Regulating Crypto: The Tug-of-War between growth and consumer protection

In December Keir Starmer and Rachel Reeves went searching for growth in an unusual place – among the UK’s regulators. Each received an early Christmas present in the form of a letter asking for pro-growth ideas.  

Since then, the Government has mounted pressure on regulators to eliminate barriers and go for growth. First with the removal of the CMA’s Chair, then the Chancellor’s ‘audit’ of regulators and now with reports (that look increasingly likely to be accurate) that the Government is considering abolishing the Payments Systems Regulator.  

However, while regulators are asked to remove barriers, the Government is introducing new regulations to increase consumer protections, from workers’ rights to Buy Now Pay Later.  

One framework that will need to ride the tension between growth and consumer protection focuses on crypto. Despite Labour’s scepticism about crypto the Government has committed to secondary legislation in early 2025 that will enable the Financial Conduct Authority (FCA) and Bank of England to regulate cryptoassets. The Bank of England is also continuing to explore the development of a Central Bank Digital Currency – but given the privacy concerns this is now being given less political focus, making the regime for private cryptoasset development all the more important.  

When the secondary legislation is published, we expect the Government to emphasise how it will increase both consumer protections and growth opportunities. But regulators will ultimately be left to develop the details that will determine where the balance lies. 

Getting that balance right is important. Crypto presents opportunities for growth in the form of jobs, investment and efficiencies in areas such as payments and capital markets, but these must be balanced against the risk that consumers lose their hard-earned savings.  

This blog considers how the FCA might manage the tug-of-war between growth and consumer protection while designing the crypto regulatory framework. In it we identify the FCA’s ban of the sale of crypto-derivatives and exchange traded notes (cETNs) to consumers as an example that epitomises this tension and explore whether the FCA will revisit its ban.  

The international context will influence the UK’s approach

Under Trump, the US now has a pro-crypto stance as it pivots away from ‘regulation by enforcement’ and takes steps to create a ‘strategic reserve of digital assets’. Meanwhile the EU’s Markets in Crypto-Assets Regulation (MiCA) is one of the first, comprehensive, regulatory frameworks for crypto. Singapore and Hong Kong have also positioned themselves as supportive environments for crypto.  

Given this backdrop, the UK cannot afford to be left behind and must act swiftly to leverage its ‘second mover advantage’ to remain internationally competitive. We understand that the FCA is eager to ‘be better than MiCA’ and ensure that lessons are learned from overseas. Building international access into the UK’s regime through equivalence or branch-type structures would be one way for the FCA to increase competitiveness without directly lowering consumer protections.  

How will the FCA manage the political tug-of-war between growth and consumer protection when implementing the crypto regulatory framework?  

The FCA faces a difficult juggling act. It must balance its primary objectives (to ensure consumer protection, market integrity and competition in the interests of consumers) with its new secondary objective (to promote growth and international competitiveness). All while prioritising its resources across an ever-increasing remit.  

To date, the FCA has prioritised consumer protection for cryptoassets. It set a tough gateway for registration under the Anti Money Laundering regime with only 14% of applicants successfully registered since January 2021. The FCA also introduced a strict financial promotions regime, banned the sale of cETNs to consumers and consistently warned that consumers could lose all their money when investing in crypto.  

However, the Chancellor’s Mansion House Speech marked a turning point in the regulatory context. Reeves said regulators needed to ‘regulate for growth’ not ‘for risk’. Since then, the FCA’s words and actions have changed. Nikhil Rathi has said he is “willing to be bold” and the FCA has started to consider pro-growth measures such as relaxing mortgage rules.  

There are early signs that the FCA’s mindset shift on risk will extend to crypto too. It has increased its dialogue with industry and is actively promoting crypto innovation through the Digital Securities Sandbox.  

With the new regulatory context, we expect the FCA to work harder to seek out crypto related growth opportunities. However, these efforts will likely be stifled if the FCA continues to take a zero-risk approach to crypto consumer protection. Where the FCA lands on the balance between growth and consumer protection will depend on its decisions across a huge range of issues including disclosures, financial crime, market abuse, prudential and conduct requirements. 

The ban on cETN epitomises the tension the FCA faces. 

The FCA first consulted on the ban over half a decade ago to protect consumers. It was introduced in January 2021 over concerns that consumers can’t reliably assess the value and risks of derivatives like contracts for differences (CFDs), futures, options, and exchange traded notes (ETNs) that reference cryptoassets. There were also concerns that cETNs could provide legitimacy to unregulated cryptoassets.  

However, industry criticised the ban saying that it stifles innovation and growth. In March 2024, the FCA appeared to respond to this criticism by enabling cETNs to list in the UK for institutional investors – demonstrating the FCA’s higher risk appetite for professionals.  

One year on from that decision we believe the blanket ban for consumers will be reconsidered as part of the development of the crypto framework for the following reasons: 

• Consumer protection risks have been reduced by new powers introduced since the introduction of the ban (e.g. crypto financial promotions regime).  

• Consumers are accessing crypto in increasingly large numbers directly from exchanges that are largely unregulated. Allowing access to cETNs would provide an alternative for those consumers to gain exposure to crypto in a more regulated environment.  

• Once the crypto regulatory framework is in place there will be more robust regulations and safeguards. 

• If consumers can access regulated crypto directly a blanket ban on cETNs cannot be sustainable. 

• Aligning with crypto-friendly markets like the US could boost UK competitiveness. We understand FCA leadership may be sympathetic to a review in the context of the growth agenda.  

While a lot of uncertainty remains about the FCA’s approach to crypto, the new regime is inevitably going to influence the approach to cETNs. The necessity of growth, the push for deregulation, the international context and the incoming increased standards for crypto means now is the time to reconsider it.  

Flint can help you navigate these changes.

As the UK develops its crypto regulatory framework, businesses and investors need to be involved.  

We provide strategic advice, on political and regulatory engagement, to help companies influence in line with their commercial interests. We understand the policy detail, how the teams involved will approach issues and can provide a global view using our network of specialists across the EU, APAC and USA.  

If you’d like to learn more about how we could support you, please get in touch.  

This blog was written by Director Adam Hendry and Manager Bhavini Parmar. Adam advises clients on regulatory, policy and economic issues with a focus on financial services and technology. Bhavini advises clients on competition, policy and regulatory issues with a focus on financial services and digital markets.