HM Treasury's Crypto Consultations: How UK Policy Was Made Iteratively

The UK’s crypto regulatory framework did not emerge from a single legislative moment. It was assembled over five years through a series of public consultations, call-for-evidence exercises, FCA discussion papers, and policy statements — each building on the last, each responding to industry, consumer group, and academic input. This iterative process produced a framework that looks quite different from the European Union’s approach, where a single comprehensive text — MiCA — was negotiated through the formal co-decision procedure and enacted as a single package.

Understanding how UK crypto policy was made reveals not just the content of the rules but the regulatory philosophy behind them — and helps explain both the strengths and the limitations of the UK’s approach.

The 2021 Stablecoin Consultation

HM Treasury’s January 2021 consultation paper, “UK regulatory approach to cryptoassets and stablecoins,” was the first major UK government document to engage seriously with the regulatory questions posed by stablecoins. Published against the backdrop of the Libra/Diem discussion and growing market capitalisation of dollar-pegged stablecoins, it framed the core regulatory questions clearly: what risks do stablecoins pose, which risks matter most for UK financial stability and consumer protection, and what institutional architecture should address them?

The consultation invited responses from a wide range of stakeholders. The responses — from banks, crypto exchanges, payment processors, law firms, consumer organisations, and academic economists — provided HM Treasury with a detailed picture of industry structure, business models, and regulatory concerns. The consultation was notable for its analytical quality: it distinguished clearly between different stablecoin types (fiat-backed, commodity-backed, algorithmic) and between different use cases (payment, trading collateral, store of value), a distinction that shaped all subsequent UK policy in this area.

The 2022 Financial Promotions Consultation

Before tackling the full authorisation regime, HM Treasury addressed financial promotions. The 2022 consultation on bringing cryptoassets within the financial promotions regime — requirements for fair, clear, and not misleading communications about financial products — led to the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023, which extended financial promotion rules to cryptoassets from October 2023.

The financial promotions intervention was deliberately sequenced ahead of the full authorisation regime. It addressed the most immediate consumer harm — misleading advertising and unsolicited promotions — without requiring the full apparatus of authorisation and ongoing supervision. The FCA’s aggressive enforcement of the new financial promotions rules, including issuing hundreds of warnings against unauthorised promoters, demonstrated that the regulatory perimeter could be extended incrementally without waiting for the comprehensive framework to be complete.

The 2023 Broader Regime Consultation

HM Treasury’s February 2023 consultation, “Future Financial Services Regulatory Regime for Cryptoassets,” was the most comprehensive of the series — setting out a proposed framework for regulated cryptoasset activities covering exchanges, custodians, issuers, lending platforms, and NFT marketplaces. It proposed using FSMA 2000’s existing regulatory framework and the FCA’s existing toolkit rather than creating a bespoke regime, positioning UK crypto regulation as an extension of mainstream financial services regulation rather than a separate legal silo.

The consultation proposed a phased approach: stablecoins (fiat-backed payment assets) first, then a broader set of activities. It invited views on capital requirements, consumer protection, market integrity, and AML/CFT obligations — the standard pillars of financial services regulation — and on how existing FCA rules (conduct of business, systems and controls, senior managers) should be adapted for cryptoasset businesses.

Industry responses shaped several important outcomes. The FCA’s decision not to adopt prescriptive reserve composition requirements for stablecoin issuers, instead using principles-based outcomes, reflected industry arguments that prescriptive rules were inflexible and unnecessary given the FCA’s existing supervisory tools. The decision to use the FSMA 2000 framework rather than create a separate licensing regime for crypto responded to industry preference for regulatory familiarity.

The FMI Sandbox

Alongside the authorisation regime consultations, HM Treasury developed the Financial Market Infrastructure (FMI) Sandbox — a regulatory testing environment allowing firms to experiment with DLT-based financial market infrastructure under modified regulatory requirements. Announced in the 2022 Edinburgh Reforms and established under powers in FSMA 2023, the FMI Sandbox allows DLT-based trading and settlement venues to test their models with real assets and real participants under modified application of CREST regulations and other FMI requirements.

The FMI Sandbox is the UK’s equivalent of the EU’s DLT Pilot Regime — both provide a controlled testing environment for DLT-based market infrastructure — but the UK version is administered by the FCA and Bank of England jointly, reflecting the dual-regulated nature of UK financial market infrastructure oversight.

Iterative Consultation vs. Comprehensive Framework

The contrast with MiCA is instructive. MiCA was conceived as a comprehensive framework addressing all major crypto asset categories simultaneously, negotiated through the EU’s formal co-decision procedure, and enacted as a single regulation directly applicable across all member states. The process took approximately four years from Commission proposal (2020) to entry into force, with the most sensitive provisions taking another two years to apply fully.

The UK’s iterative approach produced rules faster in some areas — financial promotions rules were in place by late 2023, ahead of most EU member states’ implementation of equivalent MiCA provisions — while taking longer in others. Full authorisation for crypto exchanges and custodians will not be in place until October 2027, by which time MiCA will have been fully operational for over a year.

The comparative advantages of consultation-driven iteration are responsiveness and legitimacy. Each consultation produces evidence-based policy, shaped by the actual views of those who will implement and be affected by the rules. The disadvantage is fragmentation and uncertainty during the process: firms operating in the years between consultations face regulatory ambiguity about the rules they will ultimately need to comply with, making investment and product development decisions harder. The EU’s comprehensive approach, whatever its costs in complexity and negotiating time, delivered legal certainty faster for the core authorisation and operating requirements. UK firms operating in both jurisdictions have had to plan for EU compliance certainty alongside UK regulatory uncertainty — a asymmetry that has influenced some firms’ decisions about where to establish their EU and UK operations.