UK Crypto Regulation's Great Divide, Explained

UK crypto regulation has never quite matched its rhetoric, and few people are better placed to explain that gap than someone who watched it form from the inside. Isadora Arredondo spent three years at the Financial Conduct Authority between 2018 and 2021, working on Brexit policy and then crypto regulation, before moving to Hedera as vice president of global policy. Her diagnosis is blunt: Britain doesn't have a crypto problem, it has an execution problem.

Why Has the UK Struggled to Become a Crypto Hub?

The short answer: the FCA kept getting knocked sideways. Brexit came first, forcing a near-complete rewrite of the UK's financial rulebook for life outside the EU. Before crypto had a chance to move up the priority list, COVID hit, and the entire organization pivoted to crisis mode. Forbearance measures, banking responses, emergency loan programs. Crypto got shelved.

"The COVID crisis hits, and crypto goes from a perimeter issue to a back-door issue," Arredondo said in an interview in London. "The entire organization's focus shifts to crisis mode, dealing with COVID loans, banking responses, and forbearance measures."

After the pandemic receded, the FCA was dealing with the fallout from the London Capital & Finance collapse and the Woodford Fund disaster, two high-profile investment failures that pushed the regulator sharply toward consumer protection. UK crypto regulation increasingly got viewed through that same lens, particularly under CEO Nikhil Rathi. The instinct wasn't hostility, Arredondo argues. It was sequencing: crypto kept arriving at the wrong moment.

I had never encountered first-hand the world that separates policy ambition from policy execution. There is a great divide between the ambition to drive policy and how it is actually implemented.

Two Tracks: Institutions Get VIP Treatment, Startups Get Paperwork

Here's the part that rarely gets discussed in the usual "UK is anti-crypto" narrative. The FCA isn't uniformly cautious, it's selectively cautious. For large financial institutions exploring tokenization and digital assets, the regulator has been surprisingly engaged. The Digital Securities Sandbox is a real project. The bilateral outreach to banks and asset managers is genuine.

"When it comes to institutional engagement with crypto, they are quite forward-looking, proactive, and hands-on," Arredondo said.

The picture is entirely different for smaller firms. Unlike the EU's Markets in Crypto Assets (MiCA) framework, which built crypto-specific rules from scratch, the UK largely tried to cram crypto activities into existing regulatory structures designed for traditional finance. For a startup, that means long authorization processes, repeated reviews from different internal teams, and a rulebook that wasn't written with digital assets in mind. Crypto firms have been complaining about those delays for years, and Arredondo essentially confirms their frustration is justified. But she doesn't think it was malicious. "While playing by the UK's rules is incredibly difficult, it pays off," she said. "Well-regulated businesses thrive, bringing a baseline of institutional credibility."

The Bank of England's Stablecoin Pivot, and What It Signals

The conversation around UK crypto took a concrete turn in late June when the Bank of England announced a significant shift on stablecoins. The original proposal, hard caps on how much any individual or business could hold in fiat-pegged stablecoins, was quietly dropped. Instead, the BOE landed on a macro-level guardrail: under the new Bank of England stablecoin rules, the total circulation of any single systemic stablecoin is capped at £40 billion ($50.6 billion).

The private sector had been pushing hard against the old approach. A recent Financial Times report noted that tight restrictions on stablecoins had created a massive regulatory bottleneck, businesses wanted fast integration, and the central bank was moving glacially. The new cap-per-stablecoin model is a meaningful concession, even if it still imposes limits that don't exist in the US or parts of Asia.

Arredondo's interview happened before the BOE announcement, so she didn't comment on it directly. But her broader argument applies: this looks like another case of policy ambition, "we want to be a crypto hub", colliding with implementation reality before eventually finding a workable middle ground. Slowly.

While playing by the UK's rules is incredibly difficult, it pays off. Well-regulated businesses thrive, bringing a baseline of institutional credibility.

Interoperability Is the Real Fight Now

At Hedera, Arredondo spends most of her time on a different problem entirely, one that the headlines rarely touch. The crypto industry has spent years building sophisticated infrastructure: stablecoins, tokenized deposits, central bank digital currencies, blockchain networks of every shape. What it hasn't built is the connective tissue between them.

"We have sophisticated solutions to many problems, but we don't yet have a coordinated effort on interoperability," she said. "We need to move the market from everyone doing their own very cool things to actually thinking about standard-setting across the piece."

The EU, she notes, has at least tried to create a framework that lets stablecoins, tokenized bank deposits, and central bank money coexist under the same roof. That's harder than it sounds, different forms of digital money have different risk profiles, different regulatory custodians, and different incentive structures. Getting them to interoperate without creating systemic risk is genuinely complex work.

On the broader question of whether institutional crypto represents a betrayal of the sector's original vision, a debate that resurfaces every bull run, Arredondo is direct. The early crypto movement raised fundamental questions about money, trust, and financial intermediation. The fact that traditional finance is now engaging with those questions doesn't mean the original vision failed. "It shouldn't be disappointing that we are maintaining the pillars that have long anchored trust in money," she said. Whether the firms that spent years fighting UK regulators see it that way is another matter.

The early crypto vision raised fundamental economic questions and brought them to the mainstream.