The UK’s regulatory sandbox, launched in 2016 by the Financial Conduct Authority (FCA), is designed to let financial firms test innovative products and services in a controlled environment. Instead of navigating the full weight of regulation from day one, companies can trial new offerings with real consumers under the regulator’s supervision, subject to safeguards and defined limits.
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For crypto firms aiming to operate within the UK, that matters. The sandbox lowers barriers to entry, reduces time to market, and gives startups clarity on how existing rules apply to emerging technologies like tokenisation, stablecoins or blockchain-based settlement systems. It also gives the FCA early visibility into new business models, helping shape future rule-making.
In recent years, the UK has expanded the concept. Beyond the original fintech sandbox, the FCA and the Bank of England have launched initiatives such as the Digital Securities Sandbox, allowing firms to test tokenised securities and digital bond issuance using distributed ledger technology. These programmes are part of a broader push to modernise UK capital markets infrastructure.
For example, when the UK issues its first-ever “digital gilt,” a government bond deployed on blockchain infrastructure, it does not plan to launch it straight onto the open market. Instead, the pilot will run inside the regulatory “sandbox” overseen by the Bank of England and the FCA.
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The treasury has appointed HSBC (HSBA.L) as the platform provider for the pilot issuance of the Digital Gilt Instrument (DIGIT), using its Orion distributed ledger platform, with the test taking place within the UK’s Digital Securities Sandbox.
So, what do “sandbox pilots” mean for crypto startups in the UK? The FCA currently regulates crypto firms primarily under anti-money laundering (AML) rules, requiring registration and compliance with financial crime standards. Broader cryptoasset regulation, including stablecoins and certain trading activities, is being developed in stages by the UK government.
Historically, the FCA has been viewed as cautious, particularly towards crypto, where its anti-money laundering registration regime saw a large proportion of applicants rejected or withdrawn. In 2024 alone, 84% of crypto firms applying for money laundering registration were rejected, underlining how high the bar has been.
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However, speaking on the Fairer Finance podcast on Wednesday, FCA chief executive Nikhil Rathi signalled what could amount to a broader recalibration of the body’s regulatory approach, suggesting a move away from reflexive rule-making toward a more outcomes-based framework.
“Not every problem is going to be solved quickly by doing big interventions, more rules, bans, guidance,” he said. Rathi added that the regulator is “moving to an outcome-based approach” and that “will mean less rules in the future because we think the consumer duty will do a lot of the work for us.”
He also pointed to regulatory modernisation and a review of inherited EU frameworks, saying: “The secondary objective and the broader agenda is around regulatory modernisation and looking at burdens, around data reporting and compliance.” At the same time, he stressed that markets are evolving rapidly: “These markets are moving fast, the frontier of technology, particularly AI, is shifting every few months.”
Light-touch regulation can serve as a strong catalyst for growth in the UK crypto market. By easing the burden of upfront compliance, firms can launch new products quicker, test innovative services within sandbox programmes, and engage directly with regulators before securing full authorisation.
Beyond domestic innovation, the prospect of a more flexible regulatory framework could also attract global cryptocurrency and blockchain firms to the UK, encouraging inward investment if companies choose to relocate or expand operations to take advantage of the supportive environment.
For startups exploring tokenised assets, stablecoins, or blockchain-based payment systems, a lighter regulatory approach provides clarity and lowers barriers to entry, while giving the FCA early visibility into emerging business models that could shape future rule-making.
The scale of what’s at stake in the UK is significant. According to the FCA’s Cryptoasset Consumer Research 2025 report, around 8% of UK adults currently own cryptocurrency, which equates to roughly 4.5 million people.
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However, recent data shows that ownership has declined from about 12% in 2024 to 8% in 2025, but those who remain invested generally hold larger amounts. Among current holders, the average holding value is around £1,800.
However, loosening regulatory standards is not without risks. Crypto markets remain highly volatile and vulnerable to fraud, operational failures, and cyber threats, and if oversight weakens too far, investor protection could suffer while systemic risks build unnoticed.
As industry analysts caution, reduced compliance requirements do not eliminate responsibility. Kenny MacAulay, CEO of Acting Office, pointed out that “whilst many firms will welcome reduced rules, the reality is that they are poorly prepared for the consequences of a deregulated world.”
With lighter-touch regulation, firms face immediate pressure to strengthen their internal systems, he added. “Reduced compliance protocols means immediate pressure on firms to get their houses in order, in terms of mitigating cyber risk and managing data securely. With so many organisations overseeing complex IT estates with a mishmash of AI applications and unused software, the opportunity for error is immense,” MacAulay said.
He added that even with less rigid oversight, organisations must continue to prioritise cybersecurity, data protection, and governance especially as blockchain, AI, and complex IT systems become increasingly embedded in financial services.
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