The UK is working to establish itself as a trusted hub for cryptoasset entities to conduct business. By leveraging its strong financial services sector, the UK Government aims to attract firms in the crypto space to set up operations in the UK. This approach is designed to unlock potential benefits for consumers, such as enhancing the payment system. Ultimately, the priority is to protect consumers from potential harm.
Over the past few years, several regulatory developments have been introduced to achieve this balance. Below is a timeline of key milestones and what businesses should prepare for moving forward.
Key regulatory milestone
January 2020: FCA takes on a supervisory role
On 10th January 2020, the Financial Conduct Authority (FCA) became the designated supervisor for Anti Money Laundering and Countering Terrorist Financing (AML/CTF) for firms involved in certain cryptoasset activity.
June 2023: FSMA 2023 and Digital Settlement Assets
On 19th June 2023, the Financial Services and Markets Act (FSMA) 2023 came into force. The FSMA gave the Bank of England and the Payment Systems Regulator (PSR) authority over Digital Settlement Assets (DSAs), such as stablecoins. Stablecoins are a type of cryptocurrency designed to maintain a stable value by being linked to a specific currency, commodity, or financial asset. The change marked the broader effort to regulate cryptoassets more effectively.
October 2023: Financial promotions rules
On 8th October 2023, the Cryptoasset Financial Promotions Regime came into force, as outlined in the FCA’s FG23/3 by the FCA. This regulation applies to all firms marketing cryptoassets to UK consumers, regardless of where the firm is based (in the UK or overseas) or the technology it uses for its promotions.
November 2023: Guidance on stablecoins is released
On 6th November 2023, the FCA published guidance on how stablecoins would be regulated. The guidance also covered the requirements of firms issuing or holding stablecoins. These guidelines were set out in the FCA’s DP23/4: Regulating Cryptoassets (Phase 1). The Bank of England also issued their Cross-authority roadmap on innovation in payments. The paper outlines how existing and proposed regulatory frameworks in the UK will align.
November 2024: Expanded regulatory scope
On 24th November 2024, the government confirmed its intention to introduce legislation that would pull cryptoassets into the FCA’s regulatory perimeter. A notable and significant change included the plans regarding ‘phase 1’. Phase 1 originally covered only stablecoins. It will now incorporate elements of ‘phase 2’, including authorising trading exchanges and other related activities.
December 2024: Market disclosure rules
On 16th December 2024, the FCA issued its DP24/4 – Regulating cryptoassets: Admissions and Disclosures and Market Abuse Regime for Cryptoassets paper. This paper set out the requirements for businesses seeking to commence trading on recognised platforms, such as Coinbase.
What lies ahead for cryptoasset regulation
The FCA has released its Crypto Roadmap for 2025 and 2026, which will inevitably ramp up activity. It outlines the FCA’s plans on trading platforms, intermediation, lending, staking, and related financial requirements. Consultation papers for these areas are expected to be published within the next 12 months.
These changes mean it is crucial for businesses operating in the crypto space to start preparing for new compliance requirements now. Key areas to address include:
- Engaging experienced advisors to support regulatory compliance
- Preparing applications for necessary permissions
- Reviewing and enhancing internal systems and controls
Unanswered questions and challenges
While progress has been made, there remain uncertainties to resolve. One key concern is whether regulated cryptoasset firms will be ineligible to apply small company exemptions under FRS 102 and statutory audit requirements, both may apply to all authorised cryptoasset firms, regardless of their size.
There are a growing number of crypto businesses potentially establishing themselves in the UK. However, the size of the market is unknown, questions remain about whether there will be sufficient professional services capacity to meet demand.
- CASS compliance consultants may need to expand their service offerings to align with new UK crypto regulations, to assist with applications, systems and controls
- The FCA’s guidance suggests crypto regulations will resemble the Client Asset Sourcebook (CASS) framework for investment firms. That requires appointing an auditor eligible to perform statutory audits under Part 42 of the Companies Act 2006
Opportunities for growth and legitimisation
These regulatory changes present significant opportunities for both established crypto firms and new entrants into the crypto market. Existing firms, such as Coinbase, are expected to explore expansion opportunities in response to the enhanced regulatory framework.
If implemented correctly, these measures could provide much-needed legitimacy to the crypto sector. By strengthening oversight and promoting responsible business practices, the UK has the potential to lead the way in integrating cryptoassets into mainstream financial services.
In summary
The UK’s evolving regulatory landscape for cryptoassets presents both challenges and opportunities for businesses operating in this sector. With further developments expected in 2025 and 2026, firms should take proactive steps to ensure compliance.
By seeking expert advice, enhancing internal controls, and engaging with the new requirements early, businesses can position themselves to thrive in this rapidly changing environment.
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