HMT Proposes FSMA-Based Cryptoasset Regulation: a new chapter under familiar rules

"Something old, something new”: this traditional wedding phrase mirrors HM Treasury’s approach to cryptoasset regulation. On 29 April, the HMT released draft rules proposing that cryptoassets be regulated under the Financial Services and Markets Act 2000 (FSMA), aligning cryptoassets oversight with familiar capital markets/investment rules. In doing so, the UK is not just writing new vows with its financial future, it is finalising the terms of its regulatory divorce from the EU, diverging further from the MiCA regime and charting its own post-Brexit course.

Here are six key takeaways from the consultation paper.

1. Expanded Definitions

Cryptoassets are already defined in the FSMA. However, the draft rules focus on bringing unregulated cryptoassets within the scope.

• Qualifying cryptoassets are fungible, transferable, and include qualifying stablecoins, which reference fiat currencies and are backed accordingly.

• Qualifying stablecoin: the draft clarifies the definition of qualifying stablecoin which is a stablecoin that references one or more fiat currencies and seeks to hold those fiat currencies or fiat currencies and other assets as backing assets to maintain a stable value.

• A specified investment cryptoassets is defined as something that meets both the FSMA definition of a “cryptoassets” and the FSMA definition of a specified investment (for instance an equity or a bond). The consultation paper takes the example of a token on a blockchain that represents an interest in or right to an equity.

2. New specified activities

• Stablecoin issuance becomes a specified activity, defined as anyone of offering, redeeming, or maintaining value. Undertaking any of those three independently from an establishment in the UK will bring the firm into the regulatory scope of stablecoin issuance.
• Safeguarding is added as a new regulated activity. Qualifying cryptoassets that are held on behalf of another temporarily and specifically for the purpose of settling trades are excluded from the definition of cryptoassets.
• Qualifying cryptoassets staking includes liquidity staking with the clarification that issuance of liquid staking is covered by dealing activity and a person engaging in such activity will require the necessary separate or additional permission.
• Dealing in qualifying cryptoassets as a principal or as an agent.
• Arranging deals in qualifying cryptoassets is a regulated activity and includes cryptoasset lending platform.
• Decentralised Finance is not addressed directly and specifically in the draft rules. However, firms must assess if they can be considered as a controlling party or ought to be subject to the requirement to be authorised in line with section 19 of FSMA.

3. What does it mean for existing firms registered with the FCA?

The firms fortunate enough to have been admitted to the MLR register will now face increased regulatory scrutiny and must reassess their business models against the new rules. Firms engaging in these activities will require FCA authorisation under FSMA. A transitional period will provide time to apply; after that, unauthorised firms must stop onboarding new clients and implement their wind-down plans. Even if a firm deregisters, obligations under the money laundering regulations will continue to apply if it is authorised under FSMA.

4. What does it mean for new market players looking to operate in the UK?

Firms seeking to operate in the UK should obtain FSMA authorisation and implement a robust financial crime framework tailored to cryptoasset risks.

Under the new regime, authorised firms will not require separate MLR registration, but MLR obligations as a FSMA-authorised firm will still apply.

5. What does it mean for overseas firms?

Overseas firms must assess their exposure under both financial promotions rules and the new authorisation regime.

Overseas firms serving UK retail clients, directly or indirectly, must be authorised. The term “indirectly” introduces broader scrutiny: even firms dealing only with UK institutional clients may require authorisation if those clients act as intermediaries to UK consumers. For example, this would be the case if they carry out a safeguarding activity on behalf of UK consumers. However, there is an exception for firms carrying on the safeguarding activity where they do so at the direction of a person who is themselves authorised to carry on that activity. For firms issuing qualifying stablecoins, authorisation is required only if the activity originates from a UK establishment.

6. Financial Promotions Change

The draft removes temporary provisions allowing MLR-registered crypto firms to approve their own financial promotions. Going forward, only FSMA-authorised firms will be able to do so. This is bringing cryptoassets fully in line with traditional financial services promotion rules.

Conclusion

We welcome the regulatory initiatives, as leveraging the FSMA framework to regulate cryptoassets offers clear advantages in terms of familiarity, legal certainty, and efficiency. This approach also helps avoid duplicative compliance burdens by removing the need for firms to be authorised under both the MLRs and potentially FSMA or Payment Services regulations. However, applying a framework originally designed for traditional finance to a rapidly evolving industry may impose disproportionate costs on startups, which might have benefited from a bespoke regime, as the EU has done with MiCA. Any comments should be provided to HMT by 23^rd May 2025.

If you would like to discuss anything outlined above or your cryptoasset regulation specifically, please get in touch to speak with one of our experts.

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