In late April, the UK government issued draft legislation to pull cryptoassets and stablecoins deeper into the UK’s financial services regulatory perimeter. This was swiftly followed by a discussion paper from the Financial Conduct Authority (FCA) seeking views on approach to regulating cryptoasset trading platforms, intermediaries, cryptoasset lending and borrowing, staking, decentralised finance and use of credit to purchase cryptoassets.
In this article we highlight why this development is important, and the types of activities and cryptoassets that will likely be caught under this new regime.
Any firms monitoring the space will be well aware that UK government and our financial service regulators have been engaged with industry to develop a regulatory regime for cryptoassets and stablecoins for some time.
Indeed, in a recent speech, Rachel Reeves, Chancellor of the Exchequer recently commented – 'Robust rules around crypto will boost investor confidence, support the growth of FinTech and protect people.'
Over the last five years the UK has gradually built a regulatory framework impacting firms, for example:
The draft cryptoasset legislation goes a significant step beyond the current position – it sets out the basis for the FCA to further regulate the sector, with the discussion paper providing more information on the FCA’s intended approach.
Essentially, firms operating in the cryptoasset and stablecoin space will be brought into scope of the UK’s Financial Services & Markets Act 2000 (FSMA) and its authorisation regime in relation to regulated activities once the new regime goes live.
Firms must effectively navigate this regulatory next step, as failure to hold FCA authorisation for these new regulated activities where required, or otherwise benefit from a statutory exemption, is a criminal offence.
The draft legislation proposes broad definitions for cryptoassets subject to regulation, albeit with certain carve outs:
The FCA will be required to implement an authorisation regime with rules and guidance for firms carrying on the following types of activities in relation to cryptoassets:
A question that requires careful consideration. Firms need to review operations in context of those regulated activities set out above. The intended regime has a broad geographical reach too –those who offer services to UK customers may well be caught, even if based overseas.
Certain exemptions or carve-outs are suggested for some activities, which may help firms – for example:
Given the importance of getting it right, firms should fully consider their position before assuming an exemption is appropriate.
Windows for feedback on the draft legislation and FCA discussion paper have recently closed. It's wise for firms to start familiarising with the content and how its activities and operations are likely to be impacted. The FCA maintains a useful cryptoasset roadmap here setting out some key timeframes too.
Firms in the space will be used to navigating a changing regulatory environment, given how the cryptoasset sector has matured in recent years.
It’s critical firms familarise with the content of the draft cryptoasset legislation, FCA discussion paper and related materials in the FCA's cryptoasset road map, and carefully consider how they intend to approach this regulatory levelling up in the UK.
Bringing cryptoassets and stablecoins into scope of the UK’s regulated activities regime is a significant step up though, shifting gear from focused risks linked to anti money laundering and financial promotions, to cover much broader aspects, for example the new regime will likely include:
It's anticipated the new regulatory regime will 'go live' in 2026 if all goes to plan. This involving a transitional application window for impacted firms, to engage the FCA to secure authorisation for relevant regulated activities – or – if such authorisation is not secured, to implement an effective plan to either wind down activities or ensure operations within the UK satisfy regulatory requirements to operate compliantly.
Work is still needed to deliver this new regime, however those firms taking early steps to inform themselves of developments will be in a stronger position.
Our fintech team has experience advising different services providers in the cryptoasset space, please get in touch if you’d like to discuss these regulatory developments.
