UK Crypto Regulation: Key Takeaways from Hogan Lovells Roundtable

• FCA Consultation Papers: CP 25/40, CP 25/41, and CP 25/42 form the basis of the new regulations, covering activity, admissions, disclosures, market abuse, and prudential regimes (Hogan Lovells roundtable).
• Statutory Instrument (SI): The SI is now in its final form and has been laid before Parliament, indicating the imminent formalization of parts of the framework (Hogan Lovells roundtable).
• Transparency Threshold: Cryptoasset intermediaries with annual revenues of £10 million or more are mandated to provide pre- and post-trade transparency (Hogan Lovells roundtable).
• Staking Liability Shift: The FCA has removed the prior proposal requiring firms to compensate retail clients for losses from preventable operational or technological failures in staking services (Hogan Lovells roundtable).

The UK’s approach, as elucidated by the Hogan Lovells discussion, aims for comprehensive oversight, moving past initial debates on whether to regulate to focus on the ‘how’. The requirement for Cryptoasset Trading Platforms (CATPs) to operate through a UK legal entity or an FCA-authorised branch/subsidiary for retail clients highlights a commitment to local jurisdiction. This could preserve access for overseas platforms, but the specifics around prudential requirements and the operational burden on these UK entities remain points of contention. Crucially, the removal of the overseas person exclusion signals a tightening of territorial scope, aiming to prevent regulatory arbitrage.

Participants voiced concerns that stringent ‘best execution’ standards, mandating intermediaries to source prices from at least three UK-qualifying venues, could lead to suboptimal pricing for UK consumers compared to global markets. This, coupled with restrictions on executing retail orders only on UK-admitted cryptoassets, risks limiting choice and potentially driving consumers towards unregulated alternatives. The recent finalisation of the UK’s secondary legislation for cryptoassets further cements these requirements, with the Financial Services and Markets Act 2023 providing the legislative backbone for the FCA’s expanded powers.

While the FCA’s shift towards allowing retail participation in lending and borrowing services was broadly welcomed, the market consensus suggests that certain aspects of the framework could stifle innovation and competitiveness. The “cold start” issue for intermediaries unable to find three UK quotes, or the potential for a conservative listing environment due to burdensome disclosure requirements, could inadvertently reduce market depth and choice for UK investors. Furthermore, the arbitrary nature of the £10 million revenue threshold for transparency and surveillance obligations drew criticism, with some arguing it’s too high for consumer protection on smaller platforms, and others too low for nascent firms.

The market abuse regime, while extending familiar concepts, faces unique challenges in decentralised environments. Identifying ‘inside information’ and ‘insiders’ in issuer-less projects is inherently complex, and the perceived shift of a quasi-regulatory role onto CATPs, without commensurate tools or visibility for off-platform activity, could create an uneven playing field. The FCA’s broader approach to cryptoasset regulation, as outlined in its previous consultations, aims for robust consumer protection, yet the practical implications for firms operating globally or within decentralised structures remain a significant hurdle.

I will be closely monitoring the FCA’s forthcoming guidance, particularly around the prudential requirements for UK branches/subsidiaries and the specifics of “substituted compliance” for firms operating under equivalent overseas regimes. Clarity on what constitutes “substance” for UK entities and the practical implementation of cross-platform information sharing for market abuse detection will be critical. Furthermore, the FCA’s separate consultation on applying the Consumer Duty to the new crypto regime will reveal how distinct crypto will be treated from other asset classes.

The development of industry-led solutions for market abuse oversight, endorsed by the FCA, could offer a more workable path forward, especially concerning international information sharing. The Bank of England’s recent work on stablecoin regulation also signals the broader regulatory push, which will invariably interact with these new frameworks.