The United Kingdom has a rapidly evolving crypto market with growing consumer interest. Yet, despite increased adoption, many crypto businesses and investors remain uncertain about the rules governing this space. In this first part of our three-part series, we’ll clarify how UK regulators classify cryptoassets, the scope of current regulations, and where the landscape is heading.

1. Growth of the UK Crypto Market

• Rising Adoption: Recent data suggests that millions of UK adults now hold or trade cryptoassets. A significant portion treat it as a speculative investment, but an increasing number see it as a long-term portfolio component.
• Common Misconceptions: Although awareness is high, genuine understanding remains patchy. Many people erroneously assume all crypto exchanges or tokens are covered by the Financial Services Compensation Scheme (FSCS) or subject to strict regulatory oversight, which is often not the case.

2. Key UK Regulators and Their Roles

• Financial Conduct Authority (FCA): Currently oversees crypto firms primarily for anti-money laundering (AML) and counter-terrorist financing (CTF) compliance under the Money Laundering Regulations (MLRs). The FCA also enforces financial promotion rules for cryptoassets, including mandatory risk warnings and cooling-off periods for new investors.
• Bank of England: Monitors potential systemic risks. Has new powers over certain stablecoins (known as “Digital Settlement Assets”), which may be designated as systemic payment systems.
• HM Treasury: Shapes policy through consultations and legislative initiatives. The Financial Services and Markets Act 2023 (FSMA 2023) grants HM Treasury powers to bring more crypto activities under full regulation.

3. Cryptoasset Classifications

Under UK law, “cryptoasset” is a broad term. However, there are specific categories that determine the level of regulatory scrutiny:

• Security Tokens: Grant rights similar to shares or bonds (e.g., dividends, ownership). Already regulated as securities.
• Exchange Tokens (e.g. Bitcoin, Ethereum): Used primarily as a medium of exchange or for investment purposes. Not currently regulated as traditional financial instruments but still subject to AML rules if a firm handles them.
• Stablecoins: Pegged to traditional currencies or commodities. Some may fall under e-money regulations or the new stablecoin regime.
• Utility Tokens: Provide access to a product or service, typically unregulated unless structured like investments.
• NFTs (Non-Fungible Tokens): Usually unregulated unless they confer specific rights resembling regulated assets.

4. The Evolving Regulatory Framework

• MLR Registration: Any business exchanging or safeguarding cryptoassets for UK clients must register with the FCA. Failure to do so is a criminal offence.
• Financial Promotions and Advertising: The FCA now applies strict financial promotion rules to crypto. Firms must include prescribed risk warnings and avoid misleading claims.
• Future Developments: The UK government is progressing with “phase 2” reforms that could classify many crypto activities as regulated under FSMA. This would mean full FCA authorisation requirements, more akin to traditional financial services.

An understanding of how and why the FCA regulates certain crypto activities under the MLRs, along with emerging legislation, is crucial for any firm operating in the UK. In the next article, we’ll dive into the practical side of compliance—covering registration, best practices, and the journeys of successful FCA-registered crypto firms.

MEMA’s Tip:

If you’re unsure which category your crypto offering falls into, an early regulatory review can prevent costly missteps. Get in touch with us at MEMA Compliance for a tailored assessment.

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