Cryptocurrency Regulatory Challenges: Overview of OFSI's 2025 Threat Predictions
The UK's regulatory landscape for cryptocurrencies is evolving rapidly, integrating cryptocurrencies into established financial sanctions and anti-money laundering (AML) regimes. This shift is highlighted by the Office of Financial Sanctions Implementation (OFSI)'s Cryptoassets Threat Assessment report, published on 21 July 2025.
The report underscores the growing risks and vulnerabilities in the crypto sector regarding financial sanctions compliance. It covers cryptoasset firms registered with the Financial Conduct Authority (FCA) exchanging crypto for fiat or other crypto, including exchanges, peer-to-peer providers, and wallet custodians. The report emphasises a risk-based, prioritised approach to compliance in light of expanding sector risks.
Since January 2020, cryptoasset firms must register with the FCA for AML supervision. This move is part of a broader regulatory push aimed at creating a comprehensive, competitive, and stable regime requiring authorisation, governance, and consumer protections similar to traditional financial institutions. The FCA has introduced several regulatory measures for cryptoassets, including the 'Travel Rule', financial promotions regime, and regulations for stablecoins and future market abuse.
The report, examining data from January 2022 to May 2025, reflects accelerated regulatory momentum. Key findings include the likelihood that UK cryptoasset firms are facilitating transfers to Iranian cryptoasset firms with suspected links to Designated Persons (DPs), and the high probability that UK firms have been directly or indirectly exposed to the designated Russian exchange Garantex since its designation in 2023.
OFSI's report outlines five core judgements concerning sanctions threats relevant to UK cryptoasset-related services firms. These judgements emphasise the need for firms to check the FCA register to identify registered cryptoasset firms, improve detection through the use of transaction screening and blockchain analytics, consider counterparty risk, behavioural patterns, and transaction history depth, conduct lookback exercises, report suspicious transaction chains to OFSI, and report any suspected illicit activity involving cryptoassets to the National Crime Agency (NCA) and the FCA where relevant.
The report also identifies several red flags common in the crypto sector. These include large or unusual transactions following sanctions announcements, exposure to known DPs or associated entities, sudden changes in transaction patterns, repeated payments from individual addresses for very low amounts, rapid movement of assets through multiple addresses, multiple wallets controlled by the same entity (address clustering), use of privacy coins, mixers, or VPNs, and transactions involving sanctioned jurisdictions.
The decentralised nature of cryptocurrencies also facilitates the obfuscation of transaction pathways and payment structures, including through the use of anonymous private wallets. Cryptocurrencies can be layered by moving them between different blockchain networks, increasing the complexity of tracing illicit cryptocurrencies.
Despite these challenges, the UK's regulatory approach actively seeks to mitigate these risks. The Money Laundering Regulations (MLRs) and the Sanctions and Anti-Money Laundering Act 2018 (SAMLA) apply equally to digital assets, treating them like any other asset class in the context of financial sanctions. The current regulatory landscape is complemented by FCA proposals for stablecoin issuance and crypto custody authorisation, aiming to enhance market integrity, consumer protection, and innovation within a clear legal framework.
The report serves as a critical resource for UK cryptoasset firms and stakeholders aiming to strengthen compliance and mitigate exposure to illicit activity. It also serves as a wake-up call, highlighting the immediate compliance pressures faced by firms as the UK grapples with the rising adoption of cryptocurrencies and an evolving sanctions regime.
- The UK's regulatory push for cryptocurrencies now requires firms to adhere to financial sanctions and anti-money laundering (AML) policies, similar to traditional financial institutions.
- The Office of Financial Sanctions Implementation (OFSI) has highlighted the growing risks in the crypto sector, emphasizing the need for a risk-based, prioritized approach to compliance.
- The regulatory landscape for cryptocurrencies is being complemented by FCA proposals for stablecoin issuance and crypto custody authorization, aiming to enhance market integrity and consumer protection.
- The report outlines the need for cryptoasset firms to utilize transaction screening, blockchain analytics, and other measures to reduce exposure to sanctioned persons, jurisdictions, and illicit activity.
