The UK's Financial Conduct Authority has proposed integrating crypto firms into its existing regulatory framework, aiming for final rules by 2026, signaling increased compliance for the sector.

Executive Summary

The Financial Conduct Authority (FCA) has released a consultation paper detailing proposals to incorporate crypto firms into its established regulatory framework, with a target for final rules by 2026. The move signifies a shift towards comprehensive oversight, adapting existing financial rules to the unique characteristics of the digital asset market rather than wholesale adoption. This framework will encompass operational resilience, senior management accountability, robust systems and controls, and enhanced financial crime safeguards, applying proportionate standards. The FCA is also seeking feedback on extending its Consumer Duty and allowing crypto-related complaints to be escalated to the Financial Ombudsman Service (FOS).

The Event in Detail

The FCA's CP25/25 outlines an approach that adapts, rather than copies, existing Handbook rules for the UK crypto sector. The proposals intend to apply governance standards, personal accountability regimes, and firm-wide compliance cultures. Key areas of focus include Senior Management Arrangements, Systems and Controls (SYSC) Sourcebook, covering governance, the Senior Managers and Certification Regime, financial crime prevention, and operational resilience. While the guiding principle is "same risk, same regulatory outcome," the FCA acknowledges that crypto's technology and business models necessitate adjustments. For instance, operational resilience requirements, including cyber-attack and outage safeguards, will apply in full. However, crypto firms may face standards akin to consumer credit providers, reflecting their perceived lower systemic risk compared to banks. The consultation specifically seeks views on applying the Consumer Duty, which mandates firms deliver good customer outcomes, to crypto markets, and allowing consumers to direct complaints to the FOS. Individuals and firms conducting regulated cryptoasset activities will require authorization before operating in the UK.

Market Implications

Short-term, UK crypto firms anticipate heightened scrutiny and increased compliance costs as they prepare for the new regulatory environment. Long-term, this structured approach is expected to foster a more mature and trusted UK crypto market, potentially attracting greater institutional investment and stimulating innovation within a regulated ecosystem. The FCA's objective is to develop a competitive and sustainable cryptoasset sector that promotes innovation while upholding market integrity and consumer protection. By strengthening requirements for operational resilience and crime prevention, the proposals aim to build trust and improve consumer protection from poor operational practices. This regulatory clarity could also position the UK as a leading digital asset and innovation hub.

Expert Commentary

David Geale, the FCA's executive director for payments and digital finance, indicated that a "copy and paste" regulatory model is unsuitable for digital assets due to their distinct nature from mainstream financial services. Instead, the FCA aims to design a framework that accommodates the unique aspects of blockchain and crypto markets, easing certain requirements while intensifying oversight in high-risk areas like cybersecurity. Cassie Craddock, managing director of UK & Europe at Ripple, commented on the planned collaboration between the US and UK on cryptocurrency oversight, stating it "has the potential to set a template for international cooperation in our industry," suggesting it could unlock economic potential in both countries.

Broader Context

The FCA's proposals emerge amidst increasing international collaboration on cryptocurrency oversight. The US and the UK plan to deepen their cooperation, with discussions involving stablecoins and tokenization. This bilateral initiative, intended to strengthen collaboration on advanced technologies, underscores a global push to integrate digital assets into existing financial frameworks while preventing regulatory arbitrage. The UK's comprehensive regulatory roadmap, culminating in final rules by 2026, aims to keep pace with rapid technological changes and establish the nation as a leading hub for digital finance, ensuring oversight evolves without stifling industry growth. This aligns with broader efforts by international bodies, such as the Basel Committee on Banking Supervision (BCBS), which is also reviewing its approach to banks' exposures to cryptoassets, highlighting a worldwide movement towards harmonized crypto regulation.