Regulators Test Crypto's Future as UK Struggles to Balance Control and Innovation

The UK’s Financial Conduct Authority (FCA) has launched a consultation on new minimum standards for cryptocurrency firms, signaling a step toward aligning crypto regulation with traditional financial principles. The consultation paper, CP25/25, seeks public feedback on applying FCA Handbook rules to crypto firms, focusing on operational resilience and combating financial crime. The FCA has set two deadlines for responses: October 15 for the discussion paper and November 12 for the consultation paper.

The proposed rules aim to strengthen consumer protections and market integrity while enabling the UK to remain competitive in the global crypto landscape. According to David Geale, the FCA’s executive director of payments and digital finance, the regulator is striving to create a framework that supports innovation without compromising trust. This approach reflects the FCA’s acknowledgment of the crypto market’s unique features, including a proposed new principle to ensure firms act in the best interests of their customers.

However, critics argue that the UK’s overall regulatory approach to crypto remains disjointed and overly restrictive. Despite the consultation’s goal of promoting clarity and stability, many in the crypto industry believe that the lack of clear legislative guidance has led to a “debanking” issue. Traditional financial institutions have, in some cases, severed ties with crypto firms due to uncertainty around compliance requirements. Furthermore, the FCA has been accused of applying the same high level of regulation to all digital assets, regardless of their risk profile, which has caused friction among firms seeking more tailored approaches.

Taxation is another key area of contention. The UK’s incoming Cryptoasset Reporting Framework (CARF), set to begin in January 2026, will require detailed transaction reporting from crypto firms. While intended to combat tax evasion, critics argue that the framework may impose a significant burden on traders and raise privacy concerns. In addition, the UK’s reduced tax-free allowance for capital gains has increased the tax liability for small-scale investors, further complicating the regulatory environment.

The FCA’s regulatory strategy is also being scrutinized for its potential to drive businesses offshore. Many industry stakeholders believe that the UK’s slow legislative progress and regulatory ambiguity are causing firms to seek more favorable environments elsewhere. This trend is concerning for policymakers who aim to position the UK as a global leader in crypto innovation. The FCA’s ongoing efforts to establish a comprehensive regulatory framework will likely influence whether the UK can move beyond its current weakened reputation in the crypto sector.

The outcome of the CP25/25 consultation will be a critical factor in shaping the UK’s regulatory landscape. If the proposed rules are adopted, they could help bridge the gap between innovation and investor protection. However, the FCA will need to navigate a delicate balance between imposing sufficient safeguards and fostering a climate where crypto firms can thrive. The next few months will be pivotal in determining how the UK’s regulatory approach evolves and how it compares to emerging frameworks in other jurisdictions, such as the EU’s Markets in Crypto-Assets (MiCA) and the US’s GENIUS Act.