UK’s new crypto regime boosts customer recovery rights — and risks squeezing market liquidity

What the timetable and FSMA-style authorisation mean for crypto investors right now

The Treasury has given crypto firms a clear deadline: by October 2027, platforms providing services to UK customers must meet a new authorisation standard modelled on the Financial Services and Markets Act (FSMA). That timetable gives firms time to apply, but it also sets a firm end point for a major shift in how crypto platforms operate in the UK.

For investors, the immediate implications are simple and practical. Platforms that intend to keep serving UK users will need to start paperwork and change how they hold customer assets. That should improve the legal claim customers can make if a platform fails. At the same time, a separate prudential measure described as a “conservative” rule — aimed at protecting customers — will force some platforms to cut back on risk-taking and market-making. That tightening could raise trading costs and reduce the depth of liquidity you rely on.

In short: you can expect better legal protection for your assets in a bankruptcy, but you should also expect some frictions in trading — at least while platforms rework operations to comply.

Which firms will need the FCA-style authorisation, and what will that process look like?

The new regime targets firms that provide custody, trading, or other services involving cryptoassets to UK retail and institutional clients. Think exchanges, custodians, and platforms offering spot trading or custody. Even businesses based abroad but actively serving UK customers will be in scope if they don’t carve out UK users.

The authorisation requirement will follow an FSMA-style track. That means firms must apply to the UK regulator for permission to carry on regulated activities. Expect a familiar checklist: governance and senior manager accountability, capital and liquidity standards, operational resilience, clear client asset controls, and rules on anti-money-laundering and consumer disclosures.

Practically, firms will have to prepare legal and systems changes. They will need to demonstrate how customer assets are safeguarded, how they value tokens for prudential calculations, and how they will meet the regulator’s conduct expectations. Some smaller or niche platforms will find those costs heavy. Larger, capitalised players and regulated custodians will have an easier time absorbing the expense and time it takes.

Investors should watch three immediate signals: whether a platform files for authorisation, public confirmations of custody models, and any announced changes to trading or listing policies tied to the UK market. Firms that don’t commit to the process may stop serving UK clients altogether.

Stronger bankruptcy protections — what actually improves for customers

The headline change is a clearer legal route to recover customer crypto when a platform goes bankrupt. Under the old, murky mix of terms of service and variable custody practices, customers frequently ended up as unsecured creditors alongside other claimants. The new rules aim to change that by creating statutory protections and clearer segregation of client assets.

Practically, this usually means two things. First, firms will have to separate customer assets from their own balance sheets in a way courts recognise — for example, by holding tokens in designated client wallets or using legally recognised trust arrangements. Second, insolvency rules will give priority to those segregated client assets, making them detachable from the platform’s estate and easier to return to customers.

That change raises the practical odds that people recover some or most of their crypto if a platform collapses. But it is not a perfect cure: recovery still depends on accurate accounting, operational controls, and the ability to access private keys. Tokens that are lost, stolen, or subject to complex intermingling across wallets may still be hard to retrieve. Also, not every token will be treated the same — legal and technical questions about token ownership will matter in practice.

The conservative rule that could squeeze liquidity — how that plays out

The Treasury and regulator have flagged a conservative prudential rule aimed at protecting client assets from sudden valuation swings. In plain terms, the rule forces firms to use cautious assumptions when they count client tokens for regulatory capital and liquidity tests. That conservative stance reduces the risk of a platform overstating how much liquid collateral it actually controls.

Mechanically, the rule works through three channels. First, platforms will be discouraged from using client tokens as collateral for market-making or lending because doing so would create a mismatch between what belongs to clients and what the firm needs to satisfy prudential buffers. Second, market makers and liquidity providers who rely on exchange inventory will find that inventory constrained. Third, margin and leverage facilities tied to client balances will be smaller or more expensive.

Worst-case scenarios: spreads widen on small-cap tokens as market makers pull back; order books thin and slippage rises during stress; and episodic freezes or withdrawal delays occur when platforms race to shore up liquid assets. The impact will be strongest for illiquid tokens and thinly capitalised venues; deep, regulated custodians and large exchanges will be better placed to keep markets functioning.

Who benefits, who loses, and what prices might begin to reflect

The new regime points toward consolidation. Well-capitalised exchanges and regulated custodians will gain an edge because they can spread compliance costs over larger volumes and already have custody practices that map to the new rules. Smaller exchanges, niche token platforms, and market-makers with thin balance sheets may struggle or exit the UK market.

For tokens, expect a divide. Widely traded tokens with robust custody tools and clear legal status will see smaller liquidity hits. Niche or newly minted tokens — especially those without ready legal opinions or robust custody support — are likelier to be delisted by compliant platforms. That will raise trading costs for those tokens and could depress prices as liquidity evaporates.

From an investor perspective, the regime is a net improvement in legal safety, but not in short-term convenience. Some investors will accept slightly higher trading costs in exchange for stronger protections. Others — especially active traders in small tokens — will face higher execution costs or may move to self-custody or non-UK venues.

Practical steps investors and exchanges should take before October 2027

For investors:

• Check whether your platform has publicly committed to seeking UK authorisation and what custody model it uses. Prioritise platforms that clearly segregate assets and publish custody arrangements.
• Assess concentration risk. If you hold large positions on a single platform, decide whether you want to shift some assets to regulated custodians, self-custody, or diversified venues well before any market disruption.
• Watch liquidity signals: widening spreads, shrinking order-book depth, and market-making pullbacks are early warnings. Expect higher slippage on low-cap tokens and plan order sizes accordingly.

For platform operators and market-makers:

• Start the authorisation process and map your custody arrangements to the new legal tests. Get independent legal opinions on token ownership where needed.
• Prepare for prudential impacts by stress-testing liquidity and reallocating capital toward high-quality liquid assets. Rework market-making models that rely on client token rehypothecation.
• Communicate early and clearly with customers about token lists, withdrawal policies, and timelines. Transparency will be a competitive advantage as customers migrate toward trusted operators.

The October 2027 deadline is both a protection and a turning point. It raises the safety floor for customers and makes the market more regulatory-compliant. But it will also reshape where liquidity sits in the crypto ecosystem, and how cheaply you can trade. Investors who understand the trade-offs now — between legal safety and frictions in trading — will be better positioned to protect capital and benefit from the long-term stability these rules are meant to bring.