The FCA’s consultation paper, CP25/14, has been published, providing a good look at how the UK’s new cryptoasset regime will look when it fully comes into force. For now this date is ‘2026’.
The FCA have set out a few benefits that they see from stronger regulation, aside from the primary goal of enhanced consumer protection:
- facilitating and settling transactions with cryptoassets
- acting as an on-ramp to or off-ramp from the cryptoassets ecosystem
- facilitating and settling institutional or wholesale transactions, including in a tokenised environment
- acting as a means of cross border payments
- in the future, serving as a means of payment for retail goods and services
Of particular interest to the investment industry will be the facilitating and settling of transactions, as in theory this could lead to faster execution and increased liquidity in the market.
For firms in the sector, a detailed read of the requirements should be prioritised. The FCA is building on familiar foundations, notably the Client Assets Sourcebook (CASS), but with nuances specific to the digital asset landscape. The proposals are detailed, and understanding the key changes and new requirements is critical to being able to plan and be ready for the changes.
Other Financial Services Insights
Let’s break down the core parts of the draft rules, these fall into two sections:
Stablecoin Issuance
The FCA’s primary objective is to ensure that regulated stablecoins are truly stable, with consumer protection at the forefront. One key change from the discussion paper (DP23/4) is that the Treasury does not intend to bring stablecoins into the UK payments regulation at this time.
Key proposed rules for issuers include:
- Asset Backing and Safeguarding: The requirement for 1:1 backing with high-quality, liquid assets is confirmed. Crucially, these assets must be segregated from the issuer’s corporate assets within a statutory trust, with an independent custodian appointed for safeguarding. The issuer would remain legally responsible for the backing assets.
- Redemption Rights: The right for all holders to redeem their stablecoins for fiat at par value is a cornerstone of the regime. The consultation proposes a firm T+1 (i.e. next day) settlement timeline for redemption orders, a specific requirement that firms will need to ensure they can meet operationally.
- Reporting:
- Issuers will be required to provide specific information online. Some of which, such as a description of the technology, must be updated as soon as it becomes inaccurate. Other areas must be updated at least once in every 3 month period, such as the total number of stable coins minted & issued; and a statement confirming the 1:1 backing.
- An annual review, by an auditor, of the 1:1 backing statement will be required.
- This is in addition to a CASS audit report, the requirements of which are to be set out in a future publication. However I expect these to be broadly in line with the requirement for other client money holding firms.
- Remuneration Model: It has been clarified that issuers, while permitted to retain interest earned from backing assets, are prohibited from paying interest to coin holders. This solidifies the FCA’s view of stablecoins as payment instruments rather than investment products.
- Personally, while I understand the FCA’s stance, some form of interest or bonuses being allowable would help to increase competition.
- CASS 16 is included in Annex B of the publication and sets out the intended rules in detail.
Cryptoasset Custody
The FCA is clear that it is leveraging the existing CASS framework as its blueprint for cryptoasset custody, aiming to create roughly equivalent standards, but with necessary modifications. For example considering what information firms must hold for each individual’s assets they look after – including treatment for private keys.
Keeping the requirements similar to existing CASS rules is very wise, entirely new rules would have created a gulf of knowledge that would have delayed implementation.
Key proposals for custodians include:
- Asset Segregation: As expected, client cryptoassets must be legally segregated from the firm’s own assets via a trust arrangement, this will need to be a non-statutory trust.
- Reconciliation and Record-Keeping: The draft rules mandate daily reconciliations of client asset holdings. With both internal (agreeing qualifying cryptoasset records to the contents of the wallet addresses controlled by the firm) and external (agreeing the internal records to third party records). CASS 7 will also apply, for example where crypto assets sales results in fiat currency being held for a client.
- Controls: Firms will be expected to demonstrate comprehensive systems and controls, including private key management, cybersecurity, and transaction signing processes, to prevent loss and ensure reliable client access.
- CASS 17 is included in Annex B and sets out the intended rules in detail.
Next step for firms: From planning to implementation
While these are consultation-stage proposals, I expect that the final policy statement will be very similar indeed. The consultation period is open until 31 July 2025, any firms in the industry that are going to be impacted by these changes should take the opportunity to comment.
Other essential actions are:
- Conduct a Gap Analysis: Perform a detailed assessment of existing infrastructure, governance, and client agreements against the specific requirements outlined in CP25/14.
- Review Operational Timelines: Can your current systems support T+1 redemptions and daily asset reconciliations and if not, what steps are needed to get there?
- Other Reading: CP25/14 has a sister paper on the prudential requirements (CP25/15), which is not covered here, this contains valuable information worth digesting.
A final note
This will bring significant changes to the industry and many firms that will need to comply are finding there is a lot of work to do. The support industries, including compliance consultants and auditors, will be under pressure to deal with the requirements and will face their own challenges. There will be some teething problems to iron out of course, ultimately from day 1 there will be an improvement in consumer protection, but full compliance may take a few years to settle in.
As an auditor we await the exact requirements that will come with the Conduct and Firm Standards CP that is expected later in 2025. I expect that there will be quite a lot of breaches while the rules settle in, but as is the case with existing CASS reports the FCA will expect to see these breaches. It is how they are dealt with and demonstrating improvements that will be key.
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