In May 2025, Alex Mashinsky, former CEO of cryptocurrency platform Celsius Network, was given a 12-year prison sentence after pleading guilty to fraud. It’s the second longest sentence to be handed out following the 2022 cryptocurrency crash, after Sam Bankman-Fried’s 25-year sentence for crypto fraud.

Promising high-yield rewards and a ‘safe’ alternative to banks, Celsius attracted hundreds of thousands of retail customers worldwide between 2017 and 2022, with 1.7m clients at its peak, according to Reuters. In its marketing and promotional materials, Celsius repeatedly stated it was the ‘safest place’ for cryptocurrency and offered secured loans and custody services alongside a platform to deposit crypto assets. 

Many retail customers were unaware they were granting crypto asset custody to Celsius, so even when loans were repaid, their assets were not returned to them.

Mashinsky also made false claims about regulator backing, the company’s financial health, exaggerated the value of the company’s crypto token and engaged in risky trading strategies.

Following the crypto market crash and the subsequent customer rush to withdraw funds, the company imploded and filed for Chapter 11 bankruptcy in July 2022, owing customers $4.7bn. Some had lost life savings.

The 2022 cryptocurrency collapse

Celsius is just one of several industry players which collapsed amid the 2022 drop in cryptocurrency value, and the impact has been substantial. According to Carmel King, Partner and Digital Asset Recovery lead at Grant Thornton, there was a ‘domino effect’ among major industry players. Terra Luna collapsed in May 2022 followed by Three Arrows Capital in June, Celsius in July and FTX in November of that same year.

“It became increasingly apparent there was a cumulative effect; a contagion chain. Each of these companies had significant exposure to one another,” King explains. “The market collapse resulted in a seismic wave of liquidities and insolvencies and huge value losses in the industry, so certainly, that’s made regulators sit up and take notice, even though they have been grappling with the sector for years.”

Lack of governance and due diligence

Celsius, in particular, had an ‘unsustainable business model’ with evidence of mismanagement and it was operating in a regulatory grey area. “It was like a shadow bank with no controls, governance or due diligence. Celsius is very much an example of ‘how not to do things’.”

Adrian Morris, Associate Director, Insolvency & Asset Recovery at Grant Thornton, agrees. “The business model was one of being tried, tested and having failed, especially when you’re using volatile assets like crypto to secure loans. If that asset collapses, where’s your collateral gone?”

Challenges for regulators and law enforcement authorities

One of the key challenges for law enforcement authorities in cases like this is around crypto custody. Celsius had argued in a legal hearing that crypto assets automatically become their property because customers had agreed to their terms of use when they utilised Celsius’s services. But retail customers argued that these terms were not readily understood by the average person.

“It was argued that the terms didn’t make it clear they were actually transferring ownership,” says Jessica Caws, Legal Director and Co-Head of Financial Services, Birketts LLP. “Customers misunderstood custody arrangements. From a consumer protection perspective, in contrast to the US, in the UK we have the Consumer Duty [in force from 2023], which has clear rules on how financial services businesses engage with retail customers to ensure they understand what they’re agreeing to.”

FCA publishes consultation paper

In response to mass industry failings, the FCA published a consultation paper in May 2025, “Stablecoin Issuance and Cryptoasset Custody”, which outlines a series of proposals around sector regulation in the UK.

In essence, the proposals aim to support innovation and allow UK-based crypto asset firms to “compete internationally”, while ensuring there are “appropriate” protections in place for consumers.

These proposals involve segregating client crypto assets from the firm’s own assets; ensuring stablecoins maintain a stable value relative to a fiat currency and are backed by secure, liquid assets; and implementing robust organisational arrangement to minimise risks of fraud, misuses or loss of crypto assets. Crucially, custodians must have sufficient funds and liquidity.

Crypto assets remain high-risk investments

But the consultation paper also makes it clear that the majority of crypto assets are high-risk investments - even with regulation and robust safeguarding - and warn that consumers “should be prepared to lose all their money if they buy them”.

The paper which closed for consultations in July 2025, is the latest milestone in the FCA’s Crypto Roadmap. Final rules and regulations resulting from the consultation are due to be published in 2026.

So what does the future of crypto regulation look like?

Will tighter regulations and protections bring the sector into the mainstream?

“It’s a global issue which needs a global response,” says Morris, pointing to the challenge of asset recovery following liquidation across different jurisdictions. “But we’re seeing increased capability to collaborate internationally, and I firmly believe that regulation through cooperation is better than regulation through enforcement – the carrot is always better than the stick.”

Caws meanwhile believes that with the UK bringing more crypto activities under the scope of the Financial Services and Markets 2000 (FSMA) and being subject to proposed tighter custody regulations and consumer protections, the sector may well become much more mainstream, with the proposed regulatory framework making it potentially more attractive to traditional financial platforms.