UK publishes draft crypto legislation

The UK has taken a decisive step in seeking to take the lead in digital assets, with Finance Minister Rachel Reeves unveiling draft legislation that will bring crypto firms under compulsory financial regulation.

The draft rules would extend existing financial regulations to include crypto exchanges, dealers, and agents. In doing so, Britain intends to bring crypto into the existing financial services framework - treating crypto assets like traditional securities - rather than adopting the EU’s bespoke framework under MiCA which was formally ratified on 20 April 2023. This marks a departure from the rest of europe and from the US, where lawsuits and investigations alleging that crypto assets are securities have been on the way out.

This shift means UK-facing crypto firms will be required to meet differing standards to other countries for the following key areas:

• Transparency

• Consumer protection

• Operational resilience

Rachel Reeves, Chancellor of the Exchequer revealed the news during her speech at UK Fintech Week. The Chancellor framed the new rules as a clear message that the UK is open for (crypto) business:

Through our Plan for Change, we are making Britain the best place in the world to innovate — and the safest place for consumers. Robust rules around crypto will boost investor confidence, support the growth of Fintech and protect people across the UK.

Critically, this legislation sets the tone for Britain’s policy direction. Reeves confirmed that discussions with the US Treasury are ongoing, with further bilateral talks scheduled for June via the UK–US Financial Regulatory Working Group. The two countries are also exploring a “transatlantic sandbox” for digital securities, an idea pushed by SEC Commissioner Hester Peirce. This could create a regulatory bridge between the two jursidictions for compliance.

The UK government aims to finalise the legislation by the end of 2025, following consultation with industry. It forms part of a broader push to grow and modernise the UK’s financial services sector, with Reeves promising further detail in her 15 July Mansion House speech, where she’ll unveil the country’s first 'Financial Services Growth and Competitiveness Strategy'.

While some in the industry have expressed frustration over the UK’s regulatory pace and challenging funding environment, the release of draft legislation potentially marks a turning point. With entrepreneurs and investors increasingly looking toward more innovation-friendly jurisdictions like the US, Singapore, and the UAE, clear and well-calibrated regulation is critical if the UK is to remain globally competitive.

The draft legislation is open for public comment until 23 May. Early observers have commented on potential challenges in relation to domestic stablecoins, accessing global liquidity and operational challenges imposed by bringing crypto under a securities framework where issuers may not provide disclosure that UK rules may now impose. Many of the definitions are extremely broad and permission is required for businesses which merely have UK based retail customers (directly or indirectly) meaning many global crypto players will have to block the UK if they do not have permission to operate (or are not going through an authorised intermediary) when this framework comes into effect. Stablecoins issued outside the UK are not proposed to be caught, however, if UK retail holders acquire those stablecoins.

By bringing crypto under the purview of financial regulation and setting expectations for transparency, consumer protection and operational resilience, the UK will set clearer guidelines for businesses to reach certainty around operating, at least for crypto assets which are securities, and has a possible opportunity to attract much-needed investment and signal to the world that it is serious about becoming a crypto hub. The danger it faces in treating all crypto as securities is that securities may rush into being treated in a similar manner if a regulatory arbitrage opportunity presents itself. The order presently seeks to ringfence crypto from traditional securities but this fence will likely come under pressure almost immediately. If the details in this approach develop to give consumers / investors access to the products they are plainly seeking, without onerous requirements for listings, then the UK may yet walk a fine line and show a path for other jurisdictions to follow.

Written by Steven Pettigrove and Luke Higgins with Michael Bacina