“Crypto is a growing industry. Currently largely unregulated, we want to create a crypto regime that gives firms the clarity they need to safely innovate, while delivering appropriate levels of market integrity and consumer protection,” he said.

Citing concerns about market manipulation, conflicts of interest, a lack of transparency and unreliable trading systems, Geale added: “Our aim is to drive sustainable, long-term growth of crypto in the UK. We’re asking whether we have got the balance right.”

Legislation will give the watchdog powers to oversee all crypto and digital financial businesses, including crypto-trading platforms, intermediaries, crypto-asset lenders and borrowers.