UK government sets out ambitions for growth with proposed regulation of cryptoassets industry

In 2022, the then chancellor of the exchequer, Rishi Sunak, declared his ambition to make the UK a hub for cryptoassets technology.

In the three years since, the European Union implemented a bespoke regulatory framework for cryptoassets in the form of Markets in Crypto-Assets Regulation (MiCAR), and, until recently, the United States progressed on the basis that they fall within the existing regime and pursued a strategy of "regulation by enforcement". 

Meanwhile, the UK's approach has been far more circumspect, with a slow feed of consultations and piecemeal regulation, which has left the crypto-industry uncertain of the way forward and unwilling to invest in the UK.

In recent months, that approach changed direction sharply with a significant uptick in activity. At the end of 2024, the Financial Conduct Authority (FCA) published a discussion paper on regulating cryptoassets inviting feedback on its proposals alongside a cryptoassets roadmap. This suggested that the FCA would be in a position to regulate cryptoassets during 2026.

In the past month, there has been a flurry of activity. HM Treasury has published draft legislation to bring cryptoassets inside the regulatory perimeter and indicated that it would hope to have final legislation in place by the end of the year. The FCA has now published an extensive discussion paper and two consultation papers with more to follow in the near future.

Regime begins to take shape

On 29 April, the chancellor announced the publication of draft legislation for regulating cryptoassets, bringing crypto exchanges, dealers and agents into the regulatory perimeter - the Financial Services and Markets Act 2000 (Regulated Activities and Miscellaneous Provisions) (Cryptoassets) Order 2025.

A few days later, on 2 May, the FCA published a discussion paper seeking views on the approach to regulating cryptoasset trading platforms, intermediaries, cryptoasset lending and borrowing, staking and decentralised finance, and the use of credit to purchase cryptoassets. On 28 May, the FCA published two consultation papers: the first CP25/14 on stablecoin issuance and cryptoassets custody and the second CP25/15 on the prudential regime for cryptoassets firms

Draft legislation

Under the draft legislation, crypto firms with UK customers will have to meet clear standards on transparency, consumer protection and operational resilience, bringing the following under UK regulation:

• The issuing of stablecoin.
• Safeguarding and custody of cryptoassets.
• Operating a cryptoassets trading platform.
• Dealing in cryptoassets (including lending and borrowing) as a principle or agent.
• Arranging deals in cryptoassets.
• Cryptoassets "staking".

Of the above, all but one has an analogous traditional finance – or "TradFi" – equivalent: only staking is a truly "blockchain native" activity. 

The Financial Times quoted Osborne Clarke's Nick Price, a Partner in the Commercial Disputes team, at the time of the draft legislations publication, noting that the UK approach “appears more aligned with the US, bringing crypto assets into the existing regulatory perimeter rather than developing bespoke legislation for them.”

Under the proposals, all firms serving UK retail customers will be required to be authorised, although overseas firms that only serve UK institutional customers will not (unless the UK institutions are acting as an intermediary with UK consumers). This is likely to raise a number of difficult questions around the classification of sophisticated investors, particularly in an industry that is evolving at such a fast pace – a point to which the FCA is already very alive. 

Overseas firms that are issuing stablecoin will not be required to be authorised, unless the act of issuing occurs in the UK. This specific issue has already caught media attention, suggesting that UK stablecoin issuers are likely to be at a significant competitive disadvantage compared to their overseas counterparty due to additional regulatory burden.

FCA discussion paper

The FCA's intention appears to be to adopt a "same risk, same regulation" approach where possible and to make the crypto-market subject to the same regulatory requirements as equivalent TradFi activities – diverging significantly from the EU's approach under MiCAR.

The FCA seeks feedback on the following will be regulated, with comments due by 13 June and will then consult on any proposals its intends to adopt:

Cryptoasset trading platforms

These are entities authorised to operate a qualifying cryptoasset trading platform.

Cryptoasset intermediaries 

These include those authorised to deal in qualifying cryptoassets as principal, to deal in qualifying cryptoassets as agent and to arrange deals in qualifying cryptoassets. 

Cryptoasset lending and borrowing

Operating a cryptoasset lending platform and cryptoasset lending and borrowing will fall under the regulated activities of cryptoasset dealing as principal and arranging – as such, the FCA proposes specific rules for these business models.

Restrictions on the use of credit to purchase cryptoassets

The FCA is exploring whether to impose restrictions on firms from accepting credit as a means for consumers to buy cryptoassets but potentially exempting qualifying stablecoins issued by an FCA-authorised stablecoin issuer.

'Staking'

The process of staking is where cryptoassets are used and locked for blockchain validation. Regulation will aim to address technological, customer understanding and safeguarding risks.

Decentralised finance

Decentralised finance (DeFi) activities will be covered by the new regime where they involve cryptoasset regulated activities and there is a clear controlling person or persons carrying on an activity. 

Regulatory approach

The discussion paper is lengthy, setting out 54 questions for the industry and stakeholders on how to approach the regulation of the activities to be brought within the scope of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001.  

Market engagement

It is notable that in a significant number of areas the FCA is actively seeking to improve its understanding of how the market currently operates, the benefits (and risks) of operating in that way, and how the industry considers such risks could be mitigated. This is a different approach from that seen historically from the FCA and reflects a recent trend of FCA collaboration. 

The Consumer Duty

The FCA repeatedly refers to the Consumer Duty throughout the discussion paper. It is apparent from the tone that the FCA considers the Consumer Duty appropriate across the board. It specifically asks that all responses to the 51 questions address the application of the Consumer Duty. Despite this, the FCA expressly states that it intends to apply the Consumer Duty only once – to crypto intermediaries (the FCA appears to focus on intermediaries with more scrutiny than others in the discussion paper). 

DeFi regulation 

HM Treasury has stated that "true" DeFi will not be regulated; however, the FCA intends to ensure that the regulatory perimeter is as wide as possible in this regard -  making clear that it will apply the same rules to DeFi if there is a "clear controlling person". 

Authorisation of firms

Although the FCA focuses on the regulation of the crypto market, it also emphasises the factors it will take into account in deciding whether to authorise a firm – for example, the structure of a group of cryptoassets firms (including overseas firms), what activities are to be undertaken and/or how firms manage conflicts of interest. Firms will need to ensure that they provide a robust explanation of their business model and expect to be tested by the FCA. 

Consultation papers

There are now further opportunities to influence regulation, with the FCA's publication of two consultation papers on 28 May: CP25/14 on stablecoin issuance and cryptoasset custody and CP25/15 on a proposed prudential regime for cryptoasset firms. The regulator invited comment on both by 31 July.

CP25/14 proposed requirements for issuers cover the offer and redemption of qualifying stablecoins, the holding and management of qualifying stablecoin-backing assets and the key information that issuers will need to disclose about their qualifying stablecoins – designed to ensure issuers have the right resources, processes and controls in place to promote the stability, transparency and reliability of qualifying stablecoins.

The FCA also proposes that custodians of qualifying cryptoassets should:

• Segregate client cryptoassets from their own.
• Hold qualifying cryptoassets on behalf of clients in a trust.
• Keep accurate books and records of clients' cryptoassets holdings.
• Ensure adequate controls and governance to protect clients' cryptoassets holdings.

CP25/15 proposals include sourcebooks. The FCA aims to establish an integrated prudential sourcebook bringing together core prudential requirements, or COREPRU, supplemented by sector-specific sourcebooks – a CRYPTOPRU sourcebook will contain crypto-specific capital and liquidity rules for instance.

Capital requirements are also proposed for in-scope crypto firms. They must hold a minimum amount of own funds (equity or similar high-quality capital) – the FCA's proposal is £350,000 minimum capital for stablecoin issuers, and £150,000 for crypto custodians (£350,000 if a firm carries out both activities).

Liquidity requirements proposed by the FCA are that firms should hold a minimum pool of liquid assets to meet short-term obligations – a basic liquid assets requirement.

The FCA will set out final rules and guidance, which are expected in 2026, before implementing any new regimes.

Osborne Clarke comment

The market now has the opportunity to influence the FCA's rulemaking by engaging with the process. There is a real opportunity to ensure the regulation put in place is appropriate – and we would draw attention in particular to proposals around segregation, safeguarding and staking.

If you would like help responding to the discussion paper, providing feedback on the draft legislation, or navigating the new regime and its impact on your business, please contact any of our experts.

Becky Wallis, an Associate Director of Tax at Osborne Clarke, co-authored this Insight.