Towards a Comprehensive Crypto Regulatory Regime for the UK: The Treasury Publishes a Draft Order, and the FCA Publishes a Discussion Paper on Cryptoasset Activities

Background

A newly issued draft order by HM Treasury (the “Draft Order”) on crypto assets proposes to bring the following activities within the regulatory perimeter of the UK Financial Conduct Authority (FCA):

1. Operating a cryptoasset trading platform;
2. Acting as an intermediary on regulated cryptoasset transactions;
3. Cryptoasset lending and borrowing;
4. The use of credit to purchase cryptoassets;
5. Staking; and
6. Decentralised Finance (DeFi).

The Draft Order is not final and the Treasury is seeking feedback until May 23, 2025. Until then, however, the Treasury has noted that it considers the Draft Order a ‘near-final’ version.

The Draft Order was soon followed by an FCA discussion paper published on  May 2, 2025 (the “Discussion Paper”), entitled “Regulating Cryptoasset Activities” seeking industry feedback on the proposed regulations. While the nature of FCA discussion papers is exploratory and non-binding, they are typically a key indicator of the regulator’s direction of travel. They also serve as an important way for industry stakeholders to engage with the regulator ahead of formalising the proposed regime. The Discussion Paper, a summary of which is set out below, covers both retail and wholesale aspects of the regime.

The UK aims to be a global hub for crypto innovation, but like many other jurisdictions, seeks to balance innovation with consumer protection, market integrity and financial stability. The rapidly evolving and disruptive nature of cryptoassets presents specific challenges for the FCA and other regulators. These challenges include the cross-border and fragmented nature of cryptoassets, the pseudonymity of wallets, the risks inherent in volatility and illiquidity, and the lack of an established financial market infrastructure.

What does the FCA’s Discussion Paper propose?

1)      Cryptoasset Trading Platforms¹

In general, the Discussion Paper proposes that an entity operating a trading platform for cryptoassets in the UK, or providing services to UK retail clients, will need to be authorised in the UK. On the other hand, a firm operating an offshore trading platform for cryptoassets that is only serving professional investors in the UK will not require authorisation.

The Discussion Paper considers the option for overseas firms to provide trading services to UK clients by establishing a UK branch. However, the existence of a UK branch may not, by itself, offer the FCA adequate supervisory powers for firms serving retail customers. In such cases, the FCA proposes that an international crypto firm should have both a UK branch (to handle trade execution and settlement activities) and a UK subsidiary (to handle client-facing functions, like customer onboarding and e-money issuances).

Trading platforms operating in the UK through a UK branch should expect to be subject to several requirements, including conduct of business, reporting and monitoring requirements, consumer duty requirements, disclosure, and market abuse requirements. Trading platforms operating in the UK through a UK entity should expect to be subject to a more onerous regime, including prudential capital requirements, systems and controls for operating the trading system, and relevant governance requirements.

The paper also discusses and seeks feedback on a number of issues concerning trading platforms and the risks associated with their activities, such as:

• direct trading by consumers,
• use of algorithmic and automated trading,
• market making,
• principal trading,
• issuance of cryptoassets,
• prefunding and offering trading lines to counterparties.

2)      Intermediation

The Treasury has proposed that intermediaries (such as brokers and wallet providers) should take all “sufficient steps to obtain the best possible order execution results for clients, such as being subject to best execution requirements”. Intermediaries should also make trading arrangements transparent to clients. Echoing this view in the Discussion Paper, the FCA proposes to apply the “Consumer Duty”² to cryptoasset intermediaries. This will require firms to act to deliver good outcomes for retail customers and help them make informed decisions.

In the Discussion Paper, the FCA notes that it is considering a requirement that any cryptoasset needs to be admitted to trading on at least one UK authorised trading platform before any intermediary can deal in such asset or arrange deals for UK retail customers in such asset.

Cryptoasset intermediaries will also be required to establish policies and procedures to execute orders for clients on the “best available terms”, and to execute all orders for UK consumers only by UK authorised execution venues. UK best execution, in this context, is defined in terms of “total consideration.” “Total consideration” represents the price of the cryptoasset and the costs involved in execution. The costs considered must include all expenses incurred by the client which are directly related to the execution of the order. These can include execution venue fees, gas fees, settlement fees and any other fees paid to third parties involved in executing the order.

On the wholesale regime, consistent with its approach for traditional financial assets, the FCA proposes that firms should not be required to comply with best execution obligations when dealing with eligible counterparties (such as investment firms, credit institutions, pension funds, insurance companies, etc.). In the case of professional clients, the FCA states that best execution may apply depending on the circumstances of a transaction, however, further details are yet to be elaborated by the FCA on this.

The FCA's general expectation is that firms must show they are managing conflicts of interest appropriately within their specific business models as they seek authorisation and as part of ongoing supervision. The FCA intends to explicitly prohibit a firm from receiving payment, remuneration, or commission from third parties (including those to which it directs orders for execution) in relation to the execution of client orders.

3)      Cryptoasset Lending³ and Borrowing⁴

Cryptoasset lending and borrowing have been marked in the past by the lack of prudential controls and consumer protection regulations. This resulted in firms and consumers suffering widespread losses when the crypto market experienced a downturn in 2022, leading to the insolvency of some of the larger firms in this space.

Given the potential risks to consumers from current cryptoasset lending and borrowing models, the FCA does not consider crypto lending and borrowing to be suitable for retail consumers in their existing forms. The FCA discusses risk mitigating measures and it explores whether it can feasibly apply aspects of the CONC Sourcebook or Consumer Duty to protect retail consumers from cryptoasset borrowing and lending products (e.g. the requirement to conduct creditworthiness assessments and provide appropriate forbearance to consumers in or approaching arrears or default).

On the wholesale side, the FCA recognises that institutional clients are better equipped to understand the risks and complexities of the products. Accordingly, the FCA does not propose to restrict institutional access to cryptoasset lending and borrowing products. This includes where a lender is facilitating lending and borrowing between different institutional (non-retail) clients.

4)      The Use of Credit to Purchase Cryptoassets

The FCA explores whether it would be appropriate to restrict firms from extending credit to consumers to buy cryptoassets. The FCA is considering a range of restrictions, including restricting the use of credit cards to directly buy cryptoassets, and using a credit line provided by an e-money firm to do so. The FCA’s initial expectation is that qualifying stablecoins issued by an FCA-authorised stablecoin issuer would be exempt from potential restrictions, and firms would not be restricted from offering credit options for the purchase of these qualifying stablecoins.

5)      Staking⁵

Similar to the use of credit to purchase cryptoassets, the FCA’s Discussion Paper approaches staking through the prism of protecting retail customers.

The FCA recognises that there are certain technological and third-party dependency risks in staking as an activity. The FCA expects firms to be liable for financial losses suffered by retail consumers where the firm has inadequately assessed its technological and operational resilience, including third-party dependencies. Under the FCA’s proposal, firms must implement robust arrangements to ensure they hold sufficient capital to absorb such losses, such as those caused by slashing.⁶

The FCA is concerned by the lack of consumer understanding around staking and proposes that firms must get retail consumers’ express consent on matters such as the amount of staked cryptoassets, conditions for payment, repayment, the return of cryptoassets, timing, and fee arrangements, before the firm stakes their cryptoassets. In addition, the FCA expects firms to give retail consumers key information on staking products and the associated risks in a key features document.

To address safeguarding risk, the FCA proposes that firms will need to maintain separate wallets for consumers’ staked cryptoassets, distinct from the firm’s and other consumers’ cryptoassets. They will also need to maintain accurate records of staked cryptoassets at all times and must conduct regular reconciliations of staked cryptoassets.

The FCA expects to issue a new consultation paper on conduct and firm standards that, among other things, will detail proposed requirements for custodians segregating consumers’ cryptoassets from proprietary assets by recording ownership and wallet labelling.

6)      Decentralised Finance (DeFi)

The term “decentralised finance” or “DeFi” refers to the replication of traditional finance functions and systems through the use of blockchain-based smart contracts that are composable, interoperable, and open source.  DeFi purports to allow for transactions and operations without the need for traditional intermediaries, like banks or brokers.

In line with the Treasury’s Draft Order, DeFi activities are not covered by the regime where they are truly decentralised (i.e. in absence of a clear controlling person(s) carrying on an activity). When DeFi involves the proposed regulated activities, and where there is a clear controlling person(s) carrying on an activity, then these activities will be covered by the FCA’s proposed regulatory regime — for example, services that involve an identifiable intermediary or entity that has control over business operations and product features will be subject to regulation.

To achieve the same regulatory outcomes for the same activity, the FCA proposes that the same set of requirements generally outlined above (paragraphs 1 to 5) will apply to DeFi activities where an identifiable intermediary or entity that has control over business operations and product features.

Next Steps

The FCA’s Discussion Paper and the Treasury’s Draft Order on regulating cryptoasset activities together mark a significant step towards a comprehensive crypto regulatory framework in the UK. By addressing key areas such as trading platforms, intermediation, lending and borrowing, the use of credit, staking, and DeFi, the FCA aims to foster innovation and competitiveness while ensuring a safe and secure environment for consumers and investors.

Industry feedback will be crucial in shaping future policy. Accordingly, crypto market participants should consider providing detailed, evidence-based feedback on the Discussion Paper that supports their preferred policy positions.

The deadline for comments on the Discussion Paper is June 13, 2025.

The deadline for technical input on the Draft Order is May 23, 2025.