On paper, Britain wants to be a global center for digital-asset innovation. In practice, the way the government and the Financial Conduct Authority (FCA) are building the rulebook could smother the very ecosystem they claim to champion. The ambition is real. The execution, so far, is wobblier.

The Draft Statutory Instrument (SI) on crypto assets is a genuine milestone. It signals a desire to move past the reactive, enforcement-first posture that dogged the U.S. for years. Instead of waiting for firms to implode—or to break rules—the UK is attempting a structured, rules-based approach from the outset. That’s commendable. But good intentions don’t outweigh bad design or halting rollout.

Consider retail access. In August, the FCA green-lit crypto exchange-traded notes (ETNs) for UK investors—a cautious but welcome gesture toward mainstream exposure. Yet it still bars crypto exchange-traded funds (ETFs), even as the U.S., Canada, and parts of Europe have normalized them. The split is hard to justify. If ETNs are tolerable for retail, why not ETFs, which typically offer comparable exposure with greater transparency and liquidity? The inconsistency reads less like risk-based regulation and more like institutional inertia, and the mixed signals feed skepticism about what, exactly, the UK is trying to protect.

Then there’s decentralized finance. DeFi is no longer a boutique experiment; it’s a rapidly scaling pillar of the crypto economy, with billions locked across protocols that operate without central intermediaries. Yet the UK has drawn no clear line between DeFi and regulated centralized finance (CeFi). Without definitions and boundaries, firms don’t know when they fall under FCA oversight. That uncertainty is toxic to investment and hiring: startups hesitate to build, investors hesitate to allocate, and talent gravitates to jurisdictions where rules—strict or not—are at least legible.

The compliance burden compounds the problem. Take the proposal for automated tax reporting to HMRC. As an anti-evasion tool, it sounds sensible. But crypto’s founding ethos—privacy and user sovereignty—doesn’t vanish at the first sight of a spreadsheet. Requiring granular, near-real-time reporting from exchanges is likely to push privacy-conscious users offshore to less transparent venues, ironically heightening systemic risk. And the costs won’t be shared evenly: global incumbents can absorb new teams and bespoke systems; a London-based DeFi protocol or early-stage wallet provider may find the overhead prohibitive. Regulation should widen the field, not entrench the biggest players.

To its credit, the FCA has not tried to do this in a vacuum. Its Crypto Roadmap aims to phase in rules, consult widely, and avoid the blunt instruments seen elsewhere. The emphasis on operational resilience and anti-financial-crime controls is prudent. Crypto markets remain vulnerable to hacks, scams, and manipulation; insisting on basic hygiene borrowed from traditional finance helps professionalize an industry that has too often resembled the Wild West.

But professionalism isn’t the same as suffocation. The missing word in much of the current approach is proportionality. Not every firm presents the same risk profile. A non-custodial wallet developer should not face the capital and control obligations of a centralized exchange holding billions in customer assets. The Draft SI’s trajectory suggests a one-size-fits-all mindset that will send builders underground—or abroad.

Founders in the UK ecosystem are cautiously optimistic, but their optimism is conditional. They want regulation—clear, predictable rules calibrated to the realities of open-source software, smart contracts, and programmable finance. What they fear is a regime that looks progressive in speeches and consultation papers but functions, day to day, as a bureaucratic moat—shielding legacy finance while feigning enthusiasm for disruption.

Meanwhile, the global race is already on. After stumbling, the U.S. regained momentum with approvals of spot Bitcoin ETFs. The EU’s MiCA, for all its complexity, offers a comprehensive rulebook firms can plan around. Singapore and Switzerland—traditionally conservative—have cut discernible paths for digital-asset businesses. If the UK keeps moving in half-steps, opening one door while bolting the next three, it will drift from contender to spectator.

What’s needed now is less process theater and more decisions. Finalize the SI with workable definitions for DeFi. Rationalize the treatment of listed crypto products so ETFs and ETNs aren’t arbitrarily split. Build tiered, risk-scaled obligations so small non-custodial developers aren’t treated like systemically important custodians. And use the FCA’s Roadmap to publish guidance in gray areas quickly, rather than waiting for perfect legislation to catch up with imperfect reality.

Regulation that ignores how the industry actually operates will fail, however noble the preamble.

The UK has advantages others envy: deep financial expertise, credible courts, and a tech-savvy public ready to participate in a digital economy. But advantages are not entitlements. If the government and the FCA truly want a crypto hub, they must stop treating rules as barricades and start treating them as infrastructure—built thoughtfully, collaboratively, and with an eye on where finance is heading, not where it’s been. Otherwise, the next wave of financial innovation will break—just not on British shores.