Crypto View - New UK Legislation

It's been a while since we've sent out a Crypto View, but today we have seen the publication of the Financial Services and Markets Act 2000 (Regulated Activities and Miscellaneous Provisions) (Cryptoassets) Order 2025 (Cryptoassets Order) which will introduce cryptoasset legislation in the UK, along with an accompanying Policy Note providing some commentary to aid interpretation of the legislation - so here is the rundown.

The publication of the Cryptoassets Order was trailed in a speech by the Chancellor at the Global Innovate Summit, where she said that the aim of the legislation is to deliver both for the government, but "most importantly for the industry", and to make the UK a "great place for digital asset companies to invest and innovate." Further, she discussed the prospect of international cooperation, in particular with the US, to ensure that the UK is a "world-leader in digital assets". So, does it deliver?

Background

We saw the intentions of HMT under the previous government in its response to the consultation on the Future Financial Services Regulatory Regime for Cryptoassets. The Cryptoassets Order implements the key points of that response with few surprises: "qualifying cryptoassets" are to be brought into the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO) as a specified investment, meaning that a number of activities will become regulated when carried out in relation to them; there is an amendment to the activity of safeguarding and administration when carried out in relation to crypto to remove the requirement for administration; there is a new regulated activity of operating a cryptoasset trading platform; a (general) requirement to be authorised to carry on cryptoasset activities with UK customers; and DeFi being out of scope (but more on that later).

We also now have the rules on stablecoins, following other separate publications and discussion papers.

However, there's a lot more detail now, and as ever, the devil is in that detail.

The Activities

As noted, the Cryptoasset Order introduces two brand new activities, as well as introducing new instances of existing activities that now apply to cryptoassets. It was originally suggested that the RAO would be amended so that existing activities would now apply to cryptoassets, but it seems that each activity relating to cryptoassets will have its own entry in the RAO. We look at the details of these below.

• Issuing qualifying stablecoin in the United Kingdom

As had previously been mentioned in the discussion paper on stablecoins, issuing a "qualifying stablecoin" in the UK will be a regulated activity. The definition of a "qualifying stablecoin" will be a qualifying cryptoasset that references a fiat currency and seeks or purports to maintain a stable value in relation to that referenced fiat currency, by the issuer holding, or arranging for the holding of fiat currency or fiat currency and other assets. This seems like a cross between an E-Money Token and an Asset-referenced Token under the Markets in Crypto-assets Regulation (MiCAR), though crucially this is not electronic money (the EMRs are amended by the Cryptoasset Order to confirm that "stored monetary value" includes neither stablecoins nor backing assets), and the suggestion that the stable value of a qualifying stablecoin has is based on either holding fiat or "fiat and other assets" suggests that a qualifying stablecoin cannot reference purely assets.

The activity of issuance is broad, with three components that could bring a firm within scope of the Cryptoasset Order:

1. Offering a stablecoin
2. Redeeming a stablecoin for fiat
3. Maintaining the value of the stablecoin.

However, the Cryptoasset Order does confirm that issuing does not include the creation (including the design), or the minting of a stablecoin (providing that it first exists as an identifiable asset on the blockchain and in a transferable form). Further, the Cryptoasset Order also confirms that an issuer receiving fiat for a stablecoin is not deemed to be accepting deposits.

The Cryptoasset Order also amends the CIS Order to confirm that stablecoin banking assets do not amount to a collective investment scheme.

As the activity only applies to the issuance of stablecoins in the UK, it would appear that there is no restriction on stablecoins issued elsewhere being traded or dealt with in the UK. There is no discussion of the any UK entities assessing overseas stablecoins as was raised in the FCA's DP 23/4.

• Operating a qualifying cryptoasset trading platform

A second new activity is the operation of a qualifying cryptoasset trading platform. A definition has been introduced that replicates that of a multilateral trading platform, as is currently in the RAO. It is defined as a system which brings together or facilitates the bringing together of multiple third-party buying and selling interests in qualifying cryptoassets in a way that results in a contract for the exchange of qualifying cryptoassets for money (including electronic money) or other qualifying cryptoassets. The Policy Note confirms that this is intended to ensure a clear perimeter between activities associated with cryptoasset trading, and those for the trading of traditional securities, including those in tokenised form.

• Safeguarding of qualifying cryptoassets and relevant specified investment cryptoassets

As noted, this has been amended from the existing RAO definition to remove the requirement for administration to be present. Interestingly, while the other activities that have been drafted relate only to qualifying cryptoassets, with specified investment cryptoassets still falling under the existing regime, safeguarding of cryptoassets also includes those cryptoassets which meet the definition of a security. The regulated activities are:

1. the safeguarding of qualifying cryptoassets or relevant specified investment cryptoassets on behalf of another; or
2. arranging for one or more other persons to carry on that activity.

There are some helpful points in the legislation for the industry, for example, cryptoassets held on behalf of another entity "temporarily and specifically for the purpose of settling trades" are excluded from "safeguarding" requirements. HMT recognises that this is necessary to give UK customers access to global markets. Further, the legislation provides for UK authorised custodians to sub-custody cryptoassets with group companies, providing the UK authorised custodian is contractually on the hook for the provision of the service, and has a responsibility in line with what would have been the case if it been safeguarding the cryptoasset itself. 

However, definition is otherwise extremely broad: "safeguarding" includes circumstances in which a firm has control of a cryptoasset through any means that would enable it to bring about a transfer of the benefit of the cryptoasset to another person (including itself). Further, "on behalf of another" includes where that other person has both legal and beneficial title, the beneficial title only, or a right against the firm for the return of a qualifying crypto asset. This would appear to bring into scope lending activities, as well as custodial staking, and potentially some DeFi activities as well.

• Dealing in qualifying cryptoassets as principal

This activity replicates the existing provision under art. 14 of the RAO, bringing under regulation the "buying, selling, subscribing for or underwriting qualifying cryptoassets as principal." Interestingly, the Policy Note states that the activity is drafted such that it is also intended to capture cryptoasset lending and borrowing services. Further, it will also capture the issuance of wrapped / liquid staking tokens to users. 

Some exclusions present in the RAO for traditional securities have been replicated though. In particular, a person will not be seen as carrying out this activity unless they:

• hold themselves out as willing, as principal, to buy, sell, subscribe for or underwrite qualifying cryptoassets of the kind to which the transaction relates at prices they determine, both generally and continuously rather than in respect of each particular transaction.
• hold themselves out as engaging in the business of buying qualifying cryptoassets of the kind to which the transaction relates, with a view to selling them; or
• regularly solicit members of the public with the purpose of inducing them, as principals or agents, to enter into transactions.

Further, it is not a regulated activity where the cryptoasset is bought, sold, or subscribed for no consideration, or in circumstances where cryptoassets are generated by Layer 1 protocols as a reward for the maintenance of a blockchain or the validation of transactions.

• Dealing in qualifying cryptoassets as agent

This is again a simple replication of the existing provision under art. 21 of the RAO. As with dealing, this wouldn't include where the cryptoasset is bought, sold, or subscribed for no consideration, or generated as a reward for the maintenance of a blockchain or the validation of transactions.

• Arranging deals in qualifying cryptoassets

This replicates art. 25 of the RAO, and includes:

• Making arrangements for another person (whether as principal or agent) to buy, sell, subscribe for or underwrite a qualifying cryptoasset is a specified kind of activity; and
• Making arrangements with a view to a person who participates in the arrangements buying, selling, subscribing for or underwriting qualifying cryptoassets falling within paragraph (1), whether as principal or agent, is also a specified kind of activity.

The Policy Note confirms that this is also intended to capture the operation of a cryptoasset lending platform.

However, this activity does not include arrangements where they are soley intended to introduce a person to an authorised person, or where a firm merely provides a means for two parties to communicate. There are also similar exemptions for staking as under the dealing activities above.

• Qualifying cryptoasset staking

Making arrangements for qualifying cryptoasset staking will be a regulated activity. Here, "qualifying cryptoasset staking" means the use of a qualifying cryptoasset in blockchain validation, with "blockchain validation" meaning the validation of transactions on a blockchain or a network that uses DLT (including proof of stake DLT consensus mechanisms). The Policy Note makes clear that this activity includes liquid staking, though the issuance of liquid staking tokens is covered by the dealing activity (as noted above), and therefore firms who are engaging in this activity will require both permissions.

There are exclusions for introducing customers to authorised firms who will carry on this activity, and for enabling parties to communicate.

Territoriality

Perhaps the most interesting part of the Cryptoasset Order is the confirmation that firms that are dealing directly or indirectly with a UK consumer will need to be authorised in the UK regardless of whether the firm is based in the UK or overseas when they:

• operate a qualifying cryptoasset trading platform;
• deal in qualifying cryptoassets as principal;
• deal in qualifying cryptoassets as agent; or
• arrange deals in qualifying cryptoassets.

However, overseas firms serving only UK institutional customers will not be required to be authorised (so long as those institutional clients are not acting as an intermediary for UK consumers). Where a firm is dealing with a UK consumer through an intermediary, they will not need to be authorised if there is an intermediary between them and the UK consumer that is a firm authorised to operate a qualifying cryptoasset trading platform or deal in qualifying cryptoassets as principal.

This seems to mean that unlike MiCAR, it may be possible to structure a broker model whereby a UK authorised firm enters into matched principal trades with an offshore venue, allowing for UK customers access to global liquidity sources, and large exchanges not having to split their liquidity to give UK customers a worse service.

Firms will need to be authorised in the UK if they are carrying out safeguarding or staking services in the UK or on behalf of a consumer in the UK, though where a firm carries out safeguarding at the direction of a person who is themselves authorised to carry on that activity, this can be done for overseas. Similarly, and as noted above, firms issuing qualifying stablecoins will only be required to be authorised if they are issuing a stablecoin from an establishment in the United Kingdom.

DeFi

DeFi is not covered in the Cryptoasset Order, with the Policy Note confirming that where activities are undertaken on a truly decentralized basis - i.e. "there is no person that could be seen to be undertaking the activity by way of business" -  with no sufficiently controlling party(ies) exerting control over the activities, there will be no requirement to seek authorisation for any activities. While this is helpful, in that it recognises that projects can be decentralised (in contrast to IOSCO principles), there is no recognition of the fact that many projects move from a quasi-centralised to decentralised model, and offers no relief during this period. Further, it will be left to the FCA to determine whether there is a "sufficiently controlling party or parties..." to assess if any party's control is enough to prevent the activities from being truly decentralised. I'm sure that will be universally accepted.

Financial Promotions

The Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (FPO), something most in the crypto world will be all too familiar with, is also being amended. There will be an update to the definition of "qualifying cryptoassets" to align with the Cryptoasset Order (these changes are largely cosmetic), as well as introducing the new definition of "qualifying stablecoin" - meaning that while e-money is not covered by the FPO, stablecoins will be.

The FPO will also be amended to include safeguarding of both qualifying cryptoassets and relevant specified investment cryptoassets as a controlled activity. This is a change from the current position where cryptoasset custody is not one of the cryptoasset services covered by the FPO.

In addition, the activities of operating a qualifying cryptoasset trading platform and qualifying cryptoasset staking will be included. HMT have stated that where new cryptoasset activities have not been added to the

FPO, this is because they are judged to be accounted for under the existing FPO controlled activities. Interestingly, it also notes that qualifying cryptoasset staking has only been added as a new activity for clarity, suggesting that some staking models are likely to have already been caught in the existing FPO controlled activities - though we are still not clear exactly which controlled activity this would fall under - a moot point following these amendments.

The Cryptoasset Order also removes the exemption for cryptoassets firms that are registered with the FCA under the MLRs to approve their own financial promotions. As the registration regime will fall away, this makes sense.

The MLRs

Speaking of the MLRs, HMT confirms that unlike currently, firms will not need to be dual authorised and registered, however, the existing requirements of the MLRs will continue to apply to these authorised firms in full.

Transition Period and Applications

The FCA will be required to set a period, not later than one year ahead of full commencement of the regime, where firms will be able to submit applications for authorisation (the Relevant Application Period), with the Relevant Application Period having to be at least 28 days, and with at least 28 days between the end of the Relevant Application Period and the full commencement of the regime.   

A transitional period of 2 years from the full commencement date of the regime will apply to firms who applied for authorisation during the Relevant Application Period and whose application has not been determined

There is a separate 2 year transitional period for firms who have their applications for permission for cryptoasset activities refused or who withdraw them, where they are able to continue operating, provided their activities are necessary and solely for fulfilling pre-existing contracts, in order to exercise an orderly wind-down.

Next steps

While HMT state that its policy approach is settled, it is open to technical changes (comments by 23 May).

As ever, we are more than happy to discuss any of the above in further detail. We'll get back to our normal service of Crypto Views going forward.