On 1st February 2023, His Majesty’s Treasury (“HMT”) published a comprehensive consultation paper (“Consultation Paper”) that sets out the UK Government’s (“Government”) intention to bring cryptoassets and cryptoasset related activities within the scope of the UK financial services regulatory regime, marking the next phase of the Government’s approach to regulating cryptoassets.

This is a significant development for the cryptoasset industry in the UK, including for non-UK firms that market their services to UK based customers on a cross border basis.

The proposals seek to deliver on the ambition to place the UK’s financial services sector at the forefront of cryptoasset technology and innovation and create the conditions for cryptoasset service providers to operate and grow in the UK, whilst managing potential consumer and stability risks. The Government’s view is that cryptoassets and the activities underpinning their use should follow the standards expected of other similar financial services activities, commensurate to the risks they pose, while harnessing potential benefits of the technology behind them. Having such a framework in place should stimulate growth and innovation in the sector by giving responsible actors the regulatory certainty and confidence to participate in cryptoasset markets, and investors the confidence to invest in the UK for the long-term.

The Government’s proposed measures build on existing regulatory developments such as the Financial Services and Markets Bill 2022 (“FS&M Bill”) and recent work on stablecoins and financial promotions.

HMT has asked for respondents to submit their responses to the Consultation Paper by 30th April 2023. We have summarised the key points from the Consultation Paper below.

  1. How will cryptoassets fall within the UK regulatory regime?

HMT intends to include the regulation of cryptoasset activities within the existing framework for regulation that applies to financial services firms. This will involve expanding the scope of the Financial Services and Markets Act 2000 (“FSMA”) to include “cryptoassets” as a new type of “specified investments” in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (“RAO”). The alternative approach of developing a fully bespoke regime outside of the FSMA framework was also considered by HMT, but discounted on the basis that this would not deliver a level playing field between crypto and traditional financial services firms conducting the same activity.

HMT has also reiterated that it has other powers and legislative options to regulate activities not suitable for regulation under the RAO, such as under the new Designated Activities Regime currently included in the FS&M Bill.

2. Which types of cryptoassets will fall within the new UK regulatory regime?

As stated in an earlier article, the FS&M Bill includes the following definition of “cryptoasset” for the UK’s financial services regulatory framework:

cryptoasset” means any cryptographically secured digital representation of value or contractual rights that—

(a) can be transferred, stored or traded electronically, and

(b) that uses technology supporting the recording or storage of data (which may include distributed ledger technology).”

The Consultation Paper does not specify the exact proposed definition of “crypto assets” that will be included in the RAO. However, HMT states that the future financial services regulation of cryptoassets will typically apply to a particular subset of cryptoassets depending on the matter being regulated, and will accordingly use a narrower definition to capture these. HMT has also confirmed that any of the following tokens may be within scope: exchange; utility; security; non-fungible; (fiat-backed) stablecoins; asset-referenced tokens; commodity-linked; crypto-backed; algorithmic; governance; and fan tokens. HMT has also set out specific regulatory proposals and approaches for several asset-referenced tokens, namely commodity-linked tokens, crypto-backed tokens, NFTs and utility tokens noting that they are likely to fall within the scope of the proposed changes.

3. Which types of activities will fall within the new UK regulatory regime?

The Government acknowledges that the cryptoasset ecosystem features a complex array of activities and business models, each generating different types of opportunities and risks. Taking this into account, the Government intends to create a number of new regulated or designated activities tailored to the cryptoasset market where these activities seek to mirror, or closely resemble, regulated activities performed in traditional financial services. The list of likely regulated activities relate to: issuance activities, payments activities, exchange activities, investment and risk management activities, lending, borrowing and leverage activities, custody (safeguarding and/or administration) activities and validation and governance.

The Consultation Paper also specifically states that vertically integrated business models, such as exchanges, should be ready to have various regimes applied to them.

4. What is the territorial scope of the new UK regulatory regime?

In terms of territorial scope, HMT has proposed to capture cryptoasset activities provided in or to the UK. This means the new regulatory regime would capture activities provided by:

  • UK based firms - to persons based in the UK or overseas; and
  • Non-UK firms - to UK based persons.

As such, the regulatory perimeter will be widened and, in particular, non-UK firms that provide regulated activities to UK based customers on a cross-border basis are likely to fall within the new UK regulatory regime. HMT noted that there may be certain exemptions available, such as reverse solicitation, however the scope of these exemptions will likely be defined in a way to prevent misuse and regulatory arbitrage. It is yet to be seen how the existing exemptions under FSMA and the RAO will apply and whether overseas firms can benefit from any of the existing exemptions in the RAO, such as the so-called overseas persons exemption.

5. Are there any plans for more information to be disclosed to investors?

Yes. The Government proposes to establish an “issuance and disclosures regime” for cryptoassets as part of the intended reform of the UK prospectus regime (the Public Offer and Admissions to Trading Regime). This will be tailored to the specific attributes of cryptoassets. The Government proposes to follow a similar approach to that for securities and apply regulation when the asset is admitted to trading on a regulated cryptoasset trading venue and becomes exchangeable for fiat currency, or subject to a public offer. In line with the approach applied to securities, HMT does not intend to directly regulate the “creation” of unbacked cryptoassets under financial services regulation.

For admission of cryptoassets to a UK cryptoasset trading venue (discussed further below), the Government is proposing to adapt the multilateral trading facility model from the intended reform of the UK prospectus regime. Interestingly where there is no issuer (e.g. Bitcoin), the trading venue would be required to take on the responsibilities of the issuer if they wish to admit the cryptoasset to trading.

6. How will the new UK regulatory regime impact cryptoasset trading venues?

The Government considers that many of the risks associated with cryptoasset trading are comparable to those of traditional exchanges, including operational disruptions and fraudulent or market abusive trading. However, the proliferation of cryptoasset trading venues across the globe has heightened challenges around monitoring trading venue activity and protecting consumers. As such the Government has set out its priorities and intended outcomes for these types of venues, which includes amongst other points, establishing orderly, open and resilient conditions for trading on cryptoasset exchanges, with transparent and fair access and operating rules. HMT is proposing to establish a regulatory framework which is based on existing RAO activities of regulated trading venues. Accordingly, persons carrying out these activities would be subject to prudential rules and various other requirements including consumer protection, operational resilience, and data reporting.

7. Will arranging cryptoasset transactions fall within the scope of the new UK regulatory regime?

The Government has confirmed its view that, as with traditional financial markets, cryptoasset intermediaries play an important role in the ecosystem. The activities of these market intermediaries have much in common with existing regulated activities such as “arranging deals in investments”, “making arrangements with a view to transactions in investments” and “dealing in investments as principal or agent”. As such, the Government proposes that requirements applying to analogous regulated activities should be used and adapted for cryptoasset market intermediation activities. These activities should therefore fall within the scope of the new UK regulatory regime.

8. How will the custody of cryptoassets be treated under the new UK regulatory regime?

The Consultation Paper states that custody represents one of the key aspects of the cryptoasset lifecycle in terms of providing investors access to, and safe storage of, their assets. As such, HMT proposes the application and adaptation of existing frameworks for traditional finance custodians under the RAO for cryptoasset custody activities, making suitable modifications to accommodate unique cryptoasset features, or putting in place new provisions where appropriate.

A key point to note is that this activity would be broader than the equivalent regulated activity that relates to investment business, as it would capture firms that only safeguard (but not administer) assets (e.g. firms that solely safeguard cryptographic private keys which provide access to cryptoassets). The Government considers these arrangements in the cryptoassets market to pose the same risks of harm as firms that safeguard and administer assets.

9. Will cryptoassets fall within the scope of the UK market abuse regime?

HMT believes that there is a strong case for including a market abuse regime in the proposed cryptoasset regulatory framework. As such, the Government is proposing a cryptoassets market abuse regime based on elements of the existing market abuse regime for financial instruments.

The offences relating to market abuse would apply to all persons committing market abuse on a cryptoasset that is requested to be admitted to trading on a UK trading venue. This will apply regardless of where the person is based or where the trading takes place. It would entail obligations for certain market participations, in particular cryptoasset trading venues who would be expected to detect, deter, and disrupt market abusive behaviour.

10. Are cryptoasset lending platforms within the scope of the new UK regulatory regime?

HMT notes that lending and borrowing makes up a significant amount of activity in the cryptoasset and DeFi market. Cryptoasset lending and borrowing activities conducted by lending platforms typically fall outside the current regulatory perimeter. Therefore, HMT believes there is a strong case for developing a cryptoasset lending and borrowing regime as a priority Phase 2 activity (see timing outlined below). This would be through the creation of a newly defined regulated activity – ‘operating a cryptoasset lending platform’. This should then ensure that lending platforms have:

  • adequate risk warnings for consumers lending to said platform (e.g. that the consumer could lose all their money, clarity on lack of FSCS protection);
  • adequate financial resources, capital, liquidity and wind down arrangements; and
  • lending platforms should have clear contractual terms on ownership and, if applicable,

ringfencing of retail funds in case of insolvency.

11. What are the authorisation/registration requirements?

Firms that are already authorised under FSMA for other regulated activities will need to apply to vary the scope of their permission to add the new cryptoasset related regulated activities.

Firms already registered with the FCA under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (“MLRs”) would be required to seek separate authorisation under the new FSMA-based regime.

New crypto firms not yet registered under the MLRs would not need to separately apply for registration under the MLRs.

In order to smooth this transition, the Government has said that the FCA should adopt a timely and proportionate authorisation process for complete and accurate applications, and should endeavour to avoid duplicative information requests of businesses, taking into account the supervisory history of businesses during the authorisation process.

12. Which FCA rules will apply?

The proposals would mean that the FCA’s general rule making powers would be available, allowing the FCA to design regulatory regimes for newly added cryptoasset related regulated activities. In practice this means that the FCA will be given powers to write tailored rules, as opposed to the existing rules automatically applying to cryptoassets. The FCA will need to consider what is appropriate and consult accordingly.

13. What is the proposed timing?

HMT has asked for respondents to submit their responses to the Consultation Paper by 30th April 2023.

HMT intends to pursue a phased approach to regulating cryptoassets, which is prioritised according to the areas of greatest risk and opportunity.

  • Phase 1 will focus on stablecoins and cryptoassets used for payments.
  • Phase 2 is then intended to introduce a regime to regulate broader cryptoasset activities, such as the trading of and investment in cryptoassets.

14. Is the Government seeking any views from the industry?

The Government has asked for views on the following:

  • Decentralised Finance (“DeFi”) - HMT has stated the potential challenges it foresees in regulating DeFi in the UK, which includes the speed at which DeFi evolves, its technical and structural complexity, and its borderless nature. HMT has noted that it does not intend to front-run the work of international organisations and would wait for and consider international approaches and standards. As a general point HMT is of the view that the regulatory outcomes and objectives described in the Consultation Paper should apply to cryptoasset activities regardless of the underlying technology, infrastructure, or governance mechanisms. However, due to the challenges outlined above, including the rapidly evolving nature of the sector, the way this is achieved may well differ and take longer to clarify. One option that HMT has proposed is to define a set of DeFi-specific activities – e.g. “establishing or operating a protocol” – as regulated activities under the RAO (or the Designated Activities Regime) and HMT asks respondents to consider the feasibility of this.
  • Other cryptoasset activity - this call for evidence relates to other ancillary cryptoasset activities, namely: (i) cryptoasset investment advice and portfolio management, (ii) post-trade activities in cryptoasset transactions (such as settlement and clearing); and (iii) crypto mining and validation. Generally, HMT asks respondents whether there is a case for the regulation of these activities, and specifically if staking (excluding “layer 1 staking”) should be considered alongside cryptoasset lending.
  • Sustainability - in their final call for evidence, HMT states that their concerns regarding the environmental impact of both Proof of Work (i.e. Bitcoin) and Proof of Stake (i.e. Ethereum) consensus mechanism, and proposed possibly applying similar ESG-related reporting requirements as proportionate method of achieving the “same risk, same regulatory outcome” principle. HMT asks respondents (i) what and how consumers should be provided with environmental impact information when investing; (ii) for methods to estimate such environmental impacts; (iii) how interoperable those methods would be with other recognised sustainability disclosure standards (e.g. those developed by the TCFD or ISSB); and (iv) if the proposals in the Consultation Paper will have a differential impact on groups protected by the Equality Act 2010.


The proposed regime is comprehensive and wide ranging, bringing a breadth and depth of regulation that cryptoasset service providers have long asked for but may struggle to comply with. All firms that provide services relating to cryptoassets in the UK, whether from a place of business in the UK or from overseas on a cross border basis, should seek legal advice and consider how the plans outlined in the HMT Consultation Paper relate to their business.