In December 2024, the FCA took one of its first steps down its Crypto Roadmap and released its first Discussion Paper on two key forthcoming areas of crypto regulation in the UK: the Cryptoasset Admissions and Disclosures ("A&D") Regime and the Market Abuse Regime for Cryptoassets ("MARC").
The FCA's focus on developing the UK's regulatory framework for crypto comes at a time when interest in the sector is once again on the rise (despite persistent fluctuations in value for even well-established assets such as Bitcoin). Further, regulators in the US appear to be embracing a less combative approach, following the inauguration of Donald Trump, while in the EU, the Markets in Cryptoassets Regulation ("MICA") has come into force.
Regulation of crypto assets strikes a delicate balance between creating a regulatory framework that enhances consumer protections, market integrity and transparency while ensuring that it does not impose restrictive burdens on cryptoasset firms, which could stifle investment and growth in the UK's digital economy.
In this article, we take a look at the Discussion Paper to consider whether this latest step on the Crypto Roadmap reflects a fast lane to a thriving digital economy, or a regulatory dead end.
Cryptoasset Trading Platforms
A notable feature of the Discussion Paper is the focus on Cryptoasset Trading Platforms ("CATP"). Strikingly, given the fundamental importance of CATPs to the proposals, the term has not been defined with any particular clarity, and crypto investors and entrepreneurs will be eager to learn exactly which platforms will fall within its scope. With CATPs being the FCA's preferred backstop for regulatory responsibility, whether a firm is a CATP will therefore have a major impact on its regulatory burdens.
There seems little doubt that CATP will include the large and established cryptocurrency exchange platforms like Coinbase, Kraken and Binance. But will it include decentralised exchanges ("DEXs")? DEXs are crypto exchanges that are compatible with non-custodial digital wallets, allowing users to connect a wallet for trading while retaining full sovereignty over the wallet and its assets. They are a key conduit in the market for the supply of altcoins, though some have also been used for nefarious purposes, including pump-and-dump / rug pull schemes, fraud, and money laundering. Tokens listed on DEXs are usually highly volatile and lack any particular utility (i.e are memecoins).
Admissions and Disclosures
The Discussion Paper proposes a new A&D Regime which has the aim of mitigating a range of risks, including financial crime, inadequate information and upholding market integrity. The FCA has said the A&D Regime is designed to complement and align with other regulatory frameworks1 (such as the reformed Prospectus Regime2 for traditional transferable securities, the UK Financial Promotions Regime and the Consumer Duty), without duplicating requirements.
The UK Treasury is also expected to introduce legislation to prohibit public offers of cryptoassets in the UK unless one of the following exemptions applies:
- Where public offers of cryptoassets are admitted or to be admitted to trading on a CATP, and
- Where offered off-platform to certain qualified investors only, i.e institutional investors
Notably, nothing in the Discussion Paper indicates a departure from the UK Treasury’s current proposals regarding requirements for CATPs to be established in the UK. For cryptoassets to be admitted to trading on an exchange, it is proposed that the A&D Regime will require issuers and offerors to make certain information available to ensure investors can make informed decisions. In cases where cryptoassets lack identifiable issuers (e.g Bitcoin), the "person" required to prepare the admission document may be the CATP itself.
Moreover, the A&D regime mandates CATPs to conduct due diligence on issuers or offerors and their admission documents, a significant enhancement from the existing token listing policies many CATPs currently follow. This due diligence must also be made public, with admission documents available on the National Storage Mechanism ("NSM").
The A&D regime is expected to include a “necessary information test” set out in statute, requiring, at a minimum, disclosures on:
- Features, prospects and risks of the cryptoassets
- Rights and obligations (if any) attached to the cryptoassets
- An outline of the underlying technology (including protocol and census mechanisms), and
- Where applicable and available, details of the person seeking admission to trading on a CATP (which may be the CATP itself)
These disclosures will form the content of admission documents, and the FCA is also considering introducing more detailed disclosure requirements in the FCA Handbook.
The FCA has proposed that CATPs will set and implement their own more detailed content requirements for the content of admission documents. This means that CATPs would be responsible for reviewing these documents to ensure they meet the platform's standards. The FCA would not be involved in this process, acknowledging that this could lead to variations in admission documents across CATPs, even where documents relate to the same cryptoasset.
To address this, the FCA has suggested allowing the industry to take the lead in developing the relevant standards, such as standardised disclosure templates. While this seems superficially sensible, the proposal relies heavily on industry goodwill and necessitates CATPs working together on standardised disclosure templates to limit duplication and bureaucracy. Whether CATPs will take these burdens on with consistency or enthusiasm remains to be seen.
These concerns are reinforced by the FCA's proposal to make persons who are responsible for the Admission Documents liable for those documents' accuracy, based on a "negligence standard" under the Financial Services and Markets Act 2000 ("FSMA 2000"). This proposal will bring liability for crypto admissions firmly in line with traditional securities market standards but places an incongruous burden on CATPs, most of which will not be the issuer of the cryptocurrency.
Due Diligence
Likewise, the FCA proposes that CATPs must conduct a “sufficient level of due diligence” to assess (i) whether a cryptoasset should be admitted to trading and (ii) to ensure that associated disclosures are accurate and complete. The NSM platform would make this due diligence public through a summary of key due diligence findings. Although it is contemplated that CATPs will be afforded some discretion in determining what information should be deemed key due diligence findings, at the same time, the Discussion Paper proposes that the required due diligence should do at least the following:
- Establish a "reasonable level of certainty that the offeror is legitimate and disclosures are true and not misleading" – what constitutes "a reasonable level of certainty" will need to be further defined in the relevant rules
- Cover the cryptoasset's underlying technology (such as the use of distributed ledger technology or use of smart contracts), including a review by the CATPs of any third-party code audits
- Cover the persons involved with the offer such as the issuer, offeror or person seeking admission (where applicable and possible), and key individuals such as members of the project team or foundation, to make sure any potential risks are identified
If a CATP fails to comply with the requirements to conduct an appropriate level of due diligence, or if there is evidence of negligence or misconduct, the FCA may take supervisory or enforcement action, and consumers may have the right to take private legal action, placing further regulatory burdens – and potential risk – on CATPs.
Connected with CATP due diligence requirements, the FCA is also considering mandating processes for rejecting admissions to trading, if the platform considers there to be “significant risk” that admission could result in consumer detriment. While this focus on outcomes aligns with the FCA's approach under the Consumer Duty, as things stand, the potential enforcement risks posed to CATPs by admitting new crypto tokens are in danger of outweighing the rewards.
Market Abuse Regime for Cryptoassets
Besides the A&D Regime, the Discussion Paper also sets out a regulatory framework and approach for preventing, detecting and disrupting cryptoasset market abuse, by proposing the Market Abuse Regime for Cryptoassets. This would grant the FCA powers to prohibit insider dealing, require the disclosure of inside information, and criminalise market manipulation.
Among other things, the MARC proposals published by the FCA suggest that operating a CATP will become a Regulated Activity, with new criminal offences being enacted which mirror those that already exist for traditional financial instruments. For now, the FCA proposes to oversee compliance by CATPs and intermediaries, rather than taking the more involved role which it takes in traditional securities markets.
Again, the fundamental philosophy and design principles of cryptoassets are presenting the regulator with difficulties. The FCA acknowledges the prevalence and importance of anonymity in the crypto economy, necessitating a separate market abuse regime for cryptoassets.
By placing the ultimate regulatory burden for preventing market abuse on CATPs (if, for example, issuers operate anonymously through DAOs), we may see coins and tokens being delisted more regularly or simply not made available to the UK market.
One alternative would be to exclude DEXs from the definition of CATP, but this seems unlikely, given the FCA's stated intention to prevent the ills of market abuse in crypto and the fact that a great deal of the illicit activity in crypto is conducted by bad actors in relation to the promotion and sale of altcoins. It would leave a major gap in the regulatory safety net.
All of which suggests the MARC proposals will be broadly similar to the UK's existing market abuse regime (the "Existing Regime"). The protections under the Existing Regime are similarly designed to ensure that financial markets operate fairly and transparently, safeguarding investors from abusive practices such as insider dealing, the unlawful dissemination of inside information and market manipulation.
Further, it imposes strict obligations on market participants (including individuals, issuers, financial advisers and brokers), requiring them to disclose inside information promptly, maintain transparency in trading, and refrain from engaging in any behaviour that could distort the functioning of the market.
In addition, the Existing Regime includes provisions for the surveillance, investigation and enforcement of market abuse, empowering the FCA to monitor trading activities, prevent and detect market abuse offences and take action against individuals or entities involved in market abuse, thereby promoting confidence and integrity in the UK financial markets.
However, despite the robust framework, the Existing Regime faces challenges including those around defining and detecting market manipulation in increasingly complex and digital trading environments, as well as concerns about the adequacy of the regulations in addressing new forms of market abuse, including those arising from algorithmic trading and cryptocurrency markets. The latter of these is being addressed in the Discussion Paper with a proposal for a separate cryptoasset market abuse regime although it remains to be seen if this approach, which is likely to be based on the Existing Regime but focused primarily on CATPs, will address the challenges faced, or whether more thought needs to be given to a bespoke cryptoasset market abuse regime which aligns more closely with the intricacies of cryptoassets.
Conclusion
The FCA has invited feedback on the Discussion Paper by 14 March 2025. Once the FCA has considered this feedback, it intends to publish a consultation paper relating to the proposed rules for admissions and disclosures and the market abuse regime for cryptoassets in Q3 2025.
There is a risk that the FCA will seek to regulate cryptoassets in the UK in a way that disregards the core philosophies that make Web3 so appealing. A "one size fits all" approach that seeks to shoe horn crypto into traditional financial models is unlikely to win the day.
Certainly, if the rules relating to CATPs are made wide in scope, the role of exchanges will be transformed. The FCA clearly sees CATPs as the gatekeepers. Who comes within scope is going to be a key issue.
Of course, as is always the way, the devil will be in the details. This Discussion Paper by the FCA is just the first step in the consultation process.
Jonathan Brogden (Partner and Head of Crypto Disputes), Alexander Bradley-Sitch (Associate), and Jonathan Howell (Associate) are part of the Commercial Disputes team of DAC Beachcroft LLP. They regularly advise clients on disputes and investigations relating to cryptocurrencies, DeFi and FinTech.
Michelle Jones and Jonathan Deverill are Partners in DAC Beachcroft's Corporate team, based in London. They regularly advise clients on corporate and equity capital markets transactions, including the market abuse regime.
[1] See paragraph 2.12 of the Discussion Paper
