09-14-2026 
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Digital asset regulation in Europe was back in the spotlight as the United Kingdom House of Lords voted for a comprehensive digital asset strategy, despite government objections and the incoming authorization/supervisory regime.
- U.K. Lords vote for digital asset strategy
- ESMA flags growing crypto finance risks
- Industry calls for higher DLT cap
Meanwhile, across the channel, the European Union’s top finance watchdog warned of market vulnerability related to growing digital asset links, just as industry advocates attempted to persuade EU lawmakers to increase or remove a proposed €100 billion cap ($116 billion) on DLT financial instruments.
UK Lords vote for digital asset strategy
The U.K. House of Lords—the upper house of parliament—has voted in favor of an amendment requiring the government to develop a cross-government digital assets and digital financial infrastructure strategy, beyond the U.K. Financial Conduct Authority’s (FCA’s) incoming authorization and supervision regime, due to come into effect in October 2027.
In a 194–138 vote on September 9, the Lords backed the amendment to the Financial Services and Markets Bill, despite opposition from the ruling Labour government.
The bill was introduced in the House of Lords on May 19, 2026, by the Labour government to modernize financial services regulation, including reforming consumer credit, maintaining access to banking, consolidating regulators, loosening ring-fencing, and new powers around digital asset regulation, giving the FCA authority to regulate crypto trading, custody, and stablecoins.
The bill is currently in the reporting stage and has been debated in the Lords over the past few months.
Last week, Conservative peer Baroness Neville-Rolfe introduced the amendment, which would require the Treasury to develop and publish a dedicated digital asset strategy within 12 months of the bill becoming law, to include regulation and infrastructure development beyond the bill’s existing FCA powers.
“This probing amendment seeks to require the Treasury to prepare and consult on a strategy for digital assets, including regulation, tokenization, practical operating conditions, access to banking and payment services, and international regulatory developments,” read the amendment’s explanatory statement.
The strategy would need to cover cryptoassets, stablecoins, and tokenized securities, while addressing issues including innovation, consumer protection, and firms’ access to banking, payment, and settlement services.
It would also require the government to take into account developments in the law, regulation, and supervisory practice of other jurisdictions, “so far as relevant to the safe regulation of new asset classes and digital financial market infrastructure, including digital currency exchanges.”
This latter demand appears to be a nod to developments in the United States and the EU: the former with its embrace of digital assets under President Donald Trump, and the latter with its comprehensive, bespoke regime in the Markets in Crypto-Assets (MiCA) regulation.
However, the current Labour government is opposed to the amendment, with the Treasury’s Minister for Investment, Lord Stockwood, saying the government believed it already had a digital asset strategy and was executing it during a debate in July.
“On the regulatory framework for crypto assets, the Government have legislated to establish a framework coming into force on 25 October 2027,” Lord Stockwood said. “This will bring a wide range of crypto asset activities within the registry perimeter, providing the legal certainty and consumer protections that noble Lords rightly identify as essential.”
He added that “I can assure noble Lords that we have a strategy on wholesale market digitization and tokenization and an expert to drive it forward within the sector.”
The digital asset regulatory framework in question is the FCA’s new regime, for which final rules and guidance were published on June 30.
Based on the proposed rules, firms supporting people to buy, trade and hold digital assets will need to obtain a license and meet clear standards based on a “same risk, same regulatory outcome” principle, including financial resilience requirements such as capital and stress testing, market integrity rules covering areas such as insider trading and market manipulation, consumer duty requirements, and firms undertaking regulated cryptoasset activities within the new statutory perimeter will generally need FCA authorization to operate in the country.
Firms must apply for authorization between September 30, 2026, and February 28, 2027, so they are ready to start or continue to trade under the new mandatory regime, which will come into force on October 25, 2027.
Up until recently, this was the accepted approach, the one backed by the current Labour government of Prime Minister Andy Burnham and built on proposals first developed under the previous Conservative government and subsequently legislated and implemented by the Labour government of former Prime Minister Keir Starmer.
However, while the FCA regime addresses how firms are authorized and supervised, it’s primarily about market conduct and consumer protection. The Lords amendment reflects a view that this is necessary but not sufficient, with peers arguing the FCA’s rulebook doesn’t amount to a coherent national strategy on competitiveness, infrastructure, tokenization of wholesale markets, or the U.K.’s positioning vis-a-vis jurisdictions such as the U.S. and the EU.
The amendment’s approval at the report stage means the provision is now incorporated into the bill as it proceeds to third reading in the Lords. If the bill completes its Lords stages, it will then go to the House of Commons—the U.K.’s Lower House of Parliament—where lawmakers can accept, amend, or reject it. Given that the Labour government holds a significant majority in the Commons and has already made it clear that it objects to the amendment, it is quite possible it will be rejected.
Nevertheless, if it survives Commons consideration and becomes law, the Treasury would be legally obligated to develop a strategy, which would have to be prepared, published, and consulted on within 12 months of the Act being passed, likely before or around the October 2027 FCA rules go-live.
Blockchain advocacy group U.K. Cryptoasset Business Council, which said it worked with lawmakers on the amendment, welcomed its passage in the Lords, citing the comments of Lord Chris Holmes, who asked whether the U.K. is “simply regulating digital assets” or “building a digital assets economy.”
While the U.K. considers a comprehensive digital asset strategy, the EU’s top financial markets regulator may also be hinting at the need for a more considered approach to the space, due to its concerns about growing interlinkages with traditional financial markets.
ESMA warns growing crypto links risk financial stability
The EU’s top financial markets regulator, the European Securities and Markets Authority (ESMA), warned of “the growing linkage between increasingly vulnerable crypto-asset markets and the broader financial system,” suggesting it warrants closer monitoring to prevent the risk to financial stability.
In its latest risk monitoring report, the ESMA set out the main risks and vulnerabilities in EU financial markets, which included those emanating from the digital asset sector. Specifically, the regulator warned that elevated valuations in the digital asset space, amid a weaker macro-financial and geopolitical outlook, have increased the risk of sudden and damaging market corrections, although this risk has been somewhat dampened by a general reduction in digital asset values since last year.
“From a financial stability perspective, the sharp price drop since the October 2025 peak has mechanically reduced vulnerabilities by shrinking the overall size of the crypto sector,” read the report. “However, this mitigating effect may prove temporary as interlinkages between crypto markets and the traditional financial system continue to expand through rising institutional participation, crypto investment products, stablecoins, and the integration of blockchain-based infrastructure into financial services.”
Such risks, said ESMA, warrant close monitoring, particularly in less transparent and increasingly interconnected segments of the market. In the absence of effective regulatory safeguards, these connections could facilitate the transmission of shocks from digital asset markets to the wider financial system.
On top of this, the report highlighted concerns about hacks in the digital asset sector and smart contract exploits, which have renewed worries about interconnectedness and potential spillovers.
For example, it cited the compromise of Solana-based decentralized exchange Drift Protocol, which was drained of approximately $285 million in April, after attackers gained administrative control over its governance and risk controls following a months-long social-engineering operation.
Overall, ESMA noted that hack-related losses reached around one billion dollars in the first half of 2026, a significant amount but less than half of the $2.3 billion stolen during the same period in 2025.
Nevertheless, it added that “a rising number of smaller smart contract exploits contributed to a sharp increase in the number of hacks during the period.”
Beyond digital assets, ESMA’s report also set out key vulnerabilities related to other innovative technology sectors, namely artificial intelligence (AI).
“Investment in artificial intelligence continues to expand, reflected in the growing number of AI-focused funds, particularly those targeting AI infrastructure,” said ESMA, while warning that strong performance in technology and AI-related sectors “should not be mistaken as an absence of vulnerabilities.”
The regulator also touched on the tokenization of equities, which it said remains in its early stages, but with adoption momentum increasing. ESMA said that the growth in adoption and increasing interest from traditional finance (TradFi) in tokenization shows the area’s potential for further expansion.
With this in mind, the regulator said the EU had taken “a proactive approach to addressing barriers to wider adoption, while at the same time ensuring that the risks are addressed in a relevant and proportionate manner.”
Tokenization was front and center of discussions in Europe this week, as a coalition of European financial and tokenization groups urged EU lawmakers to remove a proposed €100 billion cap ($116 billion) on tokenized financial instruments, or raise it to at least €1.5 trillion ($1.74 trillion).
EU finance groups push to remove DLT finance cap
In a draft letter, dated September 7 and addressed to EU Council members and the European Parliament’s Economic and Monetary Affairs Committee, the group of 27 industry participants and advocates said a European Commission proposal to increase the aggregate market-value threshold for DLT financial instruments—essentially tokenized financial instruments—in the EU’s DLT Pilot Regime from €6 billion ($6.96 billion) up to €100 billion ($116 billion) represented “an important step forward” but was still “relatively modest in the context of global equity markets.”
The coalition, which claimed to represent a broad alliance of both traditional finance and the emerging tokenized assets sector, was made up of a range of market participants, from trade associations such as the Crypto Council for Innovation and the Swedish Fintech Association, to digital asset exchange 21X and the NASDAQ stock exchange.
Together, they urged EU lawmakers to go further with their planned expansion of the bloc’s DLT Pilot Regime, an EU-wide temporary regulatory regime that allows financial market participants to test the trading and settlement of tokenized financial instruments using distributed ledger technology (DLT).
In December 2025, the European Commission, the EU’s executive arm, adopted a comprehensive package of measures, known as the Market Integration and Supervision Package (MISP), designed to “unlock the full potential of the EU single market for financial services” while “encouraging the adoption of new technologies in the financial sector.”
This included amending the DLT Pilot to increase proportionality and flexibility, provide legal certainty, and relax limits, including increasing the cap on the maximum aggregated market value of all DLT financial instruments admitted to trading or recorded on a DLT market infrastructure from €6 billion ($6.96 billion) to €100 billion ($116 billion).
The European Parliament and Council are now considering the proposed package, and thus, there is room for negotiation and for market participants to potentially influence the final outcome.
“We welcome the ongoing and overwhelmingly supportive discussions on the revision of the DLT Pilot Regime (DLTPR) within the MISP,” read the industry coalition letter. “It presents a unique opportunity to establish the European Union as the leading jurisdiction for regulated tokenized financial markets.”
However, it went on to note that, given rapid market developments, especially in the U.S., the proposal to increase the cap from €6 billion ($6.96 billion) to €100 billion ($116 billion) proves insufficient, particularly considering current capital market volumes, with some existing European projects already holding a volume reaching €350 billion ($406.1 billion), based on market capitalization, not trading volume, and plans for further growth.
“In practice, this would unnecessarily limit European projects,” warned the letter. “While €100 billion may seem a substantial figure, it is relatively modest in the context of global equity markets. EU legislators must use this opportunity to deliver a regulatory framework that allows for significant scale within the DLTPR.”
With this in mind, the cohort made two key recommendations. First, large-scale volumes for the DLT Regime, either by removing the cap on the total value of financial instruments admitted to trading, or expanding the threshold to €1.5 trillion ($1.74 trillion), as some policymakers are currently suggesting, would be an appropriate baseline. This, said the letter, would be “the bold move Europe deserves.”
To justify such numbers, the coalition pointed to the U.S., where it claimed a dominant settlement platform is able to tokenize U.S. equities and other assets without volume caps, which could amount to €150 trillion ($174.06 trillion) or 100 times the threshold for which they are asking.
In addition, they suggested that the proposed legislative framework should empower the European Commission to increase thresholds whenever justified by market developments.
“Fixed ceilings would reduce regulatory certainty for market participants making long-term investment decisions,” read the letter. “Players require confidence that the regulatory framework will remain capable of accommodating future growth and evolving market conditions.”
The coalition’s second recommendation was that thresholds be applied consistently to ensure a level playing field. As such, they strongly opposed the introduction of differentiated threshold mechanisms, such as €100 billion ($116 billion) for DLT market infrastructures, potentially increasing to €250 billion ($290.1 billion), but a more generous threshold of €500 billion ($580.2 billion) for Central Securities Depositories (CSDs), potentially increasing to €1 trillion ($1.16 trillion).
“This would create unlevel business and investment opportunities and hinder the scaling of new providers of market infrastructures,” they argued. “Same business, same risks, same rules is a principle that mustn’t be watered down in the DLT Pilot Regime.”
The letter follows several months of pressure from finance and DLT players seeking to influence the direction of travel of MISP when it comes to the DLT Pilot Regime.
In April, 39 financial firms and industry groups, including many of the signees of last week’s letter, urged EU policymakers to fast-track changes to the DLT Pilot Regime and raise its overall volume limits to between €100 billion ($116 billion) and €150 billion ($174 billion).
It now seems a number of market participants feel this increase wouldn’t go far enough.
Watch | Yves Mersch: Regulatory frameworks for digital currency in Europe
