Preparing for the next phase of UK cryptoasset regulation

As cryptoassets (also known as ‘cryptocurrency’) continue to gain traction as legitimate financial instruments, attracting adoption by large banks and institutional investors, the UK is heading towards the implementation of a comprehensive regulatory framework. A key milestone in this transition is the recent publication in draft of The Financial Services and Markets Act 2000 (Regulated Activities and Miscellaneous Provisions) (Cryptoassets) Order 2025 (the Draft Order) at the end of April, which sets out how certain cryptoasset activities are to be brought within the scope of UK financial regulation.

The current regulatory landscape

The regulation of cryptoassets in the UK has been fragmented and limited in scope. Two key examples of this patchwork approach are:

AML regulation

Cryptoasset exchanges and custodian wallet providers have been required to register with the Financial Conduct Authority (FCA), but only for the purposes of complying with The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs). This does not extend to broader regulatory requirements under the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (FSMA), such as prudential capital standards or conduct of business rules. As a result, firms can operate high-risk business models without being subject to the same degree of regulatory supervision that applies to traditional financial services.

Unregulated tokens

Only cryptoassets that qualify as ‘specified investments’ fall within the scope of authorisation requirements under FSMA. This includes certain security tokens but excludes a plethora of commonly traded tokens such as Bitcoin, Ethereum and most non-fungible tokens. Consequently, trading platforms dealing in these cryptoassets could operate without being subject to certain regulatory safeguards, including rules on client-asset protection.

These examples illustrate how the lack of a comprehensive regulatory framework can leave firms and consumers exposed to significant risks.

Key provisions of the Draft Order

The Draft Order introduces new categories of specified investments and new specified activities, designed to bring cryptoassets within FSMA’s regulatory control.

Specified investments

• A ‘qualifying cryptoasset’ must be fungible and transferable, which includes qualifying stablecoins.
• A ‘qualifying stablecoin’ is a type of cryptocurrency that references one or more fiat currencies (a fiat currency is a national currency that is not tied to the price of any commodity such as gold or silver) and seeks to maintain a stable value by holding those fiat currencies as backing.
• A ‘specified investment cryptoasset’ is an asset that meets both the definition of a cryptoasset and a specified investment under FSMA. This includes tokenised equities (a tokenised equity is a digital token representing shares in a company) and bonds.

Specified activities

The Draft Order identities several key activities, including:

• Issuing a qualifying stablecoin. This activity is comprised of three components: offering, redeeming, and maintain the value of the qualifying stablecoin.
• Safeguarding qualifying cryptoassets and specified investment cryptoassets that are securities or contractually based investments. While the safeguarding of traditional specified investments is already regulated, the Draft Order aims to ensure that tokenised equivalents will be subject to the same degree of regulation.
• Operating a qualifying cryptoasset trading platform. This extends to include platforms which enable the exchange of qualifying cryptoassets, either for other qualifying cryptoassets or for money (including electronic money). According to the accompanying Policy Note, this is designed to draw a clear regulatory perimeter between activities associated with cryptoasset trading and activities connected to trading traditional securities, including those in tokenised form.

Other key takeaways

• Territory – firms conducting specified cryptoasset activities in the UK, dealing directly or indirectly with UK retail customers, must be authorised by the FCA. This narrows the overseas persons exemption, limiting its application to certain business-to-business contexts.
• Decentralised Finance (DeFi) – the Draft Order does not include special provisions for DeFi models. Instead, it leaves the FCA to determine on a case-by-case basis whether there is a sufficiently controlling party that ought to be required to seek authorisation in accordance with FSMA.
• Transition period – firms are to submit their applications for FCA authorisation during a window of at least 12 months ahead of the new regime taking effect. Firms that apply but fail to secure authorisation must cease new business and conduct an orderly wind-down. The FCA may shorten the wind-down period (which can last up to two years) where necessary.

Implications for consumers and firms

For consumers and investors, the Draft Order marks a step forward in consumer protection by strengthening regulatory safeguards and expanding the scope of compliance obligations for firms. If it succeeds in enhancing market integrity (for example, by reducing instances of fraud, misconduct and operational failures), this could boost consumer confidence in the market, and accelerate investment in, and the wider adoption of, cryptoassets in the UK.

In the short term, consumers may lose access to certain platforms if those providers fail to obtain FCA authorisation. However, this may be a reasonable trade-off if the result is a safer and more transparent market for consumers. The absence of specific provisions for DeFi also means that consumers engaging with decentralised protocols remain exposed to high risks and limited protection.

For firms that are UK-based or dealing with UK retail clients, the key takeaway is the need to obtain FCA authorisation once the Draft Order is approved. Unauthorised firms will have to submit their applications during the transition window to continue operating under the new regime. The expanded regulatory perimeter introduces a heightened compliance burden. This should prompt firms (including cryptoasset platforms, custodians and issuers) to review and overhaul their internal processes where necessary, to ensure compliance with their new obligations.

The Birketts view

For more detail, we recommend reading the full Draft Order and the accompanying Policy Note. As the UK moves towards a comprehensive regulatory framework for cryptoassets, firms and consumers alike should stay informed and prepare for the changes ahead.