The UK's cryptoasset regime could accelerate the entry of banks, wealth managers and other traditional financial institutions into digital assets at the expense of crypto-native businesses, according to research by Zumo, an Edinburgh-based company that provides the infrastructure banks and fintechs use to offer their own crypto products.
With the UK's Financial Conduct Authority (FCA) authorization gateway set to open on 30 Sep, the regulator told Sandmark that "firms now have greater clarity on the requirements of the UK's new cryptoasset regime and the standards they will need to meet." It is encouraging prospective applicants to use its Pre-Application Support Service (PASS), webinars and wider engagement programme to prepare for acceptance, while stopping short of commenting on the merits of the regime itself.
A two-tier market for crypto in the UK
Nevertheless, some in the industry believe the rules are being shaped around the needs of established financial institutions rather than the crypto-native firms that have driven much of the sector's innovation.
"The wealth managers are licking their lips," Daniel Taylor, head of policy and research at Zumo, said in an interview with Sandmark. "So much of what has been applied is what they know."
As firms prepare for the regime to come into force in October 2027, Taylor argues that banks, asset managers and other traditional financial institutions have a head start. One of the clearest messages from Zumo's recent UK Regulatory Preparedness Assessment survey is that firms remain committed to the UK market, with nine in ten respondents intending to apply for authorization. However, only one in ten says it is fully prepared, while six in ten are still assessing how to adapt their UK operating model.
According to Taylor, much of that preparedness gap reflects the fact that the incoming framework is built around familiar financial-services concepts, including governance structures, compliance functions and regulatory controls.
"Crypto natives aren't familiar with Financial Services and Markets Act (FSMA) regulation," he said, citing just one example. For traditional financial institutions, those requirements are largely business as usual. Adding crypto permissions is often an extension of capabilities they already possess, creating an opportunity to offer digital assets alongside existing investment products.
Compliance costs remain a hurdle
The challenges are considerably greater for many crypto-native firms. Taylor points to prudential capital requirements as one of the most significant issues facing prospective applicants.
Unlike previous regulatory reforms in traditional finance, where firms were typically given time to adjust to new requirements, crypto businesses are facing the prospect of becoming fully compliant within relatively tight deadlines. According to Taylor, many of the global infrastructure providers commonly used by crypto firms do not have deep expertise in these UK-specific arrangements. As a result, businesses may need to redesign operating models, review legal structures and identify new service providers to remain compliant. "It all adds to the cost and is, therefore, a barrier," he said.
International firms face further complications because the UK is not offering a streamlined route for businesses already authorized elsewhere. "Firms regulated in other jurisdictions will still need to meet the requirements of the UK's regulatory framework if they wish to carry out regulated cryptoasset activities in the UK," the FCA told Sandmark.
Taylor said the FCA's position appears to be that the digital asset market is not yet mature enough for international equivalence. He argues the cumulative effect could be the emergence of a two-tier market. "The regulators are going after the large-scale highly regulated activity more than the crypto natives," he said. "The big crypto brands will go for it, but the smaller players may not come to the UK. They could go to the boutique offshore locations like the UAE, Bermuda and Malta. The UK is favouring traditional finance at the expense of innovation."
Why quantity and quality both matter
For the authorization regime to function effectively, Taylor argues, it needs a critical mass of regulated exchanges, custodians and infrastructure providers. The success of the regime will ultimately depend on both the number and calibre of authorized firms. Taylor expects most of the companies already on the FCA's Money Laundering Register to apply for authorization. However, the participation of major exchanges such as Coinbase and Kraken is also important.
That matters because many firms will depend on access to regulated counterparties. "For example, Zumo needs to know how it can route its orders," Taylor said.
The presence of major exchanges would provide the liquidity, trading venues and infrastructure needed to support wider participation from banks, wealth managers and other financial institutions entering the market. Conversely, if too many global crypto firms decide the UK's requirements are too costly or complex, development of the wider ecosystem could be slower than policymakers hope.
The FCA declined to comment on potential applicants, stressing that authorization decisions will be made on a case-by-case basis against the relevant statutory and regulatory requirements. According to Taylor, Zumo is planning to apply for authorization under the categories of custody and dealing in cryptoassets as an agent.
The UK could become a major regulated digital-assets hub. The question is whether that hub is being built primarily for banks, wealth managers and large global exchanges, or whether there will still be room for the next generation of crypto-native innovators.
