UK: HM Treasury and FCA propose new regulatory regime for cryptoassets

Why should I read this?

HM Treasury (HMT) and the FCA propose legislative changes to the regulatory regime for cryptoassets in:

• HM Treasury policy note “Future financial services regulatory regime for cryptoassets (regulated activities)”
• Draft statutory instrument “The Financial Services and Markets Act 2000 (Regulated Activities and Miscellaneous Provisions) (Cryptoassets) Order 2025
• FCA discussion paper DP25/1 “Regulating Cryptoasset Activities”

In this briefing we discuss what this means for cryptoasset trading platforms, asset managers, investment funds and custodians.

HM Treasury policy note and draft SI

In April 2025, HMT published the draft Financial Services and Markets Act 2000 (Regulated Activities Miscellaneous Provisions) (Cryptoassets) Order 2005 and a policy note setting out the intended outcomes of the SI.  HMT has invited technical comments on the legal drafting, but not on the broader policy implications.

Regulatory perimeter

The draft SI establishes the concept of “qualifying cryptoassets”, which are cryptoassets that are fungible and transferable. This includes stablecoins, but excludes other forms of cryptoassets (including those that are already regulated as specified investments, including tokenised e-money and tokenised deposits).

The draft SI brings within the regulatory perimeter activities in relation to qualifying cryptoassets, including:

• Safeguarding qualifying cryptoassets
  • A new regulated activity of acting as custodian for qualifying cryptoassets and also for cryptoassets that are securities or contractually based specified investments (so that safeguarding the tokenised versions of such specified investments are also covered by this activity)
• Dealing in qualifying cryptoassets as principal
  • Covering cryptoasset lending and borrowing services
• Dealing in qualifying cryptoassets as agent
• Arranging deals in qualifying cryptoassets
• Issuing stablecoins
  • This brings the activities of offering, redeeming or maintaining the value of a stablecoin within the regulatory perimeter, but does not include accepting deposits for regulatory purposes
• Operating a qualifying cryptoasset trading platform
  • which will include the exchange of qualifying cryptoassets for other qualifying cryptoassets, money or e-money
• Qualifying cryptoasset staking

If such activities are undertaken on a “truly decentralised” basis such that no specific person is undertaking the activity by way of business, then it will not be regulated, although precisely where this line is to be drawn remains uncertain, as acknowledged in the FCA’s connected discussion paper.

Broadly, overseas or UK firms will fall within the regulatory perimeter by carrying out these activities when they deal with or provide services to UK retail customers.  There is an exception for firms issuing stablecoins, which will only need to be authorised in the UK if they issue from an establishment in the UK.

The overseas person exclusion (the exclusion from the regulatory perimeter which may apply to firms which have no permanent place of business in the UK in certain circumstances) will not be extended to cryptoasset activities.

Financial promotions

There financial promotions regime will be revised so that it explicitly covers the promotion of:

• safeguarding of qualifying cryptoassets and cryptoassets that are securities or contractually based specified investments
• operating a qualifying cryptoasset trading platform
• qualifying cryptoasset staking

Note that HMT considers that the other new cryptoasset activities are already covered by existing financial promotion rules.

The current temporary exception that allows cryptoasset firms to approve their own financial promotions if they are registered with the FCA under the money laundering regulations will cease to have effect.

Transition

The FCA will make a direction for an application period during which firms can make advance applications for authorisation at least 1 year before the new regime comes into force.  Firms which already carry out relevant cryptoasset activities, but have their applications for authorisation refused during this application period, will not be deemed to be in regulatory breach.  However, they will not be able to take on any new business and will need to wind down their activities within two years.

FCA discussion paper DP25/1

The FCA makes several policy proposals with regards to the rules that it will introduce to accompany the new regime introduced by the draft SI, relating to:

• qualifying cryptoasset trading platforms
  • which the FCA abbreviate to “CATP” in the discussion paper
• cryptoasset intermediaries
• cryptoasset lending and borrowing
• restricting the use of credit to purchase cryptoassets
• staking
• decentralised finance (DeFi)

Unlike HMT’s policy note, the FCA DP is quite discursive in nature and many of its proposals seek feedback and there appears to be scope for not insignificant changes to the proposals.

CATPs

The FCA proposes:

• to permit the to authorisation of CATPs operated through a branch of a non-UK firm, provided there is an authorised UK subsidiary, in order to accommodate offshore firms
• CATPs which permit retail access, algorithmic or automated trading and market making activity will be subject to additional obligations
• trading systems will need to operate on the basis of non-discretionary rules
• for CATPs to eliminate their conflicts of interest, or, if that is not possible, manage them
• to impose pre-trade and post-trade transparency requirements on CATPs

Cryptoasset intermediaries

The FCA seeking to regulate the conduct of intermediaries on the basis of the “same risk, same regulatory outcome” principle. Its proposals include the following (some of which are aligned with the recommendations from the November 2023 IOSCO Crypto and Digital Asset Final Report:

• firms executing client orders should implement procedures to ensure they do so promptly, fairly and expeditiously
• firms should, at a minimum, ensure functional separation between principal trading and client order execution operations
• prohibition of payment for order flow (PFOF) for cryptoasset intermediaries (so firms must not receive payment from third parties for the execution of client orders)
• pre-trade and post-trade transparency requirements
• consideration of how the existing COBS client categorisation and opt-up regime can apply in relation to crypto

Cryptoasset lending and borrowing

The FCA proposes restricting firms from offering cryptoasset borrowing and lending products to retail customers. However, it is seeking feedback on this and the discussion paper explores ways to reduce the risk sufficiently so as to make the products appropriate to retail customers, including:

• requiring firms offering cryptoasset borrowing to retail customers to be subject to aspects of the CONC sourcebook
• limiting by how much a cryptoasset borrowing firm can automatically top up a consumer’s collateral
• getting express consent from a consumer lender, stating that they understand that they are transferring ownership of their assets to the firm
• conducting appropriateness assessments of consumer’s knowledge and experience (similar to that in COBS) and providing a key features document outlining features and risks of the product
• restricting the use of firms’ own platform tokens for cryptoasset borrowing and lending and limiting retail customers to borrowing and lending qualifying stablecoins

Restricting the use of credit to purchase cryptoassets

The FCA is seeking views on whether to restrict firms from accepting credit card payments as a means for retail customers to buy cryptoassets.  Its initial expectation is that qualifying stablecoins issued by an FCA authorised stablecoin issuer would be exempt.

Staking

The FCA proposes to address concerns about:

• technological risks - by making firms liable for financial losses suffered by retail customers if it has inadequately assessed its technological and operational resilience
• lack of consumer understanding - by requiring firms to give retail customers a key features documents setting out key information on staking products and the associated risks
• safeguarding risks - by requiring firms to maintain separate wallets for each customers’ staked cryptoassets, segregating them from the firm’s and other customers’ cryptoassets

DeFi

“DeFi” is a market term used to refer to various financial services with a high degree of automation. “Truly decentralised activities” will not be covered by the new regulatory regime.  However, if DeFi involves the proposed regulated activities and there is a controlling person carrying on the activity, for instance if services involve an identifiable intermediary or an entity that has control over business operations and product features), this will be within the regulatory perimeter.

The FCA notes the dynamic nature of DeFi and in order to help firms understand their regulatory obligations the FCA will actively seek market views.

What should firms do?

• Firms which have involvement in digital assets or are contemplating future involvement should consider reviewing the draft legislation and FCA discussion paper
• The interaction between existing regulated activities and the new regulated activities relating to cryptoassets need particular scrutiny. There is some scope for uncertainty as to precisely what additional permissions firms which are already authorised will need if they deal with or offer services in respect of qualifying cryptoassets. There is scope for some confusion as to the interaction between the cryptoasset regime under money laundering legislation and that under FSMA and the regulated activities order (RAO)
• Given that in a number of areas the position of the FCA is not settled, there is likely to be significant value on engaging directly with the FCA’s proposals, especially for cryptoasset service providers who would benefit from fully explaining their products and business models to the FCA.

How Eversheds Sutherland can help

We offer specialised advice on the safekeeping of cryptoassets, exchanges, and compliance with international regulations. Our services include guidance on custody models and infrastructure for cryptoassets, as well as advice on legal and regulatory aspects, including AIFMD and UCITS Directives. We support investment managers, custodians, and token issuers with regulatory frameworks, and assist with security mechanisms and using cryptoassets as collateral. Additionally, we apply traditional custody principles to new technology models to safeguard business interests. Our cybersecurity team collaborates with our award-winning cryptoassets team to protect assets and mitigate cyber risks.