CryptoUK (“we”) and its members welcome the opportunity to comment on the Discussion Paper regarding the FCA’s approach to regulating cryptoassets with respect to admissions, disclosures and market abuse. CryptoUK is the UK’s self-regulatory trade association representing the cryptoasset sector. Our members comprise over 150 of the leading companies across the sector and across the UK. Many of our members are also international and engage with regulators and policies on a global basis. 

We have provided detailed answers to each question posed in the Discussion Paper within the Appendix.  We seek to offer pragmatic and relevant observations about, and suggestions in response to the content within the Discussion Paper.  At the outset we would like to make a number of general/ thematic comments about the Discussion paper and the FCA’s broader approach to the future cryptoasset regulatory regime, as follows:

• We support the direction of travel with respect to answering the need for a clear regulatory framework for our industry in the UK. We also recognise and appreciate the FCA’s ongoing and demonstrated commitment to engage with the industry on these important issues, both with Discussion or Consultation papers, and with direct interaction via broad roundtable discussions or targeted meetings.
• We also do have several general areas of concern to draw to your attention:
  • We believe the FCA must apply proportionality in relation to its approach to cryptoasset firms. We suggest that directly applying traditional finance rules across all activities and types of cryptoassets or prescribing regulations that go beyond our European counterparts would be detrimental; such an approach would very likely result in the UK being less competitive than its European counterparts and the market globally.
  • We believe the FCA should focus more clearly and consistently on a “principles-based approach”, rather than applying overly-detailed rules to an industry where innovation and pace are essential. Enabling flexibility and enhancing competitiveness will bring the best outcomes for consumers, industry players, and the UK economy. 
  • We are concerned with the volume of technical matters for both the industry and the FCA to consider within a very short timeframe (whilst also appreciating the need to move at pace). Given that many of the points raised in the Discussion Paper will apply to the cryptoasset industry (“the industry”) for the first time, and that nature of the points raised are quite technical, combined with the volume of papers being published by the FCA, and with significant other regulations to consider, we believe it may be unrealistic to expect the industry to consider this all at one time. 
  • We continue to recommend that policymakers take into account the role of taxation in creating opportunities for growth, and that regulators should not treat it as a siloed area that is not directly and clearly factored into the broader jurisdictional approach to the industry and its activities. 
  • We know the industry is ready for regulation and would appreciate the opportunity to respond fully as part of a collaborative dialogue.  To this end our members would ask for further conversation on the points raised within, along with the opportunity to make further submissions where needed.

We thank you for the opportunity to respond to the Discussion Paper consultation. We also wish to acknowledge the insights from our Working Group and the expert views of member firm, CMS.

Yours sincerely,

CryptoUK and our Members

Appendix

Discussion Questions:

1. What are the operational and practical challenges of applying the suggested trading, market abuse, and other requirements to authorised overseas firms operating branches in the UK? Are there alternative approaches that could equally mitigate the risks?

We support the intent of the proposal to offer a solution which ensures that UK-based firms are not operating at a disadvantage to overseas firms that would otherwise be allowed to operate in the UK without meaningful oversight.

However, our members had varied views on whether the proposed branch/subsidiary proposal is in fact the best solution, when compared to the UK pursuing Memorandums of Understanding or equivalence arrangements with other countries.

Our members who supported the branch/subsidiary proposal believe that, although onerous and potentially costly, it will create a new market for partnerships between UK services providers and offshore businesses/platforms. They believe that, on balance, this proposal will deliver overall positive outcomes for both UK-based businesses and for the UK economy.

The members who do not support the proposed branch/subsidiary approach have several key concerns:

• This would make UK regulations extra-territorial and subject firms to a multitude of regulatory frameworks, which may potentially conflict (see below) or create burdensome oversight requirements;
• UK branches would be expected to establish their own governance structures, and may lack sufficient autonomy from the non-UK parent entity to adapt to UK-specific requirements, such as the financial promotions regime, especially as branches will not be separate legal entities;
• There could be conflicting rules and processes applied from both home state and host state; and
• Establishing a separate UK legal entity may be the most practical, but this would be costly and complex and create a barrier to making the UK “open for business”. 

These members further believe that all of the above concerns would drive away rather than attract high-quality, new business to the UK. They would rather see the UK pursue more actively the following:

• Memorandums of Understanding or equivalence arrangements with other key countries;
• Enhanced supervisory cooperation agreements; and
• Standardised technical reporting interfaces (e.g., API schemas) that could also reduce fragmentation risk.

We acknowledge that the UK has a strong regulatory framework for financial services and that the government seeks to extend that to cryptoassets, without diluting its reputation or capabilities for providing the world with high-quality markets and market oversight. As a result, the UK may be hesitant to seek equivalence arrangements.

We would conclude this question with the suggestion that other jurisdictions are not necessarily inferior to the UK, and that other jurisdictions (such as those jurisdictions subject to MiCA rules) who are providing strong regulatory frameworks should be acknowledged and taken into account by the UK for reciprocal agreements and arrangements, whatever the ultimate solution provided here. This would then mitigate or even eliminate operational and practical challenges of applying the suggested trading, market abuse, and other conduct requirements to authorised overseas firms operating branches in the UK.

2. What are the challenges and limitations of requiring the establishment of an affiliated legal entity for retail access to trading services by an overseas firm with a UK branch?

We note these key challenges to the proposal, as written, and suggest further review to take these concerns into account:

• The proposals may create duplicative infrastructure burdens for overseas firms impacting the ability for them to service UK customers and overall the competitiveness of the UK market; and
• The affiliated entity must have sufficient operational control and independence from the overseas parent in order for the full effect of the proposals to work well, which in practice, may not be feasible given it is the same legal entity.

As an alternative to requiring a separate legal entity, it might be better to allow firms to appoint a UK “responsible officer” or nominated representative accountable for compliance. This reduces legal duplication while maintaining accountability.

Overall, we do believe the balance struck currently is pragmatic because it would not seem realistic or proportionate to attempt to force all activity onshore. We would welcome further discussion on this point once the exact parameters are confirmed.

3. What conditions should apply to the direct access of trading services of an overseas CATP with a UK branch?

We support the notion that the overseas CATP have a relationship with a UK branch, as this would ensure a higher level of supervision and consumer protection.

There were mixed views from our members on the notion of full control by the UK branch over onboarding, monitoring and reporting; some members supported full control, whilst other members proposed flexibility for intra-group outsourcing in order to reduce the operational burden on international firms and their ability to offer deep liquidity pools to UK residents.

All of our members support principles-based approaches more broadly. As such, we suggest that these types of conditions would be useful to encourage:

• UK market monitoring, market conduct and customer protection, recordkeeping in formats acceptable to the FCA;
• Audit trails that facilitate attribution of orders to individuals;
• Trading interfaces that support pre-trade and post-trade transparency guidance;
• Direct access to the UK market permitted if the CATP can demonstrate principles-based equivalence in market integrity safeguards, including detection of spoofing, layering, tooting and bashing, insider trading and wash trading;
• Principles-based equivalent governance, operational and regulatory procedures and processes in home state; and
• In addition to meeting these baseline requirements, the UK branch should also clearly disclose its authorisation status and specify which regulator clients should contact in the event of any issues. The FCA could also consider allowing UK customers to escalate issues to either the UK FCA or the home country regulator, depending on jurisdictional overlap as an optional dual-path escalation model.

4. What, if any, additional responsibilities should we consider for CATPs, to address the risks from direct retail access?

Financial crime is the key focus for the retail markets, and so CATPs must ensure that their Know Your Customer capabilities are robust, as an additional responsibility.

5. How can CATPs manage the risks from algorithmic and automated trading strategies?

We are supportive of the FCA’s desire to ensure fair and non-discriminatory access to trading and orderly markets. Practically, this includes support for the importance of having in place necessary technology to identify and monitor high frequency trading, algorithmic and bot trading, and such orders should be tagged accordingly by the CATP.

However, we strongly recommend a proportionate approach here. Any new cryptoassets regulations regarding algorithmic and automated trading should not go further than the RTS6 regime seen under MIFID. In fact, we believe it may be more appropriate to require less than the RTS6 regime while the cryptoassets trading market continues to evolve. The rationale for this suggestion is to give a growing and maturing industry the time and opportunity to innovate and compete globally without applying the full array of regulation that developed over time as the financial services industry evolved. Some elements of the fully mature regulatory framework for financial services and activities are not directly fit for purpose for either the types of cryptoassets activities to which it is being applied, nor for the stage of development of the industry itself.

Further, we believe care should be taken when describing ‘abusive’ behaviour. For example we would opine that latency arbitrage is not abusive but a factor of algo trading.

6. Do you agree that CATPs should have contractual agreements in place with legal entities operating market making strategies on their platforms? Are there alternative approaches that could equally mitigate the possible risks to market integrity?

We agree that contractual agreements should be in place for formal market makers. These agreements improve accountability and create audit trails that support surveillance.

However, outside of formal market markers, any legal agreements between CATPs and participants need not be mandated by regulation. Market making can cross the boundary from unregulated to regulated activities, however activities such as firms’ trading their own book are not currently a regulated activity in traditional finance, and should remain outside the regulatory perimeter for cryptoassets as well.

7. Is there a case for permitting discretionary trading practices for CATP operators? If so, how could the above risks be appropriately mitigated?

We agree with the permitting of discretionary trading practices, but only under specific conditions, such as those in over-the-counter (“OTC”)-like venues or in request-for-quotation (“RFQ”) systems that enable risk mitigation.

Examples of the specific conditions that we would support include:

• Full post-trade transparency and auditability;
• Monitoring systems that can track:
  • All discretionary interventions, with the related rationale, timestamp, and trade impact; and
• Disclosure of discretion criteria to clients in order to preserve fairness.

A key principle that would need to be included in any such restrictions or framework is that affiliated parties should not have additional advantages over non-affiliated parties. Consequently, conflicts, transparency, information barriers, and market conduct requirements would need to be tightly managed. We would also suggest that the FCA should consult separately on any proposed rules or guidance in relation to discretionary trading practices.

8. Should firms operating a CATP be permitted to execute transactions on a matched-principal basis? If so, how could the above risks be appropriately mitigated?

We believe that matched-principal transactions should be allowed, but entities can then apply appropriate conflict mitigation approaches as noted below.

The example in the DP appears to examine a scenario where a CATP’s UK subsidiary acts as a matched-principal intermediary between the CATP’s UK customer orders and the CATP’s global order book. This sort of case would be an instance where matched-principal trading by a CATP would be entirely justified. There are also settings where unmatched-principal trading is also appropriate. A complete understanding of how the full array of trading occurs and actually benefits markets with respect to reducing price volatility for both the wholesale and the retail investor. To that point, we would note that the DP does not adequately address important distinctions between wholesale and retail investment.

Although matched-principal execution can introduce conflicts of interest and risks of front-running or trade-throughs, wholesale market participants generally have robust processes to manage these conflicts and related market abuse risks. Consistent with this observation, we recommend that conflicts be managed through a principles-based approach, and could include:

• Separation of roles;
• Monitoring of internal trade crossing and of the CATP’s own trading activities off platform;
• Systems that can differentiate proprietary and client orders and track any latency advantages used in internalisation;
• Trade surveillance; and
• Enhanced disclosures, including which trading model is used at execution.

These are examples of methods to manage conflicts of interest and are not intended to be a prescriptive minimum because entities should deploy the controls appropriate to their respective business models.

As above, we would also suggest that the FCA should consult separately on any draft rules or guidance in relation to such restrictions to ensure that they are proportional, principles-based, and not overly prescriptive. The FCA should also consult on the implications of their proposals in a wholesale setting.

9. Have we properly identified the risks from the operator of a CATP also being able to deal in principal capacity off platform? What is your view on these risks and whether it should be permitted or restricted for an operator of a CATP? If permitted, how should those risks be mitigated?

We agree that the FCA has appropriately identified these risks, and we encourage a principles-based response to these risks.

Principal trading off-platform creates potential for informational asymmetry, conflicts of interest, and abuse, and requires appropriate controls and policies and procedures in place, as well as appropriate public disclosures, transparency and annual reviews assessing effectiveness.

CATPs can clearly identify and disclose to customers how it protected its clients against front running trades. If permitted, it could be accompanied by ring-fencing, full real-time trade reporting, and cross-venue surveillance to detect self-dealing, information leakage, or preferential execution. Automated alerting and audit capabilities can be provided, along with appropriate independence and decoupling of functions. We further suggest reference to Recommendation 3 of IOSCO policy recommendations.

Please also note our response to Question 8 with respect to the notion that these are examples and not intended to be prescriptive minimums because entities should deploy approaches appropriate to their respective business models.

10. What are the risks from an entity affiliated with the CATP trading in principal capacity either on the CATP or off the CATP? What additional requirements are necessary to mitigate these risks?

Affiliates may benefit from preferential access, knowledge of order flow, or cross-subsidisation. To mitigate these specific risks, a principles-based approach could encourage:

• Order flagging by affiliate status;
• Transparency over execution priority;
  • Including, the distribution of order book execution data simultaneously to all market participants; and
• Monitoring that generates alerts for cross-subsidiary interactions.

We would also note that it is especially important to mitigate and identify abusive behavior such as wash trading, insider dealing and front running. In order to mitigate these specific risks, periodic independent reviews of order handling and conflict management should be required.

Overall, the CATP could be subject to principles-based public disclosure requirements, and should be required to update and maintain robust policies and procedures that manage conflict of interests. The CATP could be required to implement systems, policies and procedures that provide for a fair, orderly and timely execution of client orders.

11. What are the risks from admitting a cryptoasset to a CATP that has material direct or indirect interests in it? How should we address these?

We  recognise that there are a number of risks that may arise from the admission to trading of a cryptoasset in which the CATP itself has an interest, including price manipulation, wash trading, selective disclosure, conflicts of interest, front running and insider trading. However, these are well known risks which CATPs are experienced in managing and, as such, any mitigations should be applied in a proportionate and principles-based manner that leads to fair practice.

To mitigate  these risks, (in addition to the overall requirements we have suggested in prior answers) the following should be required of the CATP:

• Disclosure of any (direct or indirect) economic interest in the cryptoassets and all conflicts of interest; and
• Controls on proprietary trading and market making related to the specified cryptoassets.

Implementation of real-time surveillance can be an effective control for detecting price manipulation and other abusive trading activity, however, we recognise that this may not be appropriate or proportionate for smaller CATPs with less resources. As such, we would recommend that this be guidance rather than a requirement.

We do not think that the suggestion of legal or functional separation between the CATP and the issuer would be a proportionate solution, given the cost that this would typically involve. As such, we think that appropriate governance policies, transparency, and disclosure requirements proposed under the A&D regime should be sufficient mitigation, if well designed and well executed.

12. Are there important reasons why the same entity authorised to operate a CATP should also be able to provide credit lines or financial accommodations to the CATP’s clients?

This is current market practice for CATPs to access necessary leverage, given the lack of established financial market infrastructure that can manage, and control for, risks of trading. However we understand that these practices may weaken market integrity when both the provision of credit and execution activities  are performed by the same entity.

We  believe that a separate, suitably-capitalised and risk-controlled entity within the same CATP group of companies could safely offer this service, however, this does not need to be the sole required approach. The key component is for entities to provide effective controls to appropriately manage any conflicts. In a principles-based framework, then each CATP may work out the exact controls it deploys whilst considering best practices for its size, scale, and complexity.

Do you agree with our proposal to prevent CATPs from managing or internalising credit risks between counterparties trading on their platforms? If not, why not and how would you suggest the CATP manage these risks?

We agree with the proposal that CATPs should be prevented from managing or internalising credit risk. Internalising credit risk can increase the risk of fragile and disorderly markets.  Assuming that  CATPs are limited to only conducting spot-trading of cryptassets, the only way they could materially reduce any credit risk is if the counterparties that trade on the CATP were required to fully pre-fund their transactions.

As such we would suggest that CATPs be encouraged within a principles-led approach to mitigate these risks by:

• Prefunding or using trusted third-party custodians for collateral management;
• Providing appropriate monitoring of order books that include alerts on patterns suggesting credit-fuelled abuse (e.g., quote stuffing enabled by temporary credit extensions); and
• Segregating client assets (whether fiat or cryptoassets) in a custodian or bankruptcy remote trust.

14. How should we interpret or define settlement for the purpose of CATP settlement rules? Would these rules be specific to CATPs or should they be extended to other trading activities?

We agree with the FCA’s proposal that CATPs should be responsible for internalising settlement practices for trades finalised over its platform, such that the rules would define specific settlement obligations and requirements applicable to the CATP itself. We think that the FCA should not go further than settlement rules with the MiCA requirements, to ensure proportionality and consistency.

MiCA states that CATPs operating a trading platform for cryptoassets shall initiate the final settlement of a crypto-asset transaction on the distributed ledger within 24 hours of the transaction being executed on the trading platform or, in the case of transactions settled outside the distributed ledger, by the closing of the day at the latest (see Chapter 3, Article 76, paragraph 12).

Importantly, MiCA’s rules draw a  clear distinction between the settlement “request” and the total settlement “time”. CATPs should be required to initiate the settlement request promptly— i.e within 24 hours of the client’s instruction, which we think is a reasonable standard that should be adopted. However, CATPs should not be held accountable for the total  time taken to effect settlement, as this largely depends on the underlying blockchain, which is beyond their control. Factors like network congestion, high fees, or cyber attacks can also significantly delay settlement. Conversely, where settlement takes place outside the distributed ledger, beyond the CATP’s control, its obligation to initiate settlement should allow for longer.

We note that in the case of a CATP that provides both trading and custody (i.e., most retail-focused CATPs), settlement primarily requires updating the ledger of IOUs. In these cases, the assets are held in an omnibus account by the CATP and there is no need to actually transfer assets between individual segregated client accounts as trades are made. Rather, there is a process of switching of the CATP’s netted holdings and global payout obligations as trades are executed. Under this structure the ‘settlement’ process is limited to updating account balances, and CATP-level wallet rebalancing.

We would be grateful for clarity in the FCA’s proposed rules as to how this would apply to the process of rebalancing/updating client account/wallets, and whether the internal process of rebalancing would satisfy the initiation of the client’s settlement request, or whether settlement would be defined by reference to the customer’s ability to withdraw funds.

15. Do you agree that CATPs should be subject to both pre-trade and post-trade transparency requirements? Are there any reasons we should consider pre-trade transparency waivers?

We agree with the FCA’s proposal that CATPs should be subject to pre-trade and post-trade transparency requirements given the importance of market transparency to ensuring market integrity.  However, as with our response to Question 5, we think there should be no additional requirements other than those already required under MiFID and MiCA. These requirements should be appropriately calibrated to ensure proportionality and reflect the developing nature of the crypto industry.

With respect to requirements on any intermediaries, we think that trading intermediaries should be required to share its transaction data on behalf of its clients directly with the CATP rather than duplicating obligations, which could create inefficiencies and inconsistency in reporting and increased costs.

Regarding pre-trade transparency waivers, we understand the FCA is not currently proposing to allow these on the basis that it is too early to define specific liquidity thresholds for different assets. However, we note that these are often justified to preserve market integrity and prevent adverse market impact, protect liquidity providers, or accommodate technical limitations. For example, waivers may be considered for large block trades that are subject to minimum size qualification and partial executions, or for orders held in an order management facility of the CATP (“iceberg orders”), subject to minimum size qualifications.  We accept that in all cases the availability of such waivers should be subject to conditions. We would also be happy to engage with the FCA to share market insights that may assist in defining appropriate liquidity thresholds.

16. Which challenges may emerge for transaction data requirements if there is direct retail participation?

Whilst there are a number of risks that may appear, our members consider two key risks related to transaction data requirements:

• The pseudonymised nature of crypto trading activities could present a challenge with regards to the collation of retail participant data. Buyer/seller identification data may not always be readily available, which could make  it difficult to obtain accurate identification of the end-client involved in the transaction.
• When there is direct retail participation is the possibility of leaked or hacked Personally Identifiable Information (“PII”). We believe this can be mitigated by the use of anonymised/pseudonymised data for transfer of detailed retail customer records between intermediaries and CATPs. A given intermediary and CATP can then share a configuration table that enables the identification of the retail data subject. This will then minimise the risk of leaked or hacked PIPs.

However, we note that the key challenge to all of this will be ensuring that any transaction data relevant disclosures and terms and conditions of the CATPs and intermediaries are readily understandable and accessible to non-professional investors.

Finally, additional warnings and flags for suspicious or non-transparent venues may be necessary to prevent retail users’ data being co-opted by bad actors. 

Ultimately, we recommend, consistent with our response to DP24/4, that CATPs have the discretion to determine who they will investigate and how they will disrupt suspicious activity, whilst also limiting the risk of inappropriate client data disclosures, inconsistencies, and duplications.

17. Are there preferred standards for recording transaction data?

We recommend the ISO 20022 or FIX standards for structured trade data because these standards have been successfully utilised over an extended period of time, and have been subject to significant scrutiny for reliability and technical effectiveness. 

In addition to these data standards, the types of data that would be important to include within the transaction records are:

• Timestamps
• Participant identifiers
• Order types
• Amendments
• Cancellations
• Matching IDs.

The above data will be important because they represent standard transaction data that is typically and reliably provided in traditional finance transactions that allow entities and regulators to best monitor transactions, and for clients to be assured that their transactions are being represented accurately. All data-related audit trails should be immutable, exportable, and cover both off-chain and on-chain components.

However, we would like to point out the following caveats:

• New or smaller-scale CATPs may struggle initially to achieve such standards, and so the FCA should consider how to stage these requirements to allow start-up entities or entities new to this type of compliance to enter and continue to grow in this market. We recommend that any standards should be applied proportionate to the size, scale and business model of the CATP in question; and
• These standards do not necessarily address the current and significant data issues with respect to clearly and consistently identifying or classifying transaction and cryptoasset types in a manner that facilitates comparable and consistent reporting, whether financial and tax reporting, or upcoming mandates such as the OECD’s Crypto Asset Reporting Framework (“CARF”). We recommend that the UK become a first-mover, if needed, in establishing such standards, working closely with CATPs and the industry experts who have a deep knowledge of both what is possible, and what is necessary, but currently missing. Please see our response to Question 18 for additional thoughts on transaction reporting matters.

18. What opportunities and challenges do you see in trying to harmonise on-chain and off-chain transactions’ recording and/or reporting?

In response to this question, we would first like to ensure that we are understanding and framing our response as intended. We assume that the FCA’s intention with this question is limited to the on- and off-chain transactions or data of centralised exchanges and CATPs, and does not include decentralised exchanges. As such, we assume that the FCA is referring to off-chain ledger of customer balances and transactions, whilst the on-chain reference is to a type of “proof of reserve” report that proves that, in fact, the CATP possesses the assets it claims on its off-chain core ledger.

If the question is intended to be framed differently then we are happy to provide further input at a later time. We also have not covered decentralised exchanges in the response to this question, but would be happy to provide additional information on this, if helpful. Please see our response to Question 50 related to DeFI.

The opportunities within this type of harmonisation include:

• Enhanced market transparency;
• Improved surveillance and analytics
  • Timely identification of data discrepancies and identification of fraud risks, by revealing patterns and identities that would otherwise remain obscured;
• Facilitation of regulatory reporting and audit trails; and
• Innovations in real-time compliance

The challenges likely to be encountered are:

• Limitations to enforcement;
• Data format incompatibility and standardisation gaps;
• Identity and privacy constraints; and
• Decentralisation and lack of unified reporting obligations.

Broadly, a key challenge here is that reconciliation controls vary vastly amongst different exchanges and so significant investment may be required in this area. On the other hand, harmonisation could potentially reduce the need for manual reconciliation.

Further, at present, there is no universally accepted taxonomy or reporting schema for cryptoasset transactions. This lack of consistent communication standards presents a variety of challenges, such as in relation to inconsistent classification of assets, transaction types, and reporting rules across platforms (see our answer to Question 17).

On a related topic, we wish to point out that the OECD’s CARF will require relevant reporting entities to report taxpayer-specific transactional information to tax authorities according to the OECD’s XML schema, whilst those same CATPs are not currently required to provide information to the taxpayers themselves to aid taxpayer compliance. This can be especially challenging for the retail participants. We see this as an opportunity to consider data reporting needs for retail to be included as part of the wider discussions on future measures. We recommend a setting whereby CATPs provide all customer-specific transaction history to its customers upon their request in order to facilitate taxpayer compliance requirements or any other valid informational needs a customer may have.

19. What practical challenges might firms face if they are required to comply with these order handling and best execution requirements? Are there any alternative approaches that would deliver the same or better order execution outcomes for retail and non-retail customers respectively? Please explain why they may be preferable.

The most pressing practical challenge is whether the goal of the requirements (such as best execution and serving the best interests of the UK customers) would be served by “requiring any firm executing orders for UK consumers to ensure these orders are ultimately executed only on UK authorised execution venues”.

We have strong concerns and reservations about requiring firms to compare execution prices with only UK-authorised firms. Crypto assets are traded very differently than traditional asset classes such as equities and debt on sometimes hundreds of different venues globally, depending on the specific cryptoasset.

Such a rule risks reducing access to deep liquidity pools globally, especially where trading volumes are concentrated in a smaller number of venues or where certain instruments are illiquid. It may also delay execution and hinder the delivery of prompt, fair, and expeditious order handling, contrary to both IOSCO CDA Recommendation 4 and the objectives of COBS 11.2A. The FCA risks introducing a UK-specific price premium that is not consistent with the stated intention of enabling a best execution framework for cryptoassets.

In response to the above concerns, we believe that firms should instead be permitted to select trading venues based on robust, risk-based assessments considering liquidity, business continuity, and reputation. This would better align with a principles-based regulatory approach that focuses on achieving optimal execution outcomes for clients.

We also would like to suggest that ample care be given to the actual definition of “best execution” in this context. If it is defined too strictly, such as mandating a set number of quotes from specific venues, it would introduce costly inefficiencies. We agree it should differ to that applied to traditional finance but from a principal’s perspective it should be defined more loosely than currently is the case in the investment world. Some examples of carve outs we believe should be considered when defining the scope of such requirements are set out in question 23 below.

Best execution and general conduct of business requirements may present significant challenges for intermediaries. For example, the lack of a principal exchange (unlike traditional markets) and the resulting fragmentation of liquidity across multiple competing exchanges adds a layer of complexity for firms trying to deliver best execution in relation to cryptoasset transactions.

In addition, there is currently no commonly implemented communications protocol for exchanging crypto trading data (see our response to Question 17). This presents the challenges highlighted in response to Question 18, in that there are significant differences in communications standards. In addition, cryptoasset exchanges tend to be more prone to operational challenges such as system outages and attacks. Such disruption may lead to breaks in the flow of information, potentially resulting in delays and gaps in execution data.

Alternative approaches that should be considered are:

• Providing principles-based definitions, including for the concept of “best execution” which expects CATPs and liquidity providers to take all economically and technically feasible steps to provide the best outcome for their customers;
• Permitting the leveraging of advanced transparent methods like on-chain aggregators (e.g., Jupiter, 1inch) or proprietary routing systems that programmatically optimes for total consideration (including price, fees, slippage, likelihood of execution); this achieves “best execution” by design, rather than by relying on legacy processes and approaches; or
• Introducing some sort of “equivalence” framework, enabling best execution across trading venues operating in well-regulated jurisdictions, so as not to disadvantage UK retail customers, in particular;

These approaches are preferable because they rely on principles that allow for greater innovation around “best execution”. They also address the costs to consumers because these costs of compliance are inevitably passed on to them. Introducing the proposed regulatory regime would increase operational overhead, restrict execution venues, and see UK retail customers, in particular, paying comparatively higher fees. This set of circumstances is inconsistent with the principle and ultimate achievement of the goal of “best execution”. 

20. What benefits and risks do you see with the proposed guidance requiring firms to check the pricing for an order across at least 3 UK-authorised trading platforms (where available)?

We strongly support the underlying principle behind the proposed guidance that customers should be provided with a transparent benchmark. This is the only benefit, but, otherwise, this approach is not practical, and appears to be a legacy rule from traditional finance that is not suited to the global nature of crypto trading nor to the fact of token-to-token trading. In short, we strongly disagree with the requirement that the price should be checked across at least three UK-authorised platforms where available.

In short, price discovery should not be restricted to the UK only, as this may not be the best option from an execution perspective and may not be in the customer’s best interest unless the customer is setting buy/sell price. In addition, we know that liquidity within the cryptoasset markets is fragmented, with order books typically lying with the centralised global parent entity for most exchanges (most of the largest being non-UK).

Our strong disagreement is further driven by the fact that the proposal does not take into account the full nature of the global cryptoassets marketplace, and would not actually benefit investors and cryptoassets users because best execution is not likely to be achieved for them via these requirements. We would refer you to our response to Question 19 as further context.

Our key concerns and reasons for disagreement are listed below and they include the risks to taking the proposed approach:

• It narrowly focuses on price, while “best execution” should be a much broader construct and be operationalised using strong principles, and not simple rules:
  • The rules, as proposed, risk missing better outcomes available elsewhere, especially as on-chain liquidity is globally accessible and can be programmatically queried from numerous sources.
  • Firms should have the flexibility to use their own liquidity routers or aggregators, capturing value for clients, rather than being obliged to outsource execution if they can achieve best execution efficiently in-house through these methods.
  • It could be further argued that the technology is already capable in the cryptoassets market to ensure best execution and it therefore does not need to rely on legacy ‘human’ controls (such as the arbitrary rule of three proposed);
• It does not adequately consider or handle those cryptoassets where there is limited access via UK CATPs:
  • If a given cryptoasset is less liquid on UK CATPs, the prices will not be a good benchmark for best execution purposes because the most liquid markets are those that offer the most competitive prices and tighter spreads.
  • The arbitrary approach proposed does not take into account all execution factors and the nature of the client order and the ability for the intermediary to improve the price.
  • Conflicts in such regulatory requirements should be avoided, especially if it is not compatible with the overarching principle of best execution of taking all reasonable steps to get the best possible result for the client.

Instead of the proposed approach, we recommend that rather than checking for a single reference price when executing an order, intermediaries should calculate the total consideration for the transaction on different trading platforms. This may involve routing the client’s order through one or more trading pairs similar to cross-currency trading in FX markets in order to obtain an accurate and transparent quotation and total execution cost. On-chain aggregators can already provide this solution, for example.

At a minimum, the proposed approach should not be taken unless and until independent research investigates and publicly catalogues the differences in execution achieved between a proprietary, unconstrained liquidity router/aggregator and that achieved by restricting to only UK-regulated venues. We stand prepared to assist with input to this important research, if this would be helpful. 

21. What benefits and risks do you see with the idea that best possible results should be determined in terms of the total consideration when firms deal with retail customers?

Please also take into consideration our responses to Questions 19 and 20.

As background to our answer, we would like to offer the following context. Cryptoasset markets are subject to significant volatility. Firms and investors may find substantial price discrepancies and spreads across different platforms, and different crypto currencies (particularly for altcoins); this makes pricing alone an unreliable indicator.

As such, we agree that total consideration is the most appropriate approach for a variety of reasons. Other execution factors, such as size and nature of order, likelihood of execution and settlement, may be given precedence over immediate price and cost factors if they are instrumental in delivering the best possible result in terms of the total consideration to the retail client. Such implicit costs may be relevant for retail clients with respect to a large order in a relatively illiquid share, for example.

The benefits using the benchmark of total consideration in the retail customer context include:

• Consistency with MiFID II and other international standards;
• Transparency for clients on true execution costs;
• Incentives for firms to reduce hidden fees and promote cost-efficient execution.

However, whilst we acknowledge that defining best execution as “total consideration” is consistent with MiFID II and international standards, we strongly recommend that the definition of total consideration must be sufficiently wide to encompass all crucial elements beyond just the headline price; it needs to include execution costs, fees, speed, slippage, and the likelihood of execution and settlement. This holistic view  is essential for achieving genuine best outcomes for clients.

The challenge in assessment is that not all venues are/would be fully transparent about all aspects of their fees and charging  structure to allow for full assessment, so price alone may not be the most reliable indicator, if all other factors are not taken into account. Another example is  when transacting a large order, minimising market impact might be more important than price. In contrast, when trading an illiquid product (OTC derivative), certainty of execution might be more important than price.

In addition to benefits there are related practical requirements and risks:

• Standardising how total consideration is calculated and reported across firms;
• Disclosing how total consideration is structured and calculated;
• Addressing how easy or difficult it is to compute total consideration accurately and whether all the information required is actually available; for example, all the third parties may not be sufficiently transparent in where they take fees, nor are all the costs fixed in advance; and
• Including some ‘best effort’ style language that is applied to those intermediaries calculating total consideration.

22. Do you see any potential problems with the proposal to restrict intermediaries to offering regulated services for UK retail customers solely for cryptoassets admitted to trading on a UK authorised CATP?

We recognise and applaud the intention to provide consumer protection via this proposal. However, we are very concerned that, in fact, it will not provide the desired protection because limiting the choice may only serve to reduce their access to global liquidity and the ability to hold a well-diversified portfolio (which is the underpinning principle of sound investment and market participation). 

We understand the risks that the proposed rule is attempting to address, but also do not see this as a significant issue–market behaviour suggests the majority of retail investors invest in a portfolio of mainstream, well-established cryptoassets like bitcoin, ethereum, solana, and others.

Our concerns can be summarised by stating that this proposal would likely limit consumer choice, and stifle market innovation, as well as UK global competitiveness within the cryptoassets arena. The UK would be one of the only countries in the world to impose such a requirement, and whilst we recognise that the UK has a reputation for strong, well-governed capital markets, we believe that this proposal is so extreme that it does not actually serve that purpose in the end.

Key potential problems in more detail are:

• It limits asset choice for UK retail
  • The range of cryptoassets admitted to trading on UK-authorized CATPs is likely to be far smaller than the total universe of cryptoassets available globally, especially in the early stages of the regime.
  • This would severely restrict investment choices for UK retail customers compared to their counterparts in other jurisdictions or compared to institutional investors in the UK.
• Innovation and market development are likely to be stifled in the UK
  • New and innovative cryptoassets would not be easily offered to UK retail until they are listed on a UK CATP (which itself might be a slow process with its own criteria).
  • Cryptoasset projects could be disincentivised from focusing on the UK market or UK-based innovation in the crypto space. The impact of this is that the UK could fall behind as a hub for crypto innovation.
  • The cryptoassets market evolves rapidly with new assets gaining prominence quickly. A system reliant on formal admission to a UK CATP might be too slow to adapt, leaving UK retail behind market trends.
• The impact on existing holdings needs to be considered:
  • UK retail customers’ will likely have existing holdings of cryptoassets that are not subsequently admitted to trading on a UK CATP.
  • They may be forced to sell, and intermediaries may be unable to offer services (e.g., custody, transfer) for these assets.
• There will likely be a competitive disadvantage for UK Intermediaries as they would be at a competitive disadvantage compared to overseas platforms that can offer a wider range of assets to UK retail (if those users choose to access them directly, circumventing UK regulation).
• If only a few CATPs are authorized in the UK, and they list a limited set of assets, this would lead to concentration risk in the assets available to retail and in the platforms themselves. Again, this would create an untenable economic and financial markets scenario where investors and cryptoassets holders simply cannot create a well-diversified portfolio.

Finally, it is worth highlighting that the sector is quickly evolving, and restricting the provision of service to those cryptoassets admitted to trading on a UK exchange may result in customers going to other jurisdictions. Typically, cryptoasset investors will trade the cryptoassets that they want, and will be willing to look elsewhere even if it means accessing via VPN. From a commercial perspective, this may present a long-term negative impact by hindering the competitiveness of the UK cryptoasset sector.

23. Are there any specific activities or types of transactions we should expressly carve out of our proposed order handling and best execution rules? If so, why?

As above with our response to question 19, we believe best execution requirements, if implemented, should be principle-based and allow for nascent technologies to be used. When further delineating the scope and implementation of any best execution requirements, we would also recommend that it should apply the 4-fold cumulative test as has been done for corresponding MiFID activities. In our view, this test works well to minimise operational and compliance burdens and to increase investor accountability for institutional / sophisticated trading.

Where a client gives specific instructions on how their order should be executed, as we see in traditional financial markets, best execution should not apply. Some other carve-outs could include:

• OTC / Large (block) trades where price discovery may be bespoke and execution strategies are more complex.
  • For larger orders, other factors beyond price (e.g. speed and likelihood of execution) are equally, if not more, important than total consideration, and they also form part of what constitutes best execution;
  • A bilateral request for quote process protects confidentiality, whilst pre-trade transparency increases slippage; and
• Internal hedges by CATP’s market-making desk, specifically inventory management that does not affect client orders.

Finally, we also would like to note that the flow chart at 3.37 is not clear as to what transactional circumstances may trigger best execution for professional clients.

What risks arise when specific instructions (for example, specifying which execution venue to use) from retail customers are allowed to override certain best execution requirements? How can these be mitigated?

We do not support a complete ban on customers’ ability to override certain best execution processes and outcomes. Although we acknowledge that the risk is that investors may then have a relatively worse price outcome, in our view it is important that market participants and the regulatory regime as a whole support investor choice and accountability, which also will in turn lead to enhanced, appropriate competition between exchanges.

To be proportionate and consistent with traditional instruments, customers should be able to provide instructions and waive best execution requirements for the aspects covered by the client’s instructions. The latter qualifying point is a key component – for example, where a client specifies a venue, this should not dispense the intermediary from seeking the best price on that venue. In such cases, clients would still need to acknowledge in writing the implications of their instructions, including notably that they may not get the best possible result.

We acknowledge the corresponding risks of allowing this approach may include:

• Absence of clarity of what the override means and entails, and in what circumstances it may apply;
• Lack of consumer understanding of the consequences of that decision and difficulty for intermediary in evidencing this;
• Complexity in handling complaints where customers believe they are mislead;
• Ensuring that overrides for a specific order aren’t carried across to other orders without re-validation that this is still what the customer wants; and
• Challenges in adequate record-keeping to remove these examples from overall best execution monitoring.

The risks of allowing specific instructions can be mitigated by:

• Enhanced customer education,which could be provided by the FCA or exchanges / intermediaries;
• Providing adequate risk warnings about the risks of proceeding with the clients wishes and confirmations / acceptance of risk that is clearly documented;
• Explicit opt-in and confirmation steps for customers which would add friction and delay order execution; and
• CATPs to require that clients would need to acknowledge the implications, such as that a better result may be available elsewhere.

25. Are there circumstances under which legal separation should be required to address potential conflicts between executing own orders and client orders?

While we acknowledge that there is a significant potential for conflicts of interest to arise,  in our view a similar, if not higher, level of risk exists in the traditional finance space. Firms holding existing traditional  dealing permissions have to implement robust segregation mechanisms, for example through creation of systems to prevent the use of a client’s financial instruments when dealing on their own account or to obtain explicit consent from clients in advance.

We believe that, in most cases, functional separation is sufficient. However, firms should have the prerogative to choose legal separation if they so desire. Robust conflicts and disclosure controls should help to address such risks without the need for legal separation, and clients’ best interest rules should apply.

In the case of purely proprietary trading (as in traditional finance), legal separation may be required. This is consistent with MiCA article 76.5 forbidding [CATPs] from operating a trading platform to deal on their own account on the trading platform for crypto-assets they operate, including where they provide the exchange of crypto-assets for funds or other crypto-assets.

The overlap between agency flow and matched principal business gives better outcomes. As such, it is our view that there should be no explicit general rule, thus leaving it up to the firm how they segregate.

26. Are there any other activities that may create conflicts of interest and risks to clients if performed by the same intermediary? How can these be managed?

Activities that may create conflicts of interest and risks to clients if performed by the same intermediary include:

• A cryptoasset trading platform that conducts market-making on its own platform and impedes the fair access of competing market makers;
• Operating both a broker and a trading venue;
• Combining custody with lending and proprietary trading functions;
• Insolvency of a custodian, potentially entangling user assets; and
• Co-mingling lending and execution functions.

These issues can be managed primarily by using the principles of sound corporate governance, with appropriate segregation of duties and functional separation as appropriate. We believe, however, that these mitigations should be principles-based and not a list of specific requirements.

27. What benefits does pre-trade transparency provide for different types of market participants and in what form will it be most useful for them? Please provide an analysis of the expected costs to firms for each option if available.

We are concerned that this question does not ask for more insight about pre-trade transparency and whether it is actually needed in this context. Pre-trade and greater market transparency already exists through the multiple exchanges that provide order book bid/offer/market depth data/price streams. It does not seem sensible to introduce pre-trade transparency requirements for cryptoassets, and we would instead suggest that an exemption similar to that for spot FX should be provided.

There is one setting wherein the pre-trade transparency requirement may be necessary–for example, tokenised securities should perhaps be in scope for transparency requirements once the products are developed; For example, regulators and entities may desire parity between tokenised securities and real world securities under MiFID. 

At this time, we are not able to estimate costs to firms, but will address this question when there is a clearer picture as to the direction of the requirements.

28. What alternative solutions to the post-trade transparency requirements proposed above could mitigate the risks? Please provide an analysis of the expected costs to firms for each option if available.

Alternative solutions that could mitigate the risks include:

• A model with waivers that is similar to MiFID II;
  • Waivers to include large-in-size trades so as to mitigate immediate publication to the market of large risk exposures;
  • A reporting deferral period suitable in duration to allow for the risk exposure to be unwound:
• An anonymised trade tape (following the SEC CAT model) shared with market participants and regulators;
  • Aggregator-based reporting, where an FCA-designated repository collects and disseminates post-trade data; or
• Allowing the publication of aggregated daily transaction volumes by CATP:
  • This method blends individual orders together, reducing the risk of revealing sensitive trading activity while still promoting overall market transparency.

Most intermediaries already log trade data for internal use. Hence, the marginal cost of standardising and submitting to a shared post-trade facility is modest, especially if APIs and schemas are centrally defined.

29. Do you believe that certain cryptoassets should be exempted from transparency requirements? If so, what would be the most appropriate exemption criteria which would best balance the benefits from transparency and costs to the firms?

Please refer to our responses in Questions 27-28.

Further, there was some variation in views from our members. Many  supported a well-calibrated, risk-based regime, so that the cost of compliance does not unintentionally choke liquidity or discourage listing of innovative but still-developing assets. In their view, cryptoassets should be exempt (or subject to deferral / lighter reporting) where the marginal public benefit of real-time transparency is demonstrably lower than the private and systemic costs the rules would impose. These members do not believe there is a need for additional pre-trade transparency requirements, and that post-trade transparency that follows the MiFID II model is balanced and sensible for cryptoassets.

Another subset of our members supported specific and limited exemptions, with post-trade and pre-trade transparency as the default in most circumstances, unless the risk of harm is negligible and justification for exemption is documented. Some examples of specific exemptions include:

• Low-volume tokens, where public disclosure may risk manipulation and/or distort markets; or
• Qualifying stablecoins.

30. What would be the most appropriate exemption threshold to remain proportionate to the size of the firm while balancing the benefits from transparency and costs to the firms?

Please refer to our responses in Questions 27-29.

31. What are the crypto-specific risks of opting retail customers up? How should these be managed and what additional guidance on how to assess the expertise, knowledge and experience of clients can we give firms to better mitigate risks of harm?

We believe that there are few crypto-specific risks that may arise where retail customers decide  to opt up to professional client status. The first is that retail customers are relatively new to this asset class as well as some of the  associated activities, for example, staking. Another key area of crypto-specific risk is the taxation consequences that are not well understood by retail customers or well communicated by the industry  (Note: this risk applies across the board to all or most cryptoasset transactions, and we address this in more detail in Question 54).

The general risks (not crypto-specific risks) that may arise where retail customers opt up include lack of customer understanding, and information asymmetry, as we laid out in our response to DP24/5. These risks could in some cases result in retail customers not being in a position to make fully informed decisions. However, the burden of customer education should not be the sole responsibility of the entities with which they transact, nor should a government or regulators seek to restrict all risky transactions from retail customers in the name of consumer protection. We support a framework that encourages personal responsibility, combined with principles-led customer education, along with proportional risk warnings and disclosures requirements.

The cryptoasset markets themselves present a variety of additional risks such as extreme price swings, irreversible on-chain settlement, platform/hot-wallet hacks, protocol failure or forks, and rapidly changing legal status.

To mitigate the risk of retail customers opting up, we believe that firms should use principles-based methods to assess assess the customer’s level of expertise, including:

• Scenario-based assessments that focus directly on the types of cryptoasset products and services offered by the firm;
• Minimum live-trading history in relation to relevant cryptoassets;
• Evidence of DeFi experience/interaction; and
• Periodic reassessment (e.g., annually).

More broadly, we would ask the FCA to clarify its overall approach to client classification under the new cryptoassets regime and how this will fit with the existing investor categorisations within COBS 4 and COBS 3). Under the financial promotion rules in COBS 4.12A, crypto firms must categorise and certify clients as either “restricted retail”, “sophisticated” or “high net worth” investors. By contrast, under the professional client rules in COBS 3.5, a retail client is simply defined as a client who is neither a professional client or an eligible counterparty (a wider category of retail client than that which may be certified as a restricted retail investor for the purposes of financial promotions). This is an inconsistency which, unless clarified, would result in CATPs having to rebuild their current finprom workflows to enable an opt up process for different categories of retail clients or bucketing of listed tokens to restrict client access based on these different investor categorisations.

We would be grateful if the question of appropriate and consistent investor classification requirements be discussed in more detail with the industry, to ensure that the categorisations are both consistent and proportionate.

32. What are the benefits of having quantitative thresholds when opting clients up? How should we determine any quantitative threshold? What alternative rules or guidance specific to crypto should we consider?

The benefits of requiring quantitative thresholds in order to opt clients up include objective, automatable tests which can mitigate bias, protect retail clients and provide defensible audit trails which regulators can trust.

CATPs could set limits as follows:

• By using a percentage of liquid assets, trading frequency or 10-day VaR, benchmarked against MiFID II’s €500k portfolio/10 trades/1-year experience and the US ‘accredited investor’ $1m net-worth tests; and
• By introducing tiered limits—such as starting at £20 k/day and ≤2× leverage.

These limits should be relaxed once on-chain behaviour demonstrates a level of sophistication. This is consistent with the Dubai VARA approach.

However, we would like to note that there are certain risks involved with relying on quantitative thresholds and as such we would recommend that they be reevaluated regularly by the government and regulators in conservation with the industry. Further, we would not recommend using an individual’s net worth as a criterion to establish professional status, the risk being that this mimics the UK’s traditional finance model where investment opportunities are only available to wealthier investors, which is completely at odds with the more democratic and inclusive objectives of the cryptoassets market.

33. Do you agree with our understanding of the risks from cryptoasset lending and borrowing as outlined above? Are there any additional risks we should consider?

We largely agree that loss-of-ownership, maturity/liquidity mismatch, consumer knowledge gaps, platform-token conflicts, and product-specific features are the principal sources of harm arising from cryptoasset lending and borrowing. However, we are concerned that the description of these risks in the Discussion Paper  is overstated in parts, and some of the key risks have not been considered at all.

While we agree with the regulatory policymaking principle of “same risk, same regulatory outcome”, it is important that this approach begins with accurately identifying the “same risk”. We believe that the risks associated with cryptoasset lending and borrowing  are different from much of traditional finance lending and borrowing given that  cryptoasset loans are typically overcollateralised.

As such, we think it is crucial that the FCA does not apply a traditional finance view to the practice of cryptoasset lending and borrowing, and applies further consideration to the relevant  crypto-specific risks. We believe it is possible to mitigate these risks in a way that satisfies the FCA’s consumer protection objective, without over restricting retail participation. As noted above and in our previous responses, we support a framework that encourages personal responsibility, combined with principles-led customer education, along with proportional risk warnings and disclosures requirements.

As such, we invite the FCA to consider the following high-level crypto-specific risks:

• Cross-chain dependencies;
• Multi-jurisdiction insolvency complexity;
• Smart-contract exploit risk; and
• Ongoing regulatory-classification uncertainty for both cryptoassets and investors types.

More detailed crypto-specific risks that we believe the FCA should take into account include:

• Smart Contract Exploit Risk: Bugs or vulnerabilities in the lending protocol’s code leading to loss of funds (the primary risk in DeFi).
• Oracle Risk: DeFi lending protocols rely on oracles for price feeds to determine collateralization levels and trigger liquidations. Manipulated or malfunctioning oracles can lead to improper liquidations or protocol insolvency.
• Governance Risks: Malicious or poorly executed governance proposals can alter protocol parameters to the detriment of users.
• Liquidity Risk in Collateral: If collateral is illiquid, it may be hard to sell during mass liquidations without significant price impact, potentially leaving lenders with losses.
• Hidden Leverage: Users may borrow from multiple platforms, creating systemic risk not visible to any single lender.
• Regulatory Arbitrage/Uncertainty: Platforms operating across jurisdictions with unclear regulatory status.
• Commingling of Assets: In CeFi, the risk that client-deposited assets are commingled with operational funds or rehypothecated without clear disclosure or consent.

We would also like to draw to the FCA’s attention the following areas:

• The need to differentiate the risks between CeFi and DeFi Lending
  • While there is overlap, the specific risks and mitigations can differ. For example, counterparty risk is central to CeFi, while smart contract risk is paramount in DeFi; and
• The need to separately address the risks from “Liquid Staking Derivatives as Collateral”
  • These introduce new layers of smart contract risk and potential de-pegging risks.

We recognise that addressing these areas will involve trade-offs, particularly in relation to cost, market concentration, and speed-to-market; we are ready to engage with the FCA to determine a proportionate design. With proper disclosures, risk warnings, collateral requirements, and transparency around interest rates and counterparty exposure, retail participants can be given the opportunity to participate in a more informed and protected manner. In addition, there is currently no dedicated regulatory framework for cryptoasset lending and borrowing in most jurisdictions. Including such a framework within the UK regime would make it distinctive and forward-looking, positioning the UK as a leader in setting standards for safe and responsible innovation in the cryptoasset space.

Please see our response to Question 50 related to DeFI.

34. Do you agree with our current intention to restrict firms from offering access to retail consumers to cryptoasset lending and borrowing products? If not, please explain why.

One of the UK’s previously-stated objectives has been to make the UK a global cryptoasset hub, and to promote innovation and technological advancement. Restricting lending and borrowing would undermine HM Treasury’s vision for a competitive UK cryptoasset sector, and would likely divert activity to jurisdictions with lower retail protection standards.

As a result, we generally do not support blanket bans on retail participants in markets for any types of cryptoasset or activities. Instead, we believe the regulators and the industry should work together to find appropriate safeguards to allow innovation while also maintaining appropriate consumer protections.

As stated in our response in Question 33 that addresses the concept of “same risk, same regulatory outcome,” lending and borrowing in cryptoassets is typically different than in traditional financial markets. Most, if not all cryptoassets loans are overcollateralised by design, whereas this is not the case for traditional borrowing and lending transactions. If the UK has a goal (and the FCA has a secondary objective) to remain globally competitive, blanket bans will not serve that purpose.

At a high level, we therefore urge the FCA to adopt a graduated, permission-based approach, instead of blanket bans, that:

• Allows for collateralised borrowing by consumers where the risk of contagion is contained;
• Authorises retail products meeting prudential, conduct and disclosure tests;
• Monitors consumer outcomes through enhanced reporting and disclosures; and
• Adjusts the regime in light of empirical evidence after a defined review period.

A more detailed approach could involve “tiered” alternatives to managing any unique retail customer risks as follows:

●  Tier 1 (Permitted with Strong Protections (for all retail customers)): Lending/borrowing of highly liquid, qualifying stablecoins, fully overcollateralized, on platforms meeting high security, transparency, and operational standards. Subject to appropriateness tests and clear risk warnings;

• Tier 2 (Restricted/Sophisticated Retail Only): Lending/borrowing of more volatile cryptoassets, or products with more complex risk structures (e.g., involving rehypothecation, or DeFi protocols with less audit history). Require enhanced appropriateness/sophistication checks, lower exposure limits; and
• Tier 3 (Prohibited for Retail): Uncollateralized lending, lending for highly leveraged positions, or products with opaque risks or from unaudited/unvetted platforms.

Finally, we do not believe that any potential restrictions on intermediated access should prevent direct DeFi interaction for the purpose of cryptoasset lending and borrowing. In any case, we would encourage a focus on education and providing tools and guidance for safer direct interaction with DeFi protocols.

Please see our response to Question 50 related to DeFI.

35. Do you agree that applying creditworthiness, and arrears and forbearance rules (as outlined in CONC) can reduce the risk profile for retail consumers? Could these be practicably applied to existing business models? Are there are any suitable alternatives?

Our members expressed varied views on this question. The  majority do not agree with applying full CONC rules on the basis that these were designed for unsecured traditional finance credit to relatively small and overcollateralised cryptoassets loans. This would be a disproportionate approach, and as such, a more cryptoasset-tailored approach is needed, in discussion with the industry specialists who deeply understand the differences between the traditional finance credit markets and cryptoassets credit market. At a minimum, we would suggest proportionate restrictions tailored to: the size of loan, the nature of the cryptoasset, and the extent of collateralisation.

However, some members agreed that transplanting CONC-style credit-worthiness and arrears/forbearance rules into retail crypto lending would meaningfully reduce default rates and conduct risk without stifling innovation. These members believe that centralised platforms can embed these processes with only incremental system changes required:

• Risk mitigation: mandatory affordability checks, clear hardship protocols and structured repayment plans reduce loss-given-default and reinforce Consumer Duty outcomes;
• Practical deployment: existing KYC/AML pipelines can be extended with automated income-verification APIs and rule-based payment holidays or rate caps—no wholesale business-model overhaul required; and
• Proportionate alternative: for fully collateral-backed, real-time-margin products, a rigid LTV ceiling plus 24-hour liquidation grace period and prominent risk warnings could deliver equivalent consumer protection with lower operational overhead.

36. Do you agree that the proposed restrictions for collateral top ups would reduce the risk profile for retail consumers? Are there are any suitable alternatives?

We broadly agree that where firms use automatic collateral top up mechanisms, this should be combined with a requirement to clearly inform the customer before providing the loan and to obtain express consent before the loan is agreed. This would ensure that retail participants are aware that it is their responsibility to actively maintain sufficient collateral, to avoid undesired events, such as forced liquidation if not actively monitored. However, as noted in our responses to Questions 33-35, we are concerned that the restrictions override personal responsibility and choice, and put undue responsibility on the entities to protect retail participants beyond that required in traditional finance (where investors can easily lose all of their investment or capital as well).

37. Do you consider the above measures would be proportionate and effective in ensuring that retail consumers would have sufficient knowledge and understanding to access to cryptoasset lending and borrowing products?

While we accept that there is a need to mitigate the risks arising from cryptoasset lending and borrowing, we do not believe the proposed measures are proportionate, as explained in our responses to Questions 33-36.

Separately, we would be grateful for clarity in relation to how the FCA’s proposed measures for lending and borrowing fit with the current financial promotions rules, and in particular whether the risk warnings and appropriateness assessments required in COBS 4.12A would need to be updated to reflect these more detailed lending and borrowing assessments. Entities have already spent a considerable amount of capital and time to meet those current requirements, and it is unclear whether and exactly how much they would need to reconfigure their operations and infrastructure to align with these new requirements.

38. What benefits do platform tokens provide to consumers?

Firstly, we note that the Discussion Paper appears to create a new definition of “Platform Tokens” not previously mentioned. While, as defined, platform tokens can incentivise loyalty, reduce fees, or offer governance rights, in practice, platform tokens are not commonly used in this way. Intermediated cryptoassets borrowing and lending should be restricted to unaffiliated cryptoassets. Moreover, these firms are able to  incentivise loyalty and offer fee rebates without a token (or a straight utility token that has no tradable value outside the platform).

It is important to clarify that the term “platform token” is not a formally defined category in cryptocurrency regulation or technical literature. Instead, tokens are usually categorised based on their function within a blockchain ecosystem. However, in practice, many tokens referred to as “platform tokens” can serve multiple functions or roles simultaneously, or may serve different functions at different points during its life cycle, and often belong to one or more of the following categories, for which we articulate below the roles and benefits of each type:

Utility Tokens

• Definition: Tokens that provide access to a product or service within a blockchain platform.
• Roles and Benefits:
  • Pay for platform usage (e.g., transaction fees, subscriptions).
  • Unlock access to features or data.
  • Encourage user activity through staking or discounts.
• Examples:
  • ETH on Ethereum (used to pay gas fees).
  • BNB on Binance (used for trading fee discounts).

2. Security Tokens

• Definition: Tokens that represent ownership in a real-world asset (e.g., equity, real estate) and are regulated as securities.
• Roles and Benefits:
  • Represent fractional ownership in a company or project.
  • May offer dividends or profit-sharing.
  • Provide investor protections through legal frameworks.
• Examples:
  • Tokenized shares or real estate on platforms like Securitize or tZero.

3. Governance Tokens

• Definition: Tokens that grant holders voting rights in decentralized platforms or protocols.
• Roles and Benefits:
  • Vote on proposals like protocol upgrades, fee changes, or treasury allocations.
  • Enable decentralized decision-making and community engagement.
  • Align user incentives with platform development.
• Examples:
  • UNI (Uniswap), COMP (Compound), AAVE (Aave).

4. Reward Tokens

• Definition: Tokens that are distributed as incentives to users for participating in a platform’s ecosystem.

• Roles and Benefits:
  • Encourage behaviours like staking, providing liquidity, or referring others.
  • Serve as a mechanism for user acquisition and retention.
  • Often distributed through yield farming, mining, or airdrops.
• Examples:
  • SUSHI (SushiSwap) for liquidity providers.
  • CAKE (PancakeSwap) as farming rewards.

39. How can conflicts of interest be managed for platform tokens to reduce the risk profile for retail consumers?

While we generally do not think that the management of conflicts of interest should be strictly prescribed by regulation, we do support the approach of principles-based guidance.

Some recommendations as to how firms can apply principles by which they self-manage/mitigate any potential conflicts would include:

1. Transparent Tokenomics and Disclosures

• Risk: Insiders (e.g., founders, developers, VCs) may hold large token supplies and influence decisions for personal gain.
• Mitigation:
  • Full disclosure of token distribution (initial allocations, vesting schedules, unlock dates).
  • Public documentation of how tokens are used: treasury management, staking, reward pools, etc.
  • Regular financial audits and third-party reviews of treasury and token flow.

2. Governance Mechanism Safeguards

• Risk: Large holders (whales) may control voting outcomes, undermining decentralization.
• Mitigation:
  • Quadratic voting or vote-weight caps to limit influence of large holders.
  • Multi-stakeholder governance: Include representatives of users, developers, and independent auditors.
  • Minimum participation thresholds for key votes (quorum requirements).
  • Use time-locks on decisions to allow for community feedback and objection.

3. Independent Oversight or Advisory Boards

• Risk: Platform operators may act in their own interest (e.g., adjusting reward rates or fees to their advantage).
• Mitigation:
  • Establish independent advisory councils or community-elected committees to oversee major changes.
  • Engage third-party compliance, risk, or legal advisors to review key governance proposals.
  • Encourage participation from non-aligned stakeholders like DAOs, NGOs, or academics.

4. Clear Separation of Roles

• Risk: When the same entity issues the token, manages the platform, and controls incentives, it leads to self-dealing.
• Mitigation:
  • Separate token issuer from the platform operator or governance body.
  • Disclose affiliations of major governance participants.
  • Require conflict-of-interest declarations for core team and council members.

40. Do you consider that if we are to restrict retail access to cryptoasset lending and borrowing, an exemption for qualifying stablecoins for specific uses within the cryptoasset lending and borrowing models would be proportionate and effective in reducing the level of risk for retail consumers?

While there has been some variation amongst members in relation to the specific issues, the majority of members do not support the blanket ban on cryptoasset borrowing or lending in general. In this regard, please see our responses to Questions 33-37. However, were the FCA to require such a ban, we agree that an exemption for stablecoins for specific uses should be made available.

A minority of members believe that a proportionate risk mitigation would be to allow qualifying, fully-backed stablecoins (e.g., 1:1 USD-pegged with daily attestation and bankruptcy-remote reserves) as the only eligible collateral or loan asset, because this approach would serve the following beneficial purposes:

• Volatility neutralises – eliminates margin-call spirals that drive most retail losses in crypto lending.
• Transparent reserve reports – simpler disclosure; consumers can verify solvency in real time.
• Single-currency cash-flow – borrowers and lenders avoid FX risk and can model returns like a money-market fund.

41. Would restrictions on the use of credit facilities to purchase cryptoassets be effective in reducing the risk of harm to consumers, particularly those vulnerable? Are there alternative approaches that could equally mitigate the risks?

No, we do not believe this restriction would be an effective or proportionate harm mitigation because it would only add to the already preexisting limitations within the UK for responsible retail participants from engaging with responsible CATPs.

Many banks currently do not permit customers to fund cryptoasset trading accounts, meaning that for many crypto investors, credit cards are the only way to access this market. Further, it is the role of the credit card provider to establish the creditworthiness (and/or vulnerability) of their clients, and as such we do not think it is appropriate for the government or FCA  to dictate to individuals what they should or should not buy on credit that has been approved by a responsible credit provider.

If the FCA intends to proceed with its proposal to restrict the use of credit to fund crypto trading accounts, we would ask that it provide clear guidance to banks on regulatory expectations regarding the ability of banking customers to use their own money to buy what will be regulated assets on regulated platforms. As part of this broader UK banking issue, we would encourage the FCA to consider the wider question of banking for the cryptoasset industry, including for those who support it, but who are not actively engaged in any cryptoasset activity. Even registered institutional cryptoassets businesses can find it challenging to open bank accounts; so, more broadly, the FCA should consider its secondary objective in terms of what it can do to drive access to banking as traditional players start to move into the space.

42. Do you agree that firms should absorb retail consumers’ losses from firms’ preventable operational and technological failures? If not, please explain why? Are there any alternative proposals we should consider?

First, we believe that the FCA should make explicit that the proposals in this staking chapter apply only to custodial models of staking, and not to any non-custodial models. Although not directly relevant to DP25/1, we have concerns over various definitions in HM Treasury’s Draft Statutory Instrument (SI) – e.g., “custodian”, “dealer”, “safeguarding”, or “making arrangements”- that could inadvertently bring non-custodial staking entities or activities into the regulatory perimeter, contrary to the stated intention of the SI. We would

While our members conveyed mixed views on certain aspects of this question (which we convey below), most disagree with the overarching proposal, as currently drafted, because “preventable operational and technological failures” is too broad a phrase to be applied consistently. As such, we think  there needs to be an actual definition of this phrase which can be applied consistently, and clarity around when and how liability to the CATP will attach.

Many operational or technological downtimes are often required for operational updates to security and other aspects of a given technology; they are a common occurrence in traditional financial services as well. For example, every IT infrastructure needs to perform short, planned downtime for maintenance purposes. If a given validator needs to be online during such downtime (no one knows when a validator will be chosen in advance) and the validator is offline, then a small slashing penalty will be applied and so the potential rewards that the client would have received will be lower due to the scheduled downtime. This is normal industry standard, and no one expects a validator to be up 100% of the time. The definition used in this proposal may be interpreted to mean that any technology can never have a scheduled downtime.

Some members have suggested a free market solution that may be more effective. It is common to agree Service Level Agreements (“SLAs”) with professional staking providers and, in our experience, none are able to guarantee 100% of the rewards due to the technical reasons above. The risk of slashing due to technical failure could lead to more serious slashing penalties. The way this is usually covered in SLAs is that customers get a guarantee to be reimbursed for slashing incidents up to the total sum of operational fees that the user has paid for staking services. In addition to that, there is a free market incentive solution for this problem. Smaller staking providers usually offer validators with lower fees because they are a less known actor. Users who are willing to take that risk will earn higher yield. Well-established staking operators can and are charging higher fees for providing staking as a service. Users who want that additional security can choose to pay for it. In short, the majority of members believe that the free market can solve this concern, rather than non-principles-based, prescriptive regulations.

Any approach that tries to mandate a solution for this could adversely affect smaller players and innovation. If it is suggested that staking operators should have a sufficient balance sheet to cover staking losses it would effectively mean that only banks could offer staking services. This could inadvertently create a monopoly which adversely impacts  smaller players and innovation in the UK crypto economy. We are concerned that these suggestions could erode free market dynamics and create a staking monopoly for large financial institutions. This would not help innovation in the UK. 

A minority of members would support indemnifying retail clients for losses stemming from preventable, firm-side operational or technological failures, providing this phrase is appropriately defined. For example, these members may support asset replacement when slashing is caused by validator errors under the entity’s direct control. In such cases, liability should attach only after an independent post-mortem confirms breach of FCA operational-resilience or change-management standards; however, network-level bugs and force-majeure events would remain excluded, as is the case today. Replacement funding could combine a calibrated internal operational risk financial buffer with compulsory errors-and-omissions insurance, perhaps supplemented further by an industry-wide digital asset compensation scheme to cap contagion. Such a principles-based framework could protect consumers, preserve balance sheet predictability, and foster responsible innovation in the UK.     

In summary, the existing regulatory architecture already compels firms to absorb the direct, preventable losses they cause, while recognising that consumers must bear the risks they voluntarily take. We do not however support a blanket duty that could undermine competition, consumer choice and overall market stability. We would welcome the opportunity to collaborate with the FCA on refining alternative mechanisms and on developing guidance that ensures timely, fair redress without eroding the incentives that underpin operational resilience across the sector.

43. Do you agree that we should also rely on the operational resilience framework in regulating staking, including the requirements on accountability?

We consider that the operational resilience framework should be applied in a limited / proportionate manner in regulating staking, to avoid the unintended consequence of  limiting any entity that is not a bank or large institution from offering staking services to or launching a staking business in the UK (due to complex operational burdens).

44. Do you agree that firms should have to get express consent from retail consumers, covering both the value of consumer’s cryptoassets to be staked and the type of cryptoassets the firm will stake, with each cryptoasset staked by the consumer requiring its own consent?

We are concerned that these proposals may be conflating a variety of issues and concepts, and that they do not take into account the role of Terms and Conditions (“T&Cs”) behind these types of client-firm relationships.

In practice, if a client has left assets on a true custody basis, then the firm with which they have left them cannot simply stake (or otherwise) use the assets without express client consent. However, if there is a not a true custodial relationship between the firm and its clients,  and the firm states that they “segregate” client assets, then any uses of the client assets (including staking) by the firm should require notification and  express consent. Finally, if a client has put the assets with a firm under an “Title Transfer Collateral Arrangement” (“TTCA”), then approval is not required, but may be further addressed within the T&C outline. As such, express consent will be required, but it will depend on the specific circumstances and arrangement with the client.

45. Do you agree that firms should provide a key features document as outlined above to retail consumers? If not, please explain why? What other means should be used to communicate the key features and risks of staking to consumers?

Whilst the standardisation of some form of key information document (KID) template wording would keep consumer disclosure consistent across the sector, its prescriptive content should be kept to a minimum standard and with the expertise of responsible staking entities already operating in the UK. Please see the CryptoUK response to DP24/4 for further insight.

Staking risks vary from blockchain to blockchain and sometimes change (for example during the Pectra Ethereum upgrade). High level information about the risk of staking can be principles-based, while other specific information, such as for how long tokens are under lock-up provisions can be required. Companies should not be asked to react and document every change that happens in any blockchain ecosystem regarding staking as this would not be proportionate

Please see our response to Question 46 for additional suggestions.

46. Are there any alternative proposals we should consider to minimise the risks of retail consumers’ lack of understanding leading to them making uninformed decisions?

We would support a general information document about what staking is and what the risks are. Staking is a simple concept, but it can be complex to understand, given its variety of forms. The Digital Economy Initiative has prepared a detailed analysis and description of the different types of staking that would be beneficial to regulators and investors alike. Putting cryptoasset investments or holdings to work through staking could be viewed as a similar decision to consumers buying more relatively more risky stocks through brokers. Providing high level information regarding the general risks is important, but consumers ultimately must make their own risk decisions, and regulators should enable that personal responsibility.

47. Do you agree that regulated staking firms should be required to segregate staked client cryptoassets from other clients’ cryptoassets? If not, why not? What would be the viable means to segregate clients’ assets operationally?

Firstly, a distinction should be made between technological segregation and legal/functional segregation, and how/when either one can be utilised to address similar risks. On the one hand, technological segregation, which speaks to a requirement to maintain separate blockchain addresses and wallets, helps to increase security by isolating customer assets from firm assets. However, depending on the types of blockchain protocols used, this could prove to be costly or may not always be feasible (for example in relation to pooled staking and liquid staking models). This can also increase the cost and harm the accessibility of these products. This would represent a step backwards from the position that staking does not constitute a collective investment scheme. In such scenarios, legal/functional segregation could be utilised to address the same risks.

Secondly, while we understand the intention of the proposals, we are concerned about two additional areas:

1. That the Statutory Instrument (SI) scopes more staking firms into the regulatory perimeter than the government intends, due to some of the definitional issues raised in the recent HMT SI Roundtable that included a discussion on staking; some of the concerns were around the exact meaning of some key concepts such as “custody” or “custodian”, and “safeguarding” to name a few.
2. That the current phrasing of the proposed regulations implies that staked assets should be held in a separate wallet with a separate private key. This approach could force companies to operate multiple institutional wallet providers which is costly and could further cause an incentive for companies to hold staked assets in “normal” hardware wallets in order to follow this regulation. This dynamic would make the safeguarding of the staked assets less secure. A normal hardware wallet is much more insecure than an institutional wallet provider that provides governance protections for wallet operations that a normal hardware wallet does not have.

Having wallets with explicit labels marking them as wallets where funds are staked is a proportionate approach. Forcing clients to hold staked funds in entirely separate wallets does not work in our view. Many institutional wallet providers allow clients to create multiple wallet hierarchies that allow users to operate with multiple wallets and label wallets differently. This is done through the BIP44 standard which allows use of a single private key to operate multiple segregated wallets. This is already industry best practice.

In summary, any regulation regarding where staked funds should be held should only require adequate wallet labeling (which is possible through the BIP44 architecture) and nothing further. The FCA should prioritise the application of general custody requirements, operational resilience obligations, and disclosure standards, rather than imposing segregation requirements on staked assets.

48. Do you agree that regulated staking firms should be required to maintain accurate records of staked cryptoassets? If not, please explain why?

We agree that records should be maintained, but would suggest that this be blockchain enabled. Further, we support separate, external third-party attestation of these records.

49. Do you agree that regulated staking firms should conduct regular reconciliations of staked cryptoassets? If not, please explain why? If so, what would be the appropriate frequency?

There were mixed views on this question among our members. Some believed that the blockchain is already a publicly available record of staked crypto assets. Financial reporting already requires companies to prove movements and balances of wallets against the blockchain, and this includes staked funds. Having to build out or purchase a separate reconciliation tool will be expensive and could inhibit smaller companies and stall innovation. Other members support the notion of required reconciliations since not all entities are currently subject to audit requirements that ensure these reconciliations are being conducted in a timely, regular, and reliable manner.

50. Do you consider the proposed approaches are right, including the use of guidance to support understanding? What are the effective or emerging industry practices which support DeFi participants complying with the proposed requirements in this DP? What specific measures have you implemented to mitigate the risks posed by DeFi services to retail consumers?

We would prefer that the FCA allow for additional time, and provide a separate opportunity to discuss its proposed approaches to DeFI in more detail with the industry. This is a fast-moving, innovative area within cryptoassets, and regulation, in our view, needs to be principles-based and have the ability to flex along with the innovation. It also needs to be carefully crafted so as not to stifle it, whilst also providing consumer and market protection.

The FCA’s emphasis on outcomes—e.g., protecting consumers, maintaining market integrity, and ensuring transparency—is well aligned with effective oversight. We believe that there are still inadequate guidelines on key definitions and concrete examples.

We especially urge caution around the definition of what constitutes “DeFI” and “decentralised” activities. We do not believe these are adequately or accurately defined as yet in the SI or DPs issued to date. We would like to draw your attention to two initial areas of concerns with respect to key definitions and concepts that are relevant DeFI and decentralisation

1. “Control” and “Making Arrangements” Definition and Decentralisation

The definition for “making arrangements” across various regulated activities is overly broad and could unintentionally encompass DeFi participants that this SI does not intend to capture. Adding a “control” element to these various activities would mitigate such risk.

If a party is indeed acting in a manner that gives them sufficient control of user assets, it’s reasonable that they are regulated as such. However, the 2.10 of the Policy Note for the Statutory Instrument states that the FCA will determine if there is a “sufficiently controlling party or parties” on a case by case basis, but there is no clarity as to how this will be determined. The FCA identifies a need to assess the degree of centralisation and we believe that in order to do so, there should be an underlying definition guiding their evaluations. We propose a  possible definition:

The term “control” means the ability or independent legal right or independent legal right to obtain upon demand data sufficient to initiate transactions spending an amount of digital assets.

In assessing control, a reviewer should ask whether the underlying protocol remains under centralised authority – that is, whether any person or group of persons under common control has unilateral and independent authority to make changes to the protocol. In line with this, the FCA should also explicitly exclude various software providers and operators who do not exercise “control” over transactions and user assets, ensuring that these participants are not covered by the proposed definition of sufficiently controlling party under the SI. This would appropriately exclude developers and/or operators of:

• Unhosted wallets;
• Noncustodial peer-to-peer software protocols and applications;
• User interfaces (front-end websites or applications);
• Users who participate on a protocol (users,traders, liquidity providers, etc); or
• Communication technologies (relayers and RPC nodes).

Adopting our proposed definition of “control” would be compatible with the United States’ framework, which features a control based decentralization test and exclusions for DeFi, a goal expressed by Chancellor of the Exchequer Rachel Reeves on cross-border compatibility.

2. Same Risk, Different Solutions

The FCA states that if the same risks exist in DeFi as in centralised services, then the same solutions must apply. We find this to be a misunderstanding of the technology. There can be similar risks that may require different solutions given the nature of the technology as compared to a centralized service (DeFi protocols tend to have information open and publicly available by default so there is not a need for certain disclosures in the way that may apply to a centralized service).

Furthermore, simply because a similar risk exists does not mean that there also exists a party or parties who can comply with regulations in the way a centralised service can. For example, being liable for users or consumers’ financial losses from inadequate technological or operational resilience. Appropriately decentralised protocols never have custody over user assets, so while there are risks of financial loss, these risks require different regulatory approaches. In addition, many risks to centralized services are actually cybersecurity risks that come from points of centralization and honeypots of vast amounts of customer information. While cybersecurity risks are also relevant to DeFi in a different way, there is no centralised actor in DeFi that controls the overall network or collects customer information.

We believe that a too rigid regulatory perimeter would risk excluding legitimate innovation or risk failing to capture new risks because it is not flexible enough. However, we do wish to note the following feedback from our members as relevant to consider now as to what should be clearly distinguished in a perimeter, if one must be defined at this point (although we believe it should be still consulted on with the industry in more detail):

• Custodial vs non-custodial tools
  Financial services style regulation should apply to custodial businesses that take in customer funds to deliver services. It should not apply to software where the end users retain control over their funds at all times. This includes the software that provides the front-end to such non-custodial tools (subject to the enterprise distinction that follows).

• Development vs enterprise
  Financial services style regulation should apply where there is a for-profit business entity to apply it to (although this latter concept requires additional consultation to define well in the regulations, in our view). It should not apply where the only purpose is to develop and make available a technology solution that happens to have a financial component, or where the operation and profits of that software can be proven to be managed in a decentralised way (keeping in mind that we believe that is not yet carefully defined, and we welcome the opportunity to consult on this). There must also be provisions or safe harbours that allow new decentralised tools committed to achieve this level of operational decentralisation.

Finally, in addition to additional industry consultations on this area, the FCA could also reference existing research and bodies who are deeply involved in DeFI education and consultation matters. For example, would strongly encourage the FCA to consult:

• DeFI Education Fund, with whom we collaborate.
• IOSCO’s December 2023 report, “Policy Recommendations for Decentralized Finance (DeFi)”; and
• Global Coalition to Fight Financial Crime’s Digital Asset Task Force (“DATF”).

51. We consider these potential additional costs to firms and consumers in the context of the potential benefits of our proposed approach, set out earlier in Chapter 1. In your view, what are the costs of these different approaches? Can you provide both quantitative and qualitative input on this.

Please see our response to Question 53.

52. Do you agree with our assessment of the type of costs (both direct and indirect) and benefits from our proposals? Are there other types of costs and benefits we should consider?

Please see our response to Question 53.

53. How do you see our proposed approach to regulating these activities affecting competition in the UK cryptoasset market?

Overall, we remain concerned that the FCA and the UK are leaning toward an overly-prescriptive, less principles-based approach to cryptoassets regulation. While there will be significantly more guardrails, these will come at the expense of increased product cost and delivery efficiencies, and in short, we do not believe that the current proposals strike the best cost-benefit balance, and will leave the UK as a relatively unattractive and potentially non-competitive landscape in which to conduct business.

Other jurisdictions such as the EU (MiCA), UAE, and Singapore have introduced tiered or phased frameworks that distinguish between low-risk and high-risk activities, helping attract a broader range of actors.

We are concerned that the proposed regulatory posture will:

1. Disincentivise new entrants, including global CATPs that would otherwise have considered the UK as a base;
2. Encourage regulatory arbitrage, with firms choosing more innovation-friendly jurisdictions than the UK; and
3. Leave UK users increasingly dependent on unregulated or overseas providers, weakening consumer protection rather than strengthening it.

Please also see the introduction section for our general views on the FCA’s approach with regulating the industry.

54. Are there any additional opportunities, including for growth, we could realise through a different approach to regulating these activities?

In closing, we would like to mention the following areas by which we believe additional growth could be realised without compromising market or consumer protection as compared with traditional financial activities:

1. Smarter, more effective authorisation pathways

We continue to recommend a more nuanced approach, that includes introducing provisional or tiered authorisation for firms seeking to enter the UK market, similar to the MAS (Monetary Authority of Singapore) framework for digital payment token services. This would allow firms to begin offering limited services under strict supervision while scaling compliance obligations gradually.

Such a framework supports real-world testing, faster time-to-market, and better integration with consumer needs, without compromising oversight. It would also allow the FCA to assess applicant behaviour during the onboarding phase and use this “live data” to inform decisions on full approval.

2. Streamlined taxonomy and proportional risk assessment

We are concerned that the current regulatory scope remains too binary, without adequate and clear gradation between different types of cryptoassets, trading models, and user risk profiles, for example.

A more nuanced risk-weighting approach would:

• Allow clearer segmentation between high-frequency institutional activity vs. retail speculation;
• Enable more proportionate controls (e.g., light-touch obligations for peer-to-peer DEXs with low volume vs. systemic CEXs); and
• Reduce regulatory overheads on low-risk actors while enhancing scrutiny of higher-risk entities.

3. Competitive, clear, and growth-friendly crypto taxation policies

We continue to recommend that policymakers work together, and with industry, to fully take into account the role of taxation in creating opportunities for growth. We urge regulators and policymakers to avoid treating taxation as a siloed area; it should be directly and clearly factored into the broader jurisdictional approach to the industry and its activities.

Specifically, we reiterate:

• Our recommendation in response to HM Treasury’s 2024 “Call for Evidence on a Financial Services Growth and Competitiveness Strategy”:
  • Recognise and support the role that proportionate and reasoned taxation plays in economic growth and international competition. Focus on the areas where taxation of crypto transactions is not proportionate or consistent especially for retail participants.
• Our recommendations within the Autumn Budget 2024 Stakeholder Representation, which included, among other recommendations, the following:
  • Immediate term–implement the CryptoUK Tax Working Group’s solutions on the taxation of DeFi transactions; these are solutions that should be implemented now.
  • Medium term–introduce tax-efficient investment vehicle wrappers for UK based exchanges on select cryptoassets. This provides a means for individuals to invest in cryptoassets in a limited and safe way with UK exchanges. This would remove tax reporting burdens and promote a healthy tax system making compliance easy.
  • Longer-term–commission a broad and deep apolitical project similar to those of the Law Commission which can conduct important practical and theoretical research on how best to tax cryptoasset transactions.