On 30 October 2023, the government published three policy documents on cryptoassets regulation in the UK, covering fiat-backed stablecoins, the wider cryptoasset regulatory regime and the failure of systemic digital settlement asset (DSA) firms.

On the whole, the updates confirm the approaches previously proposed. However, much of the detail will only emerge in the next phase once secondary legislation and regulators’ rules have been published.

What is clear is that a UK regulatory regime for cryptoassets is taking longer to emerge than originally anticipated and looks certain to lag behind the EU (see our briefing on MiCA here). The papers give some indication on timing for when secondary legislation may be brought forward, however they are silent on when the government anticipates the new regimes to be in place. Although fiat-backed stablecoins are expected to be regulated sometime in 2024, wider regulation of cryptoassets is unlikely to start before mid-2025, or more realistically late 2025. The expected general election next year may also result in further delays.

Quick read

1.     Phase 1 – Fiat-backed stablecoin regulation: The government Stablecoins Update provides a clearer picture of the government’s intended approach to the regulation of fiat-backed stablecoins – phase 1 in the government’s plans for cryptoasset regulation.

The finalisation of the Financial Services and Markets Act 2023 (FSMA 2023) in June 2023 was the first step in the implementation of the new regime. FSMA 2023 contains measures which allow HM Treasury to bring activities relating to fiat-backed stablecoins within the financial services regulatory perimeter, as well as providing the Bank of England and the Payment Systems Regulator (PSR) with powers over systemic and recognised digital settlement asset payment systems and service providers.

This policy update provides further detail on the next stage of implementation, setting out the objectives of the proposed secondary legislation which the governments expects to bring forward ‘as soon as possible, and by early 2024, subject to available parliamentary time’. The secondary legislation will bring activities relating to fiat-backed stablecoins into the regulatory perimeter, enabling the FCA to regulate them. ‘Delineation between phase 1 and phase 2 activities’ below provides an overview of the government’s plans for this next stage of implementation.

2.     Final proposals for ‘phase 2’ – wider cryptoasset regulation in the UK: The government has published the outcome to its February 2023 consultation on the future financial services regulatory regime for cryptoassets. It has modified and clarified some of the original proposals in light of feedback. The original consultation covered, broadly, cryptoassets that are not stablecoins, e-money or already regulated by virtue of amounting to traditional financial instruments. See our briefing on the consultation here. See the key points from the government’s response below.

Given the government’s phased approach to cryptoasset regulation, phase 2 (broader cryptoasset) is unlikely to be in place until phase 1 (fiat-backed stablecoins) has been finalised. At this stage, the government has only stated its intention to lay phase 2 secondary legislation ‘in 2024, subject to parliamentary time’. The wider cryptoasset regulatory regime looks unlikely to be in place until mid/late-2025 at the earliest.

3.     Managing the failure of systemic DSA (including stablecoin) firms: The government has published its response following a consultation on managing the failure of systemic DSA (including stablecoin) firms in May 2022. The government intends ‘in due course’ to lay regulations to implement its approach to managing the failure of a systemic digital settlement asset (including stablecoin) firms by applying a modified Financial Market Infrastructure Special Administration Regime (FMI SAR) to such firms.

The government then intends to make the requisite insolvency rules, covering issues such as the transfer or return of customer funds and custody assets, to provide further clarity on the operation of the FMI SAR.


In more detail

Phase 2 – Future financial services regulatory regime for cryptoassets (non-stablecoin): government’s response to the consultation and call for evidence

Key points in the government’s response to the non-stablecoin consultation are highlighted below. The section ‘Delineation between phase 1 and phase 2 activities’ also provides an overview of the government’s plans for the phase 1 regulation of fiat-backed stablecoins set out in the Stablecoins Update.

Definition of cryptoassets: The government received a ‘high volume’ of feedback that the definition of cryptoassets in the consultation is too broad.  The government is keen to reassure industry regarding some specific examples raised in feedback, including in relation to NFTs (see below), asset-referenced tokens and algorithmic stablecoins. The precise legal mechanism for distinguishing between tokens that are in and out of scope will be set out in the relevant secondary legislation and FCA rules.

The government received a significant number of responses requesting further clarity on the proposed treatment of NFTs and utility tokens. The government clarifies that activities relating to truly unique or non-fungible NFTs that are more akin to digital collectibles or artwork than a financial service (in the general sense) or product should not be subject to financial services regulation. However, the government acknowledges that a range of tokens currently on the market are described as NFTs but perform other functions. When assessing whether a NFT falls within the future financial services regulatory regime, it matters less how the NFT describes itself. More important is whether the token is used for one of the regulated activities described in the consultation within financial services markets, or as a financial services instrument or product. In this way, an NFT which is used as an exchange token in practice could fall within the future financial services regime, but the sale of an in-game purchase structured as an NFT is less likely to do so.

The government expects utility tokens to be subject to a similar assessment as NFTs.

Cryptoasset portfolio management and investment advice: Although the government recognises concerns that its approach may create divergence from EU’s MiCA and from other jurisdictions, it still does not plan to bring portfolio management and the provision of investment advice on cryptoassets within the regulatory perimeter at this stage. This will be kept under review.

Mining and staking activities: Mining will not be a regulated activity at this stage.  However, as clarifying the future regulatory treatment of staking in the UK is a key priority for many stakeholders, the government has agreed to accelerate exploratory work in this area, including:

  • developing a definition of cryptoasset staking on a PoS blockchain and distinguishing this from other riskier activities which may be referred to, or marketed as ‘staking’;
  • establishing a taxonomy of the different PoS staking business models currently in the market; and
  • identifying how to mitigate the associated risks and take advantage of the potential benefits of a carefully defined, permitted form of staking in the UK.

The government agrees with stakeholders that the regulatory treatment for cryptoasset lending and staking should be differentiated.

Delineation between phase 1 and phase 2 activities: A common theme across the responses was that industry would appreciate greater clarity on the definitions of, and distinctions between, regulated stablecoins and cryptoassets more broadly.

  • Definition of fiat-backed stablecoins – HM Treasury intends that the category of fiat-backed stablecoins will be defined in legislation and capture those stablecoins which seek to maintain a stable value by reference to a fiat currency, and hold (in part or wholly) that currency as “backing”. The definition of fiat-backed stablecoin will not be limited to particular currencies or to single currency stablecoins – stablecoins which reference a basket of currencies will be in scope.
  • Regulation in two ways – the government intends to prioritise, in phase 1:
    • Issuance and custody – the creation of new FCA regulated activities under the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO) for the issuance and custody of fiat-backed stablecoins which are issued in the UK. The new custody activity will also apply to the custody of security tokens (currently subject to FCA CASS rules). The government envisages that the same custody framework will be extended and expanded to the broader perimeter of cryptoassets under phase 2.
    • Payment services – the regulation of payment services relating to certain fiat-backed stablecoins where used in a UK payment chain under the Payment Services Regulations 2017.
  • Stablecoins used in payments – Fiat-backed stablecoins issued in or from the UK by persons authorised for the RAO issuance activity will be permitted for use in UK payments The Stablecoins Update also explores how overseas stablecoins might be accommodated for use in UK payments for goods and services.
  • Next steps – When the phase 2 wider regime for the regulation of cryptoassets is in place, the regime set out in phase 1 will remain and will not be replaced. However, there will also be an expansion of the custody activity in the RAO to cover the custody of a wider category of cryptoassets coming into the regulatory perimeter, as well as the creation of new regulated activities such as “operating a cryptoasset trading venue” which will cover the buying and selling of cryptoassets using cryptoassets (including stablecoins) on an exchange.

Authorisation: Authorisation will not be automatically granted to firms registered under the Money Laundering Regulations 2017. The FCA will provide more detail on what the assessment will involve in due course and will also consider the regulatory histories of all applicant firms in those assessments. In line with the proposals previously set out, the expectation is for firms that have an existing authorisation under Part 4A of FSMA  to apply for a Variation of Permission, rather than having automatic permissions or exemptions to enable them to undertake newly regulated cryptoasset activities.

Location policy and overseas market access: The government has rejected calls to expand the scope of the overseas persons exclusion (OPE) to cover regulated activities relating to cryptoassets. This is a key policy decision, meaning that the territorial scope of cryptoasset regulation will be fundamentally different from mainstream investment services. The context of cryptoasset markets is not the same as those for traditional financial products to which the OPE already applies, and the government’s position is that firms dealing directly with UK retail consumers should be required to be authorised irrespective of where they are located. The government will instead work towards deference/equivalence type arrangements, noting that, in the period before these arrangements are in place, it will look to time-limited alternatives to facilitate access to international liquidity pools. The feedback statement also discusses the possibility of allowing UK firms operating regulated cryptoasset trading venues in overseas jurisdictions to be able to apply for authorisation for a UK branch extension of their overseas entity and notes that requirements on physical location would be determined by the FCA.

White papers: The government intends to take forward the approach proposed in the consultation, including the basis for the regime and trigger points. The government’s view is there should be disclosure documents in place for all cryptoassets which are made available for trading on a UK cryptoasset trading venue, including well-established tokens (i.e. those characterised by relatively high levels of liquidity and at least several years of trading history) as well as those which do not have a clearly identifiable issuer (eg Bitcoin). The issuance and disclosure regime for cryptoassets will be based on the Public Offers and Admissions to Trading Regime (POATR).

On liability, the government maintains the position that all firms required to publish cryptoasset disclosure documents should be liable for their accuracy. However, the government agrees that cryptoasset exchanges which choose to take responsibility for the disclosure documents, provided they have taken reasonable care to identify and describe the risks, should not be held liable for all types of consumer losses arising from events relating to that token. In addition, certain types of protected forward looking statements should be held to a different liability standard than historical, factual statements.

Custody: The use of self-hosted wallets is not expected to fall under the definition of ‘safeguarding’ or ‘safeguarding and administering’ but this will be kept under review. In terms of custody liability, the government confirms its intention to take forward a proportionate approach which would not impose full, uncapped liability on the custodian in the event of a malfunction or hack that was not within the custodian’s control.

As mentioned in ‘Delineation between phase 1 and phase 2 activities’ above, to address fundamental differences in the way that cryptoasset custody operates versus traditional custody arrangements, the custody of security tokens (i.e. tokens which meet the definition of existing specified investment) will no longer be regulated in the same way as other specified investments. As part of phase 1, custody of security tokens will fall within the same new regulated activity applicable to fiat-backed stablecoins (see Stablecoins Update).

Market abuse: The government sets out a modified approach towards market abuse obligations on cryptoasset exchanges, acknowledging the potential need for a staggered implementation for cross-venue data sharing obligations.

DeFi: HM Treasury recognises that it would be premature and ineffective for the UK to regulate DeFi activities at the moment. Instead, the government will support efforts at the international level through work at both the FSB and standard setting bodies to inform a future domestic framework. The government will also continue bilateral engagement with authorities in other jurisdictions and engage with industry to ensure that ‘cooperation and efforts on DeFi matters remains pertinent’.

Sustainability: Sustainability issues will be tackled through disclosures in the first instance. Through its involvement in existing international forums (eg IOSCO), the government will work on developing interoperable metrics to allow for meaningful comparisons. The government will also undertake further exploratory work on whether existing frameworks and indicators could be applied.


Clive Cunningham
Clive Cunningham
Partner, London
+44 20 7466 2278
Marina Reason
Marina Reason
Partner, London
+44 20 7466 2288
Kelesi Blundell
Kelesi Blundell
Partner, London
+44 20 7466 7477
Patricia Horton
Patricia Horton
Professional Support Lawyer, London
+44 20 7466 2789