UK FCA sets the tone for crypto regulation

The UK Financial Conduct Authority (FCA) has released Discussion Paper 25/1, offering a glimpse at how it plans to regulate crypto-assets following the Treasury’s proposed expansion of the financial services perimeter. Together, these developments mark a positive step forward in the UK's journey toward a comprehensive regulatory framework for crypto-assets.

The discussion paper is 83 pages long and wide-ranging, but its key focus is on five core activities: trading, intermediation, staking, lending and borrowing, and decentralised finance (DeFi). Feedback is open until 13 June 2025, with a more detailed consultation paper and draft rules to follow.

Trading - crypto-asset trading platforms (CATPs)

The proposals signal that crypto will be subject to a comprehensive regulatory regime that is modelled on traditional financial markets, but is said to be tailored to crypto’s unique structures and risks. This is clear in the proposed treatment of trading venues. The FCA is proposing to regulate cryptoasset trading platforms (CATPs) under a regime similar to multilateral trading facilities, with clear lines between market operators and token issuers, and transparency rules reflecting the direct access many retail clients have to these venues. Notably, the FCA expects that overseas platforms serving any UK retail users will establish both a UK branch and a UK-authorised entity.

Intermediaries

Intermediaries like brokers, dealers, and arrangers will face a more conventional regulatory framework, including best execution, transparency, and conduct standards. Firms will also be caught by the "Consumer Duty", meaning they must deliver good outcomes for retail customers and support informed decision-making, which raises (or perhaps formally implements) the bar for disclosure, onboarding, and risk management.

Lending and borrowing

One of the more headline-grabbing proposals is the FCA’s position on lending and borrowing of cryptoassets. These arrangements will become regulated, but the FCA is proposing to limit participation to institutional clients only (at least for now) on the basis of consumer protection concerns. Margin calls, insolvency risks, and unrealistic yield expectations have all led the regulator to conclude that these products are generally unsuitable for retail users. However, the door remains open to models involving lower risks, such as limited retail access to stablecoin lending, or arrangements supported by credit assessments or capital buffers.

Staking

Staking will also come within scope where it is offered through an intermediary. Here, the FCA is focusing on risks tied to operational resilience, transparency, and the safeguarding of staked assets, particularly given the bespoke nature of many staking arrangements and their dependence on third-party validators. The regulator is clearly concerned about how risk is allocated when things go wrong, and it is seeking feedback on how best to ensure intermediaries are both accountable and capable of meeting their obligations.

Decentralised finance (DeFi)

DeFi, however, remains an uncertain frontier with the discussion paper only briefly covering the topic (only two pages compared to the other headline items which were each at least 8 pages). The FCA reiterates the Treasury’s position that DeFi will be regulated only where identifiable persons exercise control over the service or protocol in question, following a similar approach by IOSCO. The key challenge (which is left open for now) is how "control" should be defined and assessed in practice. To support this work, the FCA plans to convene a new stakeholder forum to explore the complexities of governance, autonomy, and liability in decentralised ecosystems.

Conclusion

In tone and substance, DP25/1 suggests the UK is moving towards a sophisticated and integrated regulatory framework, being one that embraces crypto’s potential but insists on high standards and institutional-grade infrastructure. While there is room for innovation, firms hoping for regulatory arbitrage or light-touch oversight will be disappointed as this approach embraces crypto, but only if it becomes more like tradfi approach.

Written by Steven Pettigrove and Luke Higgins with Michael Bacina