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Discussion on the regulation of encryption asset activities
Overview
In May 2025, the Financial Conduct Authority (FCA) of the United Kingdom published a discussion paper on the regulation of cryptoasset activities (DP25/1), which aims to implement the UK Treasury's 2023 legislative plan for the regulation of cryptoassets, and build a safe, competitive and sustainable crypto industry ecosystem. According to the Treasury's draft Regulatory Activities Order published in November 2024, the FCA's regulatory scope will be expanded from the current anti-money laundering rules, financial promotion regime and consumer protection laws to activities such as the operation of cryptoasset trading platforms, intermediary services, lending, staking and decentralized finance, promoting the UK as a global crypto financial center by balancing innovation and risk, strengthening market integrity and consumer protection. Despite the high level of awareness of crypto assets in the UK, the inherent high volatility of the market, the lack of a valuation system and the anonymity of cross-border make it a significantly higher risk level than traditional financial products. In particular, the FCA emphasizes that even if the new regulatory regime is implemented, investors still need to be prepared to "lose all their money", and the crypto market cannot provide the same protection as traditional financial markets due to the lack of centralized issuers, mature risk settlement infrastructure and unified governance mechanisms. Therefore, the core positioning of the new system is "risk prevention and control" - reducing systemic risk through rule-based constraints, rather than eliminating the high uncertainty of the market itself. In terms of the design of the regulatory framework, the FCA closely aligns with international standards, deeply participates in the formulation of rules by the International Organization of Securities Commissions (IOSCO), the Financial Stability Board (FSB) and other institutions, leads the implementation of the IOSCO Crypto and Digital Assets Recommendations, and promotes the peer review of the global regulatory framework. At present, it has released discussion papers on stablecoin regulation and market abuse system, and plans to launch consultations on qualified stablecoin issuance, asset security, and behavioral standards in phases in 2025, so as to reserve room for innovation for the industry in the form of "establishing a framework first, and then detailing the rules". In terms of the possible impact of regulation, the FCA not only focuses on the direct expenses of corporate compliance costs such as IT system upgrades, staff training, and governance adjustments, but also pays attention to the indirect effects of changes in market structure, such as the transmission of costs to consumers and the exit of small and medium-sized institutions. To this end, the regulators are committed to maintaining policy flexibility through mechanisms such as open consultation and industry roundtable discussions. In the field of consumer protection, in addition to the application of the Consumer Responsibility to enhance transparency, special rules will be added for the characteristics of crypto assets, such as requiring enterprises to conduct risk perception tests before users participate, clarifying the terms of asset ownership transfer, and prohibiting the provision of high-risk lending products to retail customers, reflecting a differentiated and prudent approach. ## Construction of Regulatory Framework for Crypto Asset Trading Platforms
The Financial Conduct Authority (FCA) of the United Kingdom has adopted a balanced strategy that takes into account market vitality and risk prevention and control in the construction of the regulatory framework for cryptoasset trading platforms (CATPs). At present, the crypto trading market is highly globalized, and platform operators often assume multiple roles such as transaction matchmaking, asset custody and even credit provision at the same time. Regulators are particularly concerned that unconstrained proprietary trading practices on platforms may distort market price discovery mechanisms, while the popularity of algorithmic trading and high-frequency strategies has exacerbated market volatility, and the direct participation of retail investors in trading has amplified the potential harm of information asymmetry. In response to these challenges, the FCA has proposed a tiered regulatory approach. At the institutional access level, it is required that services for UK retail customers must be provided through local authorized entities, but international platforms are allowed to access the global liquidity pool through a dual-track structure of "branch + subsidiary", in which the UK branch is responsible for core trading functions and the local subsidiary handles customer access and compliance management. This design not only maintains the regulator's control over key links, but also avoids the fragmentation of the market caused by excessive closure. In terms of trading mechanism specifications, platform operators are expressly prohibited from exercising their discretion to match orders, and all transactions must be automatically executed in accordance with pre-announced rules to eliminate the unfair advantage that may be brought about by human intervention. For liquidity providers such as market makers, platforms are required to establish transparent access agreements, disclose business affiliations, and prevent market manipulation through false quotes. Settlement and asset security are another regulatory focus. The FCA emphasises that trading platforms should not assume clearing functions or provide credit support to clients, and must maintain a risk-neutral stance to avoid affecting the normal operation of the market due to proprietary positions or credit exposure. Considering the particularity of blockchain technology, the regulatory scheme maintains a certain degree of flexibility in settlement arrangements, but requires the platform to clearly inform customers of the timeliness and division of responsibilities for asset transfer. In terms of transparency, it is planned to simultaneously implement the pre-trade order book information disclosure and post-trade transaction data disclosure system, but allow appropriate delays in the release of sensitive commercial information. It is worth noting that in view of the particularity of retail investors' direct participation in transactions, the regulator has given platforms more active monitoring obligations, including setting risk parameters and identifying abnormal transactions, so as to make up for the regulatory gap that individual investors' behavior is not subject to financial conduct rules. This regulatory framework is unique in that it not only absorbs the regulatory wisdom accumulated over decades in traditional financial markets, such as mature practices such as market maker management and trading transparency, but also fully considers emerging features such as 24×7 operations, smart contract settlement, and global liquidity pools in the crypto asset market. In the trade-off between risk prevention and control and market efficiency, the FCA shows a clear "risk-based" orientation, imposing strict restrictions on proprietary trading, credit exposure and other activities that may endanger the stability of the system, while adopting moderately standardized strategies for market makers and algorithmic trading that help improve market quality. This differentiated regulatory approach reflects the prudent attitude of regulators in seeking a dynamic balance between promoting innovation and preventing and controlling risks. ## Regulatory System for Crypto Asset Intermediary Services
The UK's Financial Conduct Authority (FCA) has established a risk-commensurate regulatory regime for cryptoasset intermediation, taking into account the diverse needs of both retail and institutional clients. In the current crypto market, intermediaries play a key role in connecting investors with trading platforms, with about 28% of UK crypto users participating in the market through payment or brokerage intermediaries, but such services often come with higher fees and potential information asymmetry risks. The core risks of intermediary business focus on consumer perception bias and lack of market transparency. Some intermediaries do not clearly distinguish between proprietary trading and agency business models, and the interface design is easily confused with the trading platform, making it difficult for retail investors to identify the essence of the service. The quality of order execution is uneven, the liquidity dispersion leads to significant differences in the prices of similar assets, and some intermediaries have multiple business overlaps, such as engaging in proprietary trading and customer order execution at the same time, which may induce conflicts of interest. Of particular concern is the "order flow payment" model, which the FCA intends to expressly prohibit for intermediaries to direct client orders to a specific trading platform for commissions, which may harm the best execution interests of clients. In response to the above-mentioned risks, the regulatory framework proposes a layered governance scheme. In order execution, intermediaries are required to establish "best execution" standards similar to those of traditional financial markets, especially for retail clients, using "total consideration" (including fees and implied costs) as a benchmark. Intermediaries are required to regularly assess the price data of at least three UK-authorised trading platforms and review the enforcement policy on an annual basis. For cross-border business, overseas institutions that meet certain criteria are allowed to provide services through a UK branch, but retail customers must establish a relationship through a UK legal entity. In terms of transparency, it is proposed to require proprietary trading intermediaries to disclose key information such as trading volume and price in near real time, and at the same time explore the introduction of pre-transaction transparency rules, such as requiring intermediaries to publish quotation ranges. Given the differences in liquidity of different crypto assets, regulators may waive some disclosure requirements for small-scale institutions or specific assets. In terms of customer categorization, the "opt-in" mechanism for retail clients to upgrade to professional investors will be strictly limited to prevent intermediaries from improperly inducing clients to abandon protective measures. The framework places particular emphasis on the principle of technology neutrality, which applies uniform regulatory standards as long as the business is substantially the same, regardless of whether centralized or distributed ledger technology is used. The FCA will clarify the operational details through follow-up consultation, including how to adapt the rules on credit assessment and grace arrangements in the existing Consumer Credit Handbook to the crypto lending scenario. Overall, the new regulations attempt to strike a balance between consumer protection and market competitiveness, requiring intermediaries to bear more information disclosure and compliance responsibilities, while retaining room for business model innovation. ## Risk Management and Control of Crypto Asset Lending Market
The crypto asset lending market presents a typical cyclical characteristic, from rapid expansion in the early stage to concentrated risk exposure in the later stage, a process that reveals systemic risks unique to this field. From the essence of the business model, its core feature is the full transfer mechanism of asset ownership, where investors transfer the legal and beneficial ownership of crypto assets to the platform in exchange for the fixed income returns promised by the platform. In consideration, the platform side realizes returns through diversified asset allocation strategies, including but not limited to reinvestment, liquidity pool participation, and decentralized finance protocol interaction. From a regulatory perspective, there are three key risks in the current market: first, at the level of retail investor protection, there is a general cognitive bias on the legal consequences of asset ownership transfer; Secondly, in the mortgage lending business, the high volatility of crypto assets leads to the possibility of systemic risks caused by the margin call mechanism. Finally, there is a structural conflict of interest in the economic model design of the platform token. In response to these risks, regulators are building differentiated regulatory frameworks, including protective restrictions on the retail market and risk management requirements for institutional investors. In terms of the innovative application of regulatory tools, policymakers are promoting the adaptation of traditional financial regulatory rules. Specific measures include the establishment of a solvency-based credit assessment system, the implementation of a standardized key information disclosure system, and the introduction of a capital buffer mechanism for technology risks. Of particular note is the fact that stablecoins may receive differentiated treatment in the regulatory framework due to their price-stabilizing properties, reflecting the regulator's prudent balance between promoting innovation and preventing risk. ## Crypto Asset Credit Purchase Restrictions
The UK's Financial Conduct Authority (FCA) has noted that as crypto assets become more popular among consumers, the use of credit cards or other credit tools to purchase crypto assets is rapidly increasing. A recent survey shows that the proportion of UK consumers buying crypto assets with credit cards or existing credit lines has risen from 6% in August 2022 to 14% in August 2024. This trend has raised regulatory concerns: the extreme volatility of crypto asset prices may put consumers in a debt repayment dilemma in a short period—when asset values plummet, consumers relying on appreciation to repay credit may find themselves in financial crisis, potentially affecting their credit scores due to late payments, which in turn restricts their future access to credit. In light of this risk, the FCA is considering implementing restrictions, including banning the use of credit cards for direct purchases of crypto assets and limiting the credit lines provided by electronic money institutions for such transactions. Regulators are particularly focused on the protective effects of this policy on financially vulnerable groups, while also noting that some payment companies have proactively taken measures to limit related transactions. However, there are still crypto asset service providers in the market promoting credit purchase options, which may expose consumers to unnecessary financial risks. It is noteworthy that the FCA has reserved exemption clauses for qualified stablecoin issuers authorized by it in its proposals, reflecting the regulator's intention to seek a balance between risk control and financial innovation. At the policy-making level, the FCA recognizes that any restrictions will have widespread implications for market participants and consumers, and is actively gathering industry feedback to assess the feasibility and potential effects of different options. This initiative showcases the forward-thinking management of crypto asset market risks by UK regulators, with the core objective of preventing consumers from bearing excessive credit risks due to the high volatility of crypto assets while maintaining overall stability in the financial market. ## Crypto Asset Staking Service Standards
As a key mechanism in the blockchain ecosystem, crypto asset staking (Staking) is undergoing a transformation from technical practice to standardized financial services. This process is accompanied by the evolution of unique business model innovations and risk profiles, requiring the establishment of appropriate regulatory frameworks. At present, the mainstream staking services mainly focus on lowering the threshold for participation, enabling retail investors to indirectly participate in blockchain verification work that originally requires a high technical threshold through entrusted verification and asset pooling. However, this convenience also brings new challenges - investors are often not fully aware of the complex terms of smart contracts, asset lock-up mechanisms, and how returns are calculated, and the technical failures or operational errors of service providers may directly lead to the loss of users' assets. In terms of business architecture, the rise of liquid staking models is particularly noteworthy. This model theoretically solves the problem of insufficient liquidity in traditional staking by issuing derivative tokens that represent pledged assets. However, in practice, issues such as price fluctuations and redemption delays of derivative tokens may trigger a chain reaction, especially during periods of intense market volatility. At the same time, some platforms have vague disclosures and fail to clearly inform users of the actual ownership of assets during the pledge period, which lays a hidden danger for potential disputes. The core of regulatory intervention is to establish transparent and accountable operational standards, including but not limited to specific requirements such as mandatory disclosure of key terms, regulating the management of third-party service providers, and implementing segregated custody of assets. From the overall perspective of risk management, the staking service actually builds a multi-level trust system: the technical level depends on the stability of the blockchain protocol, the operational level relies on the professional capabilities of the service provider, and the financial level requires a reasonable income distribution and risk compensation mechanism. Effective regulation should cover all three dimensions at the same time, not only to protect retail investors who are at an information disadvantage, but also to provide clear development expectations for innovative entities operating in compliance. In the future, with the expansion of the scale of pledged assets and the increase in product complexity, how to prevent systemic risks while maintaining technological neutrality will become an important topic for regulators and the industry to explore. ## Decentralized Finance (DeFi) Regulatory Pathway
As an important innovation in the field of crypto assets, decentralized finance (DeFi) faces unique challenges in the construction of its regulatory framework. The services that are advertised as "decentralized" in the current market are actually spectral - from a hybrid model from fully algorithm-driven to the presence of substantial control subjects. The Financial Conduct Authority of the United Kingdom (FCA) adopts a "substance over form" regulatory principle, focusing on the existence of an identifiable controller or entity, including management key holders who can modify smart contracts, decision-making groups that centrally hold governance tokens, and development teams that provide key technical support. DeFi services operated by such entities, regardless of their technical architecture, will be regulated as traditional financial institutions, covering the entire business chain such as trading, lending, and asset management. At the level of specific regulatory implementation, regulators pay special attention to three core risk dimensions: first, technical risks, where smart contract vulnerabilities may cause user assets to evaporate instantaneously and be difficult to recover; The second is governance risk, and the decision-making mechanism of decentralized autonomous organizations may blur the responsible subjects; Finally, there is cognitive risk, which is often difficult for ordinary investors to understand the complex mechanisms of staking, liquidity mining, etc. To this end, regulatory requirements must ensure transparency in information disclosure, fairness in product design, and effectiveness of dispute resolution mechanisms. It is important to note that for agreements where there is no truly central control body, the regulation will remain moderately lenient, but require that it meet basic anti-money laundering and consumer protection standards. To strike a balance between regulation and innovation, the UK has adopted a gradual regulatory approach. In the initial stage, the regulatory boundaries will be clarified through industry dialogues, especially for cutting-edge issues such as the determination of the responsibilities of governance token holders and the security audit standards of smart contracts. The governance sandbox mechanism will be used to test the viability of automated compliance solutions, such as using oracles to monitor on-chain activity in real time, or developing DeFi-specific "governance plugins". This kind of flexible supervision not only reserves space for technological innovation, but also prevents regulatory arbitrage through the principle of "same activities, same risks, and same supervision". As international regulatory harmonization deepens, the UK will dynamically adjust its policy framework to maintain its competitiveness in the global crypto asset space while maintaining financial stability. ## Conclusion & Outlook
The establishment of the UK's regulatory framework for crypto assets marks a profound paradigm shift in the governance of financial markets. Rather than simply transplanting the traditional financial regulatory model or adopting a laissez-faire approach to emerging technologies, this systemic reform has built a principled and flexible regulatory system by accurately identifying the unique risk characteristics of the cryptoasset market. In terms of the design of the regulatory framework, the FCA has demonstrated hierarchical and progressive regulatory wisdom. At the fundamental level, we will focus on trading platforms as market hubs and reshape the robustness of market infrastructure by mandating non-discretionary trading rules and restricting trading on private accounts. This reform directly targets the most prominent source of systemic risk in the crypto market, laying a solid foundation for the entire regulatory system. At the intermediate level, efforts are made to standardize the intermediary service chain, with the transparency of order execution as the core, and to build a consumer protection mechanism throughout the entire transaction process. Of particular note are the special provisions on algorithmic trading and market making, which both recognize the technical characteristics of the crypto market and guard against market distortions that may arise from new trading models. For high-risk businesses such as crypto lending and pledge, the regulatory plan adopts a differentiated regulatory intensity. This hierarchical regulatory strategy not only reflects the concept of risk-based supervision, but also avoids the innovation inhibition that "one size fits all" may bring. In cutting-edge fields such as DeFi, regulators have shown rare policy flexibility, and the regulatory principle of "substance over form" proposed by them not only ensures the effective coverage of supervision, but also reserves room for experimentation in technological evolution. The unique value of this regulatory system lies in its dynamic adaptability. The FCA has clearly established a policy feedback mechanism to calibrate regulation through ongoing market dialogue. This design not only overcomes the shortcomings of traditional supervision in responding to technological change, but also prevents the accumulation of risks that may be induced by "regulatory gaps". In terms of cross-border regulatory collaboration, the "branch + subsidiary" hybrid regulatory model proposed in the plan not only maintains the UK's regulatory sovereignty, but also maintains the interconnection with the international market. Looking ahead, the implementation of this regulatory framework will face three tests: the challenges of rule adaptation brought about by technological iterations, the challenges of regulatory coordination in a globalized market, and the delicate balance between compliance costs and innovation dynamism. The FCA is aware of this, emphasizing a "gradual reform" path that sets a clear regulatory bottom line and leaves room for rules to be optimised based on feedback from practice. This pragmatic and forward-looking regulatory philosophy may give the UK a first-mover advantage in the international competition for cryptoasset regulation, and provide a valuable institutional model for global cryptoasset governance.