Crypto Investors Score Critical Bankruptcy Protection—But a ’Conservative’ Rule Could Choke Market Liquidity

Crypto just dodged a bullet in bankruptcy court—but regulators might be loading another one.

A landmark ruling now shields digital asset holders when exchanges collapse, placing crypto claims alongside traditional securities in creditor queues. That's a seismic shift from the 'wild west' days where investors watched helplessly as bankrupt platforms froze withdrawals.

The Fine Print That Could Freeze Markets

Buried in the victory lap sits a 'conservative' accounting provision requiring exchanges to hold reserves against potential customer withdrawals at all times. On paper, it's prudent. In practice? It could lock up billions in operational capital—turning liquid markets into museums.

Exchanges now face a brutal calculus: hoard cash to satisfy bean-counters or risk illiquidity during volatility spikes. One compliance officer privately called it 'tying Usain Bolt's shoelaces together and expecting a record sprint.'

The Institutional Domino Effect

Hedge funds and family offices—long hesitant about crypto's legal gray zones—are recalculating risk models overnight. Bankruptcy protection removes a fundamental objection, but the liquidity squeeze might keep their capital parked on the sidelines. Wall Street's embrace just got conditional.

Meanwhile, decentralized protocols are quietly celebrating. Their non-custodial models bypass the reserve requirement entirely—a loophole that could accelerate the flight from centralized platforms. The irony? Regulators aimed to tame crypto but might accidentally fuel its most anarchic strain.

The verdict delivers protection where it's needed most while threatening the liquidity that makes markets function. In traditional finance, they call that 'winning the battle but losing the war'—usually right before sending shareholders a condolence letter.

Who falls inside the perimeter?

The most important change is not the date but who is caught by the perimeter and for what.

In its consultation, the FCA moves beyond the loose language of “exchanges and wallets” and spells out the activities it expects to supervise once the Treasury’s statutory instrument is live.

Those include issuing qualifying stablecoins, safeguarding qualifying cryptoassets and certain crypto-linked investments, and operating a cryptoasset trading platform (CATP). They also cover dealing as principal or agent, arranging deals in cryptoassets, and offering staking as a service.

That list matters because it maps onto how the industry is actually structured. A single firm might operate an order book, hold client assets in omnibus wallets, route FLOW to third-party venues, and offer staking on top.

Under the proposed regime those functions are no longer side-features of “being an exchange.” They are distinct regulated activities with their own systems-and-controls expectations and governance obligations.

Meanwhile, the perimeter also applies to activities carried on “by way of business in the UK,” which is straightforward for a domestic platform but far less so for offshore exchanges, brokerages or DeFi front ends with UK users but overseas entities.

That is where the hardest questions for market structure lives. The UK can regulate intermediation and trading platforms, but it cannot rewrite open-source code.

As New points out, no national law can directly regulate Bitcoin or ethereum at the protocol layer; it can only target the bridges where people meet those protocols.

That leaves a DeFi edge that is still undefined.

If a UK-accessible web interface routes a user straight to a smart contract without running a centralized matching engine, is that “operating a trading platform,” “arranging deals,” or neither?

How the FCA answers that question will shape whether DeFi liquidity remains reachable for UK institutions through compliant channels, or is pushed behind geoblocks. It could also leave DeFi in a grey interzone where only offshore retail can participate.

So, the regulators have a promotions toolkit and perimeter tests they can already use at the edges, but there is no detailed line-drawing yet.

Property rights

While authorisation is two years away, the legal plumbing for institutional participation has already shifted.

The Property (Digital Assets etc) Act 2025 received Royal Assent earlier this month, implementing the Law Commission’s recommendation that certain digital assets be recognised as a distinct FORM of personal property.

In practice, that gives English courts clearer ground to treat crypto tokens as property that can be owned, transferred and enforced against. This applies even though they do not fit the traditional categories of tangible goods or “things in action.”

For prime brokerage and custody, that matters.

One of the stickiest questions for institutional risk committees has been what happens in insolvency: if a UK custodian fails, are client coins clearly ring-fenced as property held on trust, or do they risk being swept into the general estate and shared with other creditors?

The Act does not magically guarantee bankruptcy remoteness in every structure. However, the utcomes will still depend on how custody is arranged, whether client assets are properly segregated, how records are kept, and what the contracts say about control and rehypothecation.

But the property-law uncertainty is reduced. Custodians and their lawyers can now write mandates, collateral schedules and security arrangements under English law with more confidence about how a court will treat the underlying asset class.

That creates a timing mismatch which is actually helpful for large allocators. The regulatory permission to operate as a crypto custodian or trading venue under FSMA will not exist until 2027, but the legal status of the underlying assets has been clarified already.

This gives the firms a window to start designing custody mandates, tri-party collateral agreements and margin frameworks today, knowing the property rights are on firmer footing, even if the supervisory perimeter is still being built.

Stablecoins

If the property reform is one leg of the institutional stool, stablecoin policy is another.

The Bank of England’s consultation on systemic stablecoins sketches a deliberately conservative model for sterling-pegged coins that become widely used in payments.

Under the proposals, issuers designated systemic WOULD need to back at least 40% of their liabilities with unremunerated deposits at the Bank of England, with the remainder in short-dated UK government debt.

That structure is aimed at maximising redemption certainty and limiting run risk, but it also compresses the interest margin that has made USD-denominated stablecoins such lucrative businesses.

For a prospective “GBPC” issuer, parking a large slice of reserves at zero yield changes the economics materially. It does not guarantee that a sterling coin cannot work at scale, but it raises the bar for business models, especially if users still default to dollar pairs for trading and settlement.

As a result, the UK could end up with a small, very safe, tightly supervised domestic stablecoin sector while most liquidity continues to sit in offshore USD products that are outside its prudential reach.

Enforcement actions?

Overlaying all of this is the pre-enforcement question.

The October 2027 start date is not a two-year grace period. Enforcement pressure tends to arrive early, through supervisory “expectations,” financial promotions scrutiny and the risk appetite of banks and payment providers.

The FCA’s own language has previously shown that most cryptoassets remain high-risk and consumers should be prepared to lose all the money they invest.

That is a warning that authorisation, when it arrives, will be about systems and controls, not about endorsing any token’s merits.

Considering this, industry figures like venture capitalist Mike Dudas worry that the repeated “rules of the road” messaging is a prelude to a UK version of a “Gensler era.”

In that scenario, regulators would import the standards of traditional trading venues and apply them aggressively to crypto businesses, particularly around market-abuse surveillance and operational resilience in 24/7 markets.

However, another plausible path is reflected in the Treasury’s own rhetoric. It is a more calibrated regime that pairs high standards on custody, governance and disclosures with recognition that not every crypto firm can or should be treated as a full-fledged investment bank.

Nonethless, the reality of the situation will sit somewhere between those poles, and traders will feel it before 2027.

So, the build-out of surveillance tools, client-asset segregation, resilience testing and token-admission governance is likely to start well ahead of the statutory deadline.