UK's Crypto Rules Test: Innovation vs. Investor Protection

The UK's approach to regulating cryptoassets is drawing sharp criticism from industry leaders, with Aave CEO Stanley Kulechov arguing that current rules are stifling innovation. Speaking out against the Financial Conduct Authority's (FCA) evolving regulatory framework, Kulechov highlighted concerns that overly cautious policies could deter institutional participation and technological advancement in the UK's crypto sector. His comments come as the FCA tests standardized crypto disclosure templates through a RegTech sandbox initiative led by Eunice, a collaboration aimed at enhancing transparency for investors but which Kulechov and others see as insufficiently supportive of innovation. According to reports, the FCA's sandbox trial, announced in November 2025, involves major exchanges like Coinbase, Crypto.com, and Kraken. Eunice's CEO Yi Luo emphasized the project's goal of fostering "integrity and transparency" as institutional interest in crypto grows. The initiative aligns with the FCA's broader Crypto Roadmap, a multi-year plan to finalize comprehensive crypto rules by 2026. This includes recent policy shifts such as lifting the ban on crypto exchange-traded notes (ETNs) for retail investors and proposing to extend the Consumer Duty framework - traditionally applied to traditional finance - to the crypto sector. While the FCA's focus on risk mitigation and market abuse prevention is clear, Kulechov has criticized specific proposals as counterproductive. He praised the UK's HMRC for adopting a "no gain, no loss" tax treatment for DeFi lending and staking activities, which he argues aligns with the economic reality of users borrowing stablecoins against collateral without triggering capital gains taxes. However, he sharply opposed the Bank of England's (BoE) proposal to cap individual stablecoin holdings at £20,000 and firm-level limits at £10 million. Kulechov labeled the BoE's approach as "choking the market before it has a chance to grow," warning that such restrictions would make pound-backed stablecoins less competitive globally according to industry analysis. The debate underscores a broader tension between regulatory caution and the need for innovation. The FCA's sandbox model, which prioritizes real-world testing of industry-led solutions, reflects an attempt to balance these priorities. Yet critics like Kulechov argue that policies such as the BoE's stablecoin caps risk positioning the UK as a less attractive hub for crypto innovation compared to jurisdictions with more flexible frameworks. With the FCA's final rules slated for 2026, the coming months will test whether the UK can harmonize investor protection with the dynamism needed to sustain its crypto ecosystem according to industry experts.