Matthew Long, the FCA's first director in the newly created digital assets unit, said FTX combined issuance of tokens, trading, wholesale market activity and safeguarding of funds in one place.

"In our view, extremely dangerous because you can have interaction between each of those things, which in other regulated areas would be separate legal entities or have 'sterile' corridors so they couldn't effectively influence each other," Long told parliament's Treasury Select Committee.

"We need a regulation that deals with those sterile corridors so we don't see what we have already seen."

The FCA along with other global regulators at IOSCO, an umbrella group for securities watchdogs, are looking at how those activities could separately be covered by best practice rules, with recommendations to members in mid-2023, Long said.

Long said regulators' response to the FTX debacle would be "pacy".

IOSCO chair Jean-Paul Servais told Reuters last month that past experience with regulating firms like credit rating agencies would be used to deal with conflicts of interest at crypto "conglomerates" like FTX.

Britain is approving a financial services and markets bill that will give the FCA powers to regulate the crypto market, with the finance ministry due to issue a public consultation perhaps as soon as Friday on "world leading" rules.

The European Union is also finalising its own crypto regime.

Currently crypto dealings are unregulated in Britain, with firms only needing to show they can comply with anti-money laundering rules.

"In terms of dark money, there is money laundering that is running through crypto," Long said.

Sarah Prichard, the FCA's executive director for markets, told the committee that crypto promotions would be regulated like other "high risk" investments, labelled with a warning that investors should not invest unless willing to lose their money.

(Reporting by Huw Jones; Editing by Hugh Lawson)

By Huw Jones