Regulating the Digital Frontier: UK Government Unveils Draft Cryptoasset Legislation

On 29th April 2025, HM Treasury published a draft statutory instrument: the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2025 (the “Draft Order”), proposing a broad extension of the UK’s financial services regulatory perimeter to bring a wide range of cryptoasset activities within scope. This marks a pivotal moment in the evolution of digital asset regulation in the UK and offers long-awaited clarity for both established and emerging market participants.

Legislative Context and Policy Direction

The Draft Order marks the first formal legislative step in implementing Phase 2 of the UK government’s proposed cryptoasset regulatory framework. It follows HM Treasury’s initial 2022 policy consultation and 2023 response, which outlined a phased approach - beginning with anti-money laundering oversight in Phase 1, and now expanding in Phase 2 to regulate a broader range of cryptoasset activities under the Financial Services and Markets Act 2000 (FSMA). The goal is to balance innovation with robust consumer and market protections.

The UK’s regulatory approach remains activity-based, meaning it regulates what financial services firms do, rather than the technology they use. The Draft Order brings key cryptoasset activities within the scope of FSMA by classifying them as regulated activities. This reflects the government’s broader principle of “same risk, same regulatory outcome” where crypto services that pose similar risks to traditional finance are subject to similar rules.

Scope of the Draft Order

The scope of the Draft Order is detailed in the statutory instrument itself and further clarified in the accompanying policy note published by HM Treasury. These documents collectively outline the categories of cryptoasset activities that will become regulated under FSMA, marking a notable expansion of the UK’s financial services framework.

The Draft Order introduces substantial amendments to the Regulated Activities Order (RAO), with the most material change being the formal classification of certain cryptoasset activities as regulated. These include:

• Operating a cryptoasset trading venue: similar to multilateral trading facilities (MTFs) or organised trading facilities (OTFs), this covers platforms enabling the buying and selling of cryptoassets between third parties.
• Cryptoasset custody: the safekeeping and administration of cryptoassets—or the private cryptographic keys that provide access to them—will become a regulated activity. This follows growing concerns over insolvency and fraud in the custody space.
• Cryptoasset dealing and arranging: captures firms that deal in cryptoassets as principal or agent, or arrange transactions. This brings brokers, aggregators, and other intermediaries into scope.

In addition to those expressly covered in the Draft Order, other activities may fall within scope through broader interpretation or future legislation, including:

• Cryptoasset lending: while not expressly included in the Draft Order, lending and staking may be regulated in future phases. Activities offering returns on pooled cryptoassets may already fall within scope under existing interpretations.

In defining the scope of these activities, the Draft Order adopts the statutory definition of a “cryptoasset” introduced by the Financial Services and Markets Act 2023: “a cryptographically secured digital representation of value or rights that can be transferred, stored, or traded electronically.” The use of this broad and technology-neutral definition ensures consistency across the UK’s regulatory framework. It does not distinguish between payment, investment, or utility tokens, reinforcing the government’s focus on regulating financial activities, rather than the form of the asset itself.

Territorial Reach and Extraterritorial Application

As outlined in the accompanying policy note, one of the most notable features of the proposed regime is its broad territorial scope. The Draft Order will apply to:

• UK-based firms conducting in-scope cryptoasset activities, and
• Overseas firms actively soliciting UK clients or marketing cryptoasset services into the UK.

The government has clarified that firms dealing directly or indirectly with UK consumers will need to be authorised in the UK. However, where the activity is conducted through a UK-authorised intermediary, such as a trading platform or dealer, direct authorisation may not be required for the overseas firm.

This approach is especially important given that cryptoasset services are typically offered online and across borders, making it easy for overseas firms to reach UK consumers without a physical presence.

Transitional Arrangements

To manage the impact of these changes on market participants, the government proposes a temporary authorisation regime for firms already registered with the Financial Conduct Authority (FCA) under the Money Laundering Regulations (MLRs). These firms will be permitted to continue operating while they seek full authorisation under the new FSMA-based framework. While not an official comparison, this transitional regime serves a similar function to the Temporary Permissions Regime introduced post-Brexit, in aiming to ensure market continuity.

Firms will have at least 12 months, from the date the FCA opens its application window, to submit their applications and continue operating during that time. However, firms not currently registered will not be eligible and should assess their position promptly to avoid operational disruption.

Interaction with Existing Regimes

Cryptoasset firms that are currently registered with the FCA for anti-money laundering (AML) purposes will not automatically be authorised under the new FSMA regime. The upcoming rules go much further than the existing AML framework, introducing tougher requirements around conduct, safeguarding client assets, financial stability, and disclosure.

Once authorised under FSMA, firms will no longer be required to maintain a separate registration under the MLRs. More detail on authorisation requirements is expected in forthcoming FCA consultations and updates to the FCA Handbook, which may require firms to significantly adapt their compliance systems.

Implications for Financial Services and Fintech Clients

The Draft Order presents both opportunity and challenge. While it provides a clearer legal framework for engaging with cryptoassets, it also introduces stricter regulatory obligations that could significantly impact business models, operational structures, and compliance processes.

Firms should consider the following key areas:

• Regulatory permissions: Review whether existing FCA permissions cover cryptoasset activities or whether new authorisations will be needed.
• Group structure: Businesses offering crypto services through separate entities may need to rethink how they manage risk, governance, and oversight across regulated and unregulated parts of the group.
• Marketing and client onboarding: Cross-border marketing could bring firms into UK regulatory scope, so international targeting and onboarding processes should be reviewed.
• Custody and trading models: Review how digital assets are stored, safeguarded, and traded in anticipation of FCA standards.

Key Takeaways

• The UK government has published draft legislation to bring key cryptoasset activities within the FSMA regulatory perimeter.
• New regulated activities include operating crypto trading platforms, custody services, dealing, and arranging cryptoasset transactions.
• The regime applies to both UK-based firms and overseas firms marketing to UK clients, with some exemptions where authorised intermediaries are involved.
• Firms registered with the FCA for AML purposes will need to seek full authorisation to continue operations under the new rules.
• A transitional regime will allow some firms to continue operating temporarily, but preparation should begin now.

The Draft Order is a clear indication that the UK intends to establish itself as a global leader in cryptoasset regulation—offering a structured, activity-based framework that aims to compete with international regimes such as the EU’s MiCA and the evolving US approach. By extending the FSMA regime to cover key crypto activities, the government is seeking to position the UK as both a safe environment for innovation and a credible destination for investment in digital finance. However, the success of this initiative will depend not just on the legislation itself, but on how effectively the FCA implements and enforces it. Achieving the right balance between fostering growth and maintaining strong oversight will be key to ensuring the UK’s long-term credibility and competitiveness in the digital asset space.