Edmonds, Marshall, McMahon | Rhys Evans
United Kingdom
Why the FCA is moving towards full oversight
The crypto sector’s decentralised and unregulated operation has made it rife with illicit activity. UK crypto regulation is now being reshaped as The Financial Conduct Authority (FCA) looks to move from a light touch regulatory approach, concerning financial promotions and Anti-Money Laundering, to a full conduct, fully regulated infrastructure.
The FCA’s three recent consultation papers build on the draft ‘Financial Services and Markets Act 2000 (Cryptoassets) Regulations 2025‘, recently laid before Parliament, and are intended to come into force in 2027. This proposed legislative approach follows fears that the UK was falling behind the US and EU in crypto regulation and establishing a foothold as a global crypto hub.
What is being proposed? FCA crypto regulation proposals explained – authorisation, platforms and UK entities
The FCA’s consultation papers focus on cryptoasset trading platforms (CATPs) and form a central part of the UK’s proposed crypto regulation framework Such CATPs will be required to obtain authorisation from the FCA to conduct any operations within the UK.
It will now be a requirement that UK consumers, served by an authorised UK CATP, to have a relationship with a UK entity. Where it is necessary for a UK authorised branch of an overseas entity for the purpose of accessing a global liquidity pool, then it is possible for the UK entity to operate in connection with this authorised branch.
The consultation papers mark a distinct shift; CATPs are no longer to be regarded as neutral vendors, but as regulated gatekeepers with affirmative responsibilities to protect UK consumers. The FCA recognises that retail users have direct access to crypto trading venues (unlike traditional financial markets), which justifies enhanced platform level protections.
In particular, UK consumers will only be admitted to trading on UK authorised CATPs. The consultation paper also proposes pre-trade disclosure and risk signposting, aimed at bringing the risk of trading cryptoassets to the forefront of the consumer’s attention.
Additionally, ‘large’ CATP operators (those with more than £10mn in annual revenue in the last three reporting years) will be expected to monitor on-chain activity relating to market abuse and flag suspicious transfers. This stands as part of the wider admission and disclosure – as well as the market abuse – regimes.
How FCA crypto regulation could reduce fraud and scams
These proposals indicate a clear upshift in CATP obligations (and the associated liabilities that come with these), under the UK’s emerging crypto regulation regime, alongside significantly enhanced consumer protection.
Mandating a UK connected entity will no doubt improve efficiency in regulatory enforcement actions and litigation. This, in principle, resolves the issue of opaque corporate structures, often with parent companies domiciled in secrecy jurisdictions. Beyond identifying the appropriate UK entity, the process for affecting good service will be expedited, and bring these platforms firmly within the court’s jurisdiction.
Furthermore, enhanced record keeping obligations should result in more consistent, and more complete, information sharing – whether in the context of regulatory compliance or through court ordered disclosure. In the context of fraud and asset recovery, it presents itself as an aid in identifying the operators of fraudulent wallet addresses and, in turn, expands the viable legal remedies to pursue these individuals.
The present light touch regulatory approach adopted by the FCA places the burden on the individual consumer to protect their assets. This will now change, with much of the onus being placed on CATPs to safeguard consumers, identify, and prevent illicit activity and circumvent market-abusive transactions.
This shift in responsibility has the consequence of increased exposure to liability on the part of CATPs. Analogous to traditional financial systems, should CATPs fail to adhere to their regulatory obligations, which consequently results in loss or damage by one of its UK users, then there is the potential for liability to be pinned on the CATP for such losses. These obligations are likely to lower the threshold for establishing breaches of statutory duties.
This will be a welcome consequence for victims of crypto fraud, in particular. Whilst claims against CATPs for knowing receipt have been attempted, these have historically failed to get off the ground. In these circumstances, it is difficult to establish that the targeted CATP was on notice of the fraudulent transfer upon receipt. Should these safeguarding measures be implemented, suspicious transactions should be flagged, and so the CATP will have knowledge (actual or constructive) of the transfer.
At Edmonds Marshall McMahon, we are already factoring this regulatory change into our asset tracing strategies by flagging addresses holding stolen funds with fraud markers, so that when those assets are later transferred to reputable exchanges, those exchanges will be on notice that those assets are the proceeds of crime.
The future of crypto regulation in the UK – balancing innovation and enforcement
We consider that these proposals mark a significant development in UK crypto regulation, particularly in relation to consumer safeguards and exchange accountability. Fraudsters and criminals continue to become increasingly sophisticated, and it is a matter of when, not if, they find ways around these measures.
No doubt the legislation that does eventually come into force (should it receive royal ascent) will be modified to the current draft iteration. This is understandable as regulation of this nature must balance enhancing consumer protection and promoting innovation.
This article first appeared on Lexology | Source
