UK Treasury Proposed a Broad Financial-Services Regime for Crypto

HM Treasury opened a consultation on February 1, 2023 that proposed bringing centralized cryptoasset exchanges, custodians, lending platforms and other intermediaries into the United Kingdom’s financial-services regulatory perimeter.

The 82-page paper marked a substantial expansion from the government’s earlier work on fiat-backed stablecoins and cryptoasset promotions. It proposed regulating specified activities under the framework of the Financial Services and Markets Act 2000, generally adapting existing financial rules to crypto rather than creating an entirely separate legal system.

The distinction between a proposal and an operative rule is essential. No exchange, custodian or lender became newly authorized under this framework on February 1. The consultation was scheduled to close on April 30, 2023, after which the government intended to consider responses, prepare legislation and leave the Financial Conduct Authority to consult separately on detailed rules.

Exchanges, custody and lending

Under the proposed approach, operating a cryptoasset trading venue would become a regulated activity requiring authorization. Applications would be expected to describe a firm’s operations, business plan, governance, controls and risk-management arrangements. Trading venues would also face prudential, reporting and operational-resilience requirements developed by the FCA.

Custody was treated as a separate regulatory problem. HM Treasury proposed using the FCA’s existing client-assets framework as the basis for bespoke crypto rules. The paper contemplated safeguards against commingling customer assets with a firm’s own property, accurate ownership records, governance over private-key arrangements and sufficient financial resources for an orderly wind-down.

Operating a cryptoasset lending platform would likewise require authorization. The proposed perimeter included platforms facilitating collateralized or uncollateralized crypto borrowing, as well as fiat borrowing secured by cryptoassets. Possible requirements included capital and liquidity standards, risk warnings, clear contractual treatment of legal and beneficial ownership, collateral disclosures and stress-based management of funding risks.

These were proposed regulatory outcomes, not findings that any particular platform satisfied them. The paper also left significant details—including precise capital thresholds, physical-presence expectations and the possible availability of compensation protection—to later FCA work.

A regime extending beyond UK-incorporated firms

The consultation proposed a broad territorial principle. A provider incorporated in the United Kingdom would generally be in scope, as would an overseas provider supplying covered services to UK customers, subject to possible exceptions. Whether an overseas firm would need a physical UK presence remained under consideration.

The plan also addressed issuance and market conduct. Admission of a cryptoasset to a UK trading venue would trigger disclosure requirements, while public offers—including initial coin offerings—could need to proceed through regulated platforms. Trading venues would be expected to perform due diligence and maintain systems for detecting market abuse. The government identified manipulation, wash trading and spoofing as behaviors the future regime should address.

The proposal focused on activities rather than automatically regulating every token. HM Treasury said non-fungible tokens and utility tokens could enter the perimeter when used in a covered financial-services activity, while assets outside those activities would not necessarily be captured.

Why February 1 mattered

The institutional significance lay in the proposed change from a comparatively narrow framework—principally anti-money-laundering registration for many crypto businesses—to broader conduct and prudential supervision. Firms already registered under the money-laundering regime could still need separate authorization because the proposed assessment would cover a wider range of risks.

HM Treasury explicitly connected the initiative to the failures and market disruption of 2022, including FTX, Celsius Network and Voyager Digital. Its interpretation was that conflicts of interest, weak transparency, liquidity mismatches and vertically integrated business models strengthened the case for regulation. Those were the government’s policy conclusions; the consultation did not itself adjudicate responsibility for any failure.

On February 1, the durable development was therefore the publication of a detailed regulatory blueprint and request for evidence—not enactment, FCA authorization or proof that its proposed safeguards would work. The unresolved questions concerned the final statutory perimeter, treatment of overseas providers, calibration of prudential requirements and the detailed obligations the FCA might eventually propose.