Crypto firms must prepare for UK regulation change as FCA consults on new guidance

A consultation by the Financial Conduct Authority (FCA)  on its proposed  guidance for how the regulator will police the crypto asset sector closes next month. It comes ahead of new legislation extending the scope of the FCA’s regulatory remit in respect of certain crypto asset business activities.

The FCA’s guidance is aimed at businesses operating in the sector – from cryptoasset firms, including those overseas which provide services to UK consumers, and stablecoin issuers, to traditional financial services firms extending their activities to cryptoassets, intermediaries and service providers in the field – ahead of the perimeter of regulation being widened.

David Heffron, a financial services regulation expert with Pinsent Masons, said cryptoasset firms should use the opportunity now to assess whether they are in-scope.

“Once the guidance takes effect, the ‘we thought we were out-of-perimeter’ position becomes much harder to sustain,” he warned.

“The guidance means firms will not be able to merely rely on cryptoasset market labels such as ‘staking’, ‘custody’ or ‘platform’ to decide whether their activities are regulated. The FCA is explicit that what matters is the substance of a firm’s activities rather than how the services provided are described, which may also be used inconsistently across the sector.”

The guidance consultation clarifies the FCA’s interpretation of the specified investments and regulated activities introduced in the new cryptoassets regulations, with the aim of assisting businesses to understand whether they will fall within the FCA’s extended remit and, if so, which regulatory permissions they will need.  It provides guidance on how the activity of issuing stablecoins will interact with the new regulations, and who would require authorisation to carry out the activity; along with identifying the safeguarding requirements, and who is subject to them.

For operation of trading platforms, the proposed guidance clarifies when doing so may be carrying on the regulated activity of operating a qualifying cryptoasset trading platform, and when authorisation and regulatory permissions are required to do so. It also clarifies general requirements around dealing in cryptoassets and staking requirements.

“Firms should conduct a step-by-step approach, mapping their business model and actual activities to the legislative elements, to assess whether activities will fall within the new regulatory perimeter,” explained Heffron.

“While this regulatory expectation that firms need to apply to their business model will be familiar to many traditional regulated firms, it is likely to be more forensic than many crypto-native firms or ‘technology-stack’ firms expect.

“With the authorisation gateway opening this September - ahead of the cryptoasset regulatory regime going live in October 2027 - firms that start mapping their cryptoasset business model now can potentially reduce delays to any authorisation application required, as well as mitigating the risk of regulatory challenge and remediation.”

The proposed guidance also highlights requirements for custody and custody-adjacent models, particularly around the degree of control over the client’s cryptoassets. The explicit capture of arranging safeguarding as a regulated activity means firms should scrutinise more than just ‘who holds the keys’.

The regulator has made clear that, once these cryptoasset activities are regulated, carrying out such activity in breach of the new requirements will be a criminal offence which can carry an unlimited fine and a two-year jail sentence, meaning all businesses in the space need to be familiar with the new framework. The regulator also cautioned that, because government policy aims to modernise the payments framework, businesses involved with stablecoin activities should be aware that the regulatory perimeter may change further. The FCA will update its final guidance in light of legislative changes as necessary.

Sébastien Ferrière, a financial services regulation expert with Pinsent Masons, said the new regulations could mean more than just one particular aspect of a cryptoassets business would fall under their scope.

“Many business models won’t sit neatly in a single permission,” warned Ferrière.

“The FCA’s draft guidance makes clear that firms that act within cryptoasset trading chains - including exchanges, brokers and staking providers - may trigger a combination of activities.

“The authority will regulate ‘activity in the chain’, not firms’ labels, and firms should be particularly mindful of the permissions they will need under the new regime.”

The FCA consultation will close on 3 June.

Separately, the government has published draft legislation for amending the new cryptoasset regulations. There will be an ‘informal’ consultation period on this draft.

“The government wants to remedy issues for firms seeking to provide stablecoin payment services that are likely to be within the cryptoasset perimeter for dealing or arranging, and which it would prefer wasn’t the case,” Heffron said.

“Although firms can start to map their cryptoasset business activities now, they should be aware that legislation governing the FCA’s perimeter may change, and businesses involved with stablecoin activities should, as the FCA has already flagged, be particularly alive to this.”