What is the legal framework for UK businesses using blockchain technology for financial transactions?

With the rise of blockchain technology and cryptoassets, the UK authorities have been proactive in setting out a regulatory regime for digital currencies. As businesses in the UK, it is essential that you comprehend the legal framework set by the Financial Conduct Authority (FCA) and the Her Majesty's Treasury (HMT). This framework oversees your activities involving digital assets, such as trading and transacting in cryptocurrencies.

The regulatory environment for blockchain and cryptoassets in the UK is both complex and evolving. This article seeks to give you a robust understanding of the current rules and regulations surrounding this innovative technology.

Understanding the Regulatory Landscape for Blockchain and Cryptoassets

The FCA, the UK's financial watchdog, plays a significant role in regulating cryptoassets. The FCA's guidance on cryptoassets, published in 2019, has been critical in setting the regulatory tone. According to the FCA, tokens issued via blockchain can be broadly categorised into three types: exchange tokens, utility tokens, and security tokens.

Exchange tokens are cryptocurrencies like Bitcoin that are not issued by a central authority. They are not considered within the FCA's regulatory perimeter, meaning that the FCA doesn't supervise their issuers or intermediaries. However, activities involving these tokens may still be regulated if they constitute regulated activities.

Utility tokens, on the other hand, provide access to a product or service but are not considered as money nor securities. Such tokens fall outside the FCA's regulatory perimeter, but services related to them may still be regulated.

Lastly, security tokens are akin to traditional securities such as shares or bonds. They are within the FCA's regulatory perimeter, and activities relating to these tokens are subject to the same rules that apply to traditional financial instruments.

HMT’s Proposal for Cryptoasset Regulation

The HMT has also shown a keen interest in ensuring a healthy market for cryptoassets and blockchain technology. In 2020, HMT published a consultation paper laying out its plans to expand the regulatory perimeter for cryptoassets.

These proposed changes reflect the government's will to ensure that cryptoasset firms adhere to the same standards as other financial businesses. They aim to protect consumers, promote market integrity, and maintain financial stability. If implemented, the proposals would bring a wider range of cryptoasset activities under the FCA's regulatory purview.

The HMT has proposed a comprehensive regulatory regime for stablecoins used as a means of payment. Stablecoins are digital tokens that aim to maintain a stable value by being pegged to a reserve of assets. The HMT's proposals subject firms issuing or providing services in relation to such stablecoins to certain regulatory requirements.

The Cryptoasset Activities under the FCA’s Regulatory Perimeter

The FCA's regulatory perimeter for cryptoassets extends to several types of activities. A business is within the FCA's regulatory perimeter if it carries out 'specified activities' related to 'specified investments'.

Cryptoasset exchange providers and custodian wallet providers are subject to registration with the FCA under the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017. These firms must comply with certain Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) requirements.

Cryptoasset firms carrying out activities with security tokens or certain stablecoins may also need to be authorised by the FCA. These firms will have to follow the same rules and regulations as traditional financial service providers.

The Future of Blockchain and Cryptoasset Regulation in the UK

The regulatory landscape for blockchain and cryptoassets in the UK is dynamic and subject to change. The government has expressed its intention to adapt the regulatory regime as the market evolves.

The government's stance reflects a balancing act. On the one hand, it aims to encourage innovation and the growth of blockchain technology and cryptoassets. On the other hand, it seeks to mitigate the risks associated with these assets, including financial crime, market volatility, and consumer protection issues.

As businesses, it is crucial that you stay informed about regulatory developments and adapt your activities accordingly. The FCA and other UK authorities will continue to closely monitor the cryptoasset market and are likely to introduce further regulations as necessary.

Navigating the Regulatory Regime for Blockchain and Cryptoassets

Understanding the legal framework for blockchain and cryptoassets is essential for businesses in the UK. The regulatory regime is complex but navigable with the right knowledge and advice.

It is important to remember that the regulatory regime applies to activities, not technologies. Therefore, the applicability of financial regulation to your business will depend on the nature of your activities involving blockchain and cryptoassets.

You should seek legal advice if you are unsure about how the regulations apply to your business. A legal advisor with expertise in financial regulation and cryptoassets can help you navigate the regulatory landscape and ensure that your activities comply with the law. Regardless of the type of cryptoasset or blockchain service you offer, ensuring regulatory compliance should be a top priority.

Incorporating Blockchain and Cryptoassets into a Financial Services Business

Exploring how blockchain and cryptoassets can be incorporated into a financial services business requires a deep understanding of the UK's regulatory framework. Exchange tokens, for example, do not require supervision by the FCA, but this does not exempt activities involving these tokens from regulation. Financial services businesses must ensure they maintain compliance with the associated regulatory framework.

Activities involving utility tokens may still be regulated, although the tokens themselves are not considered money nor securities. Businesses need to understand the implications of this if they plan to use these tokens to offer products or services.

The use of security tokens may also be appealing to financial service providers. However, these tokens are within the FCA's regulatory perimeter and are therefore subject to the same rules as traditional financial instruments. Companies that deal with security tokens have similar responsibilities as those dealing with shares or bonds.

Businesses must also be aware of their obligations under the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017. Crypto asset exchange providers and custodian wallet providers must register with the FCA and comply with anti-money laundering (AML) and counter-terrorist financing (CTF) requirements.

Data Protection and Cryptoassets

Data protection is another significant consideration for businesses involved in blockchain and cryptoassets. The UK's data protection laws apply to any company that processes personal data, including those in the blockchain and crypto asset sectors.

The UK’s data protection regime requires businesses to implement appropriate technical and organisational measures to ensure data protection principles are met. These include lawfulness, fairness, transparency, data minimisation, accuracy, storage limitation, integrity and confidentiality.

The blockchain’s immutable nature can pose challenges to the data protection principle of the right to erasure, also known as the right to be forgotten. Businesses must be aware of these challenges and ensure they have robust measures in place to comply with data protection laws.


The UK’s regulatory framework for blockchain and cryptoassets is both complex and dynamic. Businesses involved in cryptoassets activities need to understand the regulations around exchange tokens, fiat-backed stablecoins and other digital assets.

The regulatory regime applies to specific activities, not technologies, so businesses must closely consider the nature of their operations. Understanding the legal landscape can be challenging, but it is achievable with the right knowledge and advice.

Ensuring compliance to prevent money laundering and terrorist financing is of utmost importance. Additionally, businesses must adhere to UK data protection laws when handling personal data.

With the regulatory landscape continually evolving, it is crucial for businesses to stay informed and adapt their practices accordingly. A legal advisor with expertise in financial regulation and cryptoassets can be invaluable in navigating this ever-changing environment.

As we march forward in this digital age, the UK's commitment to fostering innovation while also prioritizing consumer protection and market integrity is evident. By maintaining a clear understanding of the regulatory regime, businesses can confidently participate in the exciting and dynamic world of blockchain and cryptoassets.