UK crypto rules set to spark M&A wave, banks target regulated firms

Europe's MiCA licenses are secured. The rulebook is entering a new phase, and lawyers and executives say it could reshape who owns the industry. Ongoing compliance costs mean the next chapter will revolve around mergers and partnerships between crypto-native firms and banks.

That trend could accelerate in the U.K., where the FCA's proposed crypto framework would impose standards comparable to MiCA, said Steven Lightstone, a partner at Morgan Lewis. "The FCA is trying to help competition, and it really is trying to help newcomers," he said. "It does have very high standards, particularly where consumers are involved."

The U.K. proposals would integrate crypto firms into the same rules as traditional investment firms, Lightstone said. Businesses would face the same prudential and client asset requirements, not a bespoke crypto regime. "Because the proposals use existing rules, it's going to be much less like a standalone framework," Lightstone said. "A crypto firm will be treated like any normal traditional financial institution. It will still be hard to get FCA authorization."

Established banks may find adapting to crypto relatively straightforward. Newer crypto businesses face higher costs building capital and custody systems from scratch, Lightstone said.

The FCA's proposed client asset regime applies the Clients Asset Sourcebook (CASS) framework, Lightstone said. It would require segregation of customer crypto assets under trust arrangements and introduce crypto-specific operational safeguards around private keys and reconciliations. "The CASS requirements are very onerous," Lightstone said. "That could encourage those newcomers to merge with, be acquired by, a traditional firm that's already subject to CASS and has those controls in place."

Consolidation prospects are rising as banks grow more willing to enter digital assets now that regulatory uncertainty is lifting, said Simon Schneider, CEO of Sygnum Europe. "As of today, there is less than 20% of all the banks in Europe that offer today any type of crypto services, so it's heavily underserved," Schneider said. MiCA's greatest contribution is giving financial institutions legal certainty, not just new licensing categories, he said.

Schneider pointed to Switzerland as a potential blueprint. After Switzerland's DLT legislation several years ago, crypto adoption among major Swiss banks increased. Today roughly three-quarters of the country's leading banks offer digital asset services, he said, a trajectory he expects Europe could eventually follow.

Banks are more likely to rely on infrastructure providers for custody, brokerage, staking and tokenization services, Schneider said. Sygnum itself has focused on supplying regulated digital asset infrastructure to financial institutions. "We see a clear tendency towards regulated institutions," Schneider said. "Banks have the relationships today already, they have the distribution network today, and they have all the compliance regulatory framework in place today."

Assets will migrate toward regulated providers as firms without MiCA licenses wind down European operations, Schneider said. He expects self-custody and institutional custody to coexist. "We will remain to have these two concepts," Schneider said. "But I see a clear tendency towards regulated institutions."

Britain's proposals are designed to encourage innovation. They also reinforce a direction where success depends on operating like a regulated financial institution, not just on technology, lawyers said.