UK’s FCA consults on new regulatory regime for stablecoin issuance and crypto custody

Introduction

On 28 May 2025, the Financial Conduct Authority (FCA) published a consultation paper on proposed rules for firms that will conduct the proposed new regulated activities of issuing stablecoins or undertaking cryptoasset custody (the Consultation Paper).

Market participants will have until 31 July 2025 to respond to the consultations. The FCA will publish further consultation papers, and in due course, a policy statement with final rules ahead of implementation of the new cryptoassets regime.

In line with the FCA cryptoassets roadmap, the new cryptoassests regime is expected to go live in 2026.

 

Areas to note

The consultation seeks to balance  being pro-growth and innovative on an international level, whilst supporting  market confidence, consumer protection and financial crime prevention and focusing on ensuing that stablecoin is a “trusted, money-like instrument”.

The Consultation Paper covers the following topics:

• rules to back stablecoin to protect holders;
• procedures to safeguard cryptoassets;
• redemption standards (requiring redemption at par); and
• disclosure requirements.

The FCA emphasises that stablecoins are to be treated as “money-like”, but distinct from e-money, with a secondary market value and capable of being minted before receipt of token holder funds. A subsequent consultation paper to cover regulatory perimeter issues is promised at a later date.

We see for the first time proposals for the new FCA sourcebook, “CRYPTO”, and stablecoin-specific updates to CASS. Geographically, the draft CRYPTO text looks at the location of the issuer, or any part of the issuance. not the holder. It does not distinguish different classes of holders for the purpose of these rules.

 

Cryptoasset issuance

Chapter 3 of the Consultation Paper contains the following proposals for stablecoin issuers. It focuses on stablecoin referencing a single fiat currency and asks for input around considerations specific to multi-currency stablecoin. 

• Qualifying stablecoins are designed and built with risks addressed: Stablecoin issuers will be required to understand and manage risks associated with the design and build of a qualifying stablecoin before it is issued.
• Qualifying stablecoins to be fully backed at all times: Stablecoin issuers will be required to back their coins with high-quality, liquid assets which should be equal in value to all outstanding stablecoins at all times. The backing pool asset will be required to consist of certain low-risk instruments such as “on demand deposits”, and short-term government debt that have a maturity of one year or less. The rules also permit limited use of longer-term public debt or certain money-market funds. The FCA does not intend to prescribe specific compositions of the backing pool assets, rather it will allow firms to determine their own compositions, based on factors including the redemption modelling they undertake on an ongoing basis. The FCA explains that the purpose of this requirement is to ensure that stablecoins can meet redemption requests from holders and maintain parity with their reference currency.
• Prohibition on sharing interest with Holders: Firms will not be permitted to pass interest earned on the backing pool assets to stablecoin holders. 
• Qualifying stablecoin backing assets to be effectively safeguarded: All stablecoin backing pool assets will be required to be segregated immediately and held on trust for the benefit of stablecoin holders. The issuer will act as trustee with a fiduciary duty to holders, and the backing pool assets will be required to be segregated from the issuer’s own funds. Stablecoin issuers will be required to place backing pool assets with  third-party custodians who must not be affiliated to the issuer’s group.
• Reconciliation: Firms will be required to implement procedures to reconcile the backing pool assets on a daily basis, correcting any shortfalls or excess in a timely manner (e.g. by topping up backing pool assets or burning surplus tokens) to maintain 1:1 asset backing. Firms will be required to maintain accurate books and records. They must be validated independently at least annually.
  
  The FCA explains that the purpose of the safeguarding and reconciliation requirements is to protect holders funds in the event that the stablecoin issuer fails. In this regard, the rules are similar to the current FCA CASS rules that apply to firms that hold client money in the context of “traditional finance”.
  
  
• Redemption of qualifying stablecoins to be guaranteed by the issuer at par: Stablecoin holders will be required to have an unconditional right to redeem their stablecoins at par value with the issuer (i.e. this is the value of one unit of the reference currency, multiplied by the number of stablecoins being redeemed, irrespective of the value of the backing assets. The redemption value is not to fluctuate in line with the performance of underlying backing assets). Redemption will be required to be made available to all holders with no minimum redemption thresholds.
  
  Stablecoin issuers will need to implement procedures to ensure that redeemed funds are placed with the holder by the end of the business day following receipt of a valid redemption request. Any fees charged for redemption of the stablecoin must be commensurate with the operational costs incurred for executing the redemption request. In all cases fees must not exceed the value of the stablecoins being redeemed, or pass on costs and losses arising from the sale of assets in the backing asset pool.
  
  The FCA does acknowledges and the rules contemplate that there may be exceptional circumstances where an issuer needs to suspend or delay the right to redeem to avoid further harm. This could include the failure of the stablecoin issuer or a third party, a technological problem with the underlying DLT, or a sudden loss of confidence in the qualifying stablecoin.
  
  
• Outsourcing: Stablecoin Issuers will be required to have arrangements in place to undertake due diligence on outsource providers, enter into comprehensive contractual outsourcing agreements, facilitate adequate information-sharing, and implement procedures to monitor and oversee the activities of outsourced providers to ensure that they comply with the rules. These rules are similar to the rules in the FCA SYSC sourcebook that apply to firms in the context of traditional finance, with the asset-specific requirement that all payments for the issuance of stablecoin are made directly to the issuer.
• Disclosures: On at least a quarterly basis, stablecoin issuers will be required to publish details of the number of stablecoins in circulation and a breakdown of the backing pool asset composition. In addition, they will be required to publish and update holders on other important information about the qualifying stablecoin such as the technology used, material outsource providers and the process for redemption. These disclosures must be clear, fair and not misleading. The FCA explains that the purpose of the disclosure requirements is to inform holders on the risks associated with the stablecoin and the mechanisms that are in place to facilitate stability of the stablecoin.

The FCA refers to its proposals in DP23/4, to require stablecoin issuer to appoint a CASS oversight officer, conduct a client asset audit and submit a Client Money and Assets Return (CMAR) regulatory return to the FCA. The FCA confirms that it intends to take these rules forward and will subsequently consult on these requirements in due course.

 

Custody

Chapter 4 of the Consultation Paper contains the following proposals in relation to cryptoasset custody. It also covers safeguarding means of access e.g. private keys:

• Safeguarding ownership: Custodians will be required to segregate client assets from their own (house) assets by holding tokens in clearly identified individual or omnibus wallets or accounts which are separate from any “house” holdings. The clients’ cryptoassets must be held on trust for the holder’s benefit, which will mean that in the event that the custodian becomes insolvent, the client’s custody assets will be ring-fenced from the general estate and returnable to clients as is the case under the existing FCA CASS rules for “traditional finance”.
• Trust structure: Custodians will be permitted to choose an approach to operating trusts which is suitable for their business model, client base and the types of qualifying cryptoassets it will provide services for. For example, a custodian may elect to operate separate trusts for each client, or for each class of qualifying cryptoasset, or for different virtual addresses.
• Staking and reuse of client assets: Acknowledging current business models that allow use of client’s custodied cryptoassets e.g. for staking, as distinct from prohibitions in traditional finance regulation, the FCA raises concern about client risk. The FCA will consider feedback on DP25/1 and consult under the “Trading platforms, intermediation and staking” consultation expected in Q4 2025/Q1 2026, to inform its approach.
• Ownership and records: Custodians will be required to ensure that they hold the correct amount of qualifying cryptoassets (assets) for the correct clients in the trust at all times including by maintaining accurate books and records.  Assets held on trust in an individual client wallet address will be required to be recorded by the custodian in the name of that client in the firm’s internal records. Assets held on trust in an omnibus “client wallet address” will be required to be recorded as such in the firms’ internal records.
• Reconciliations: Custodians will be required to perform daily client custody reconciliations to ensure that it has correctly identified and is holding the correct amount of assets and correct any discrepancies and to prevent or promptly detect any shortfall in the client custody wallet or account. Custodian will be expected to take prompt action to rectify the shortfall. The FCA is proposing that custodians notify the FCA if a shortfall is unlikely to be resolved prior to the next reconciliation. Again this approach is consistent with the core custody requirements in the FCA CASS rules that apply to custodians in the traditional finance markets.
• Maintain security and accessibility: Custodians will be required to establish and implement robust cybersecurity measures, private key management, recording processes, and access management to mitigate the risk of loss, theft, or misuse, and ensure holders’ maintain access to their assets at all times. Custodian will also be required to implement procedures to ensure the prompt return of cryptosassets including in the context of an insolvency event. 
• Governance and Controls: Firms will be required to implement governance and  controls to facilitate the protection of clients’ cryptoassets. This should include  procedures  to mitigate the risk of fraud, cyberattacks, and operational errors. Custodian will be required to undertake due diligence and impose contractual obligations on outsourced providers.   The FCA will require firms to have  a dedicated “CASS” or crypto asset safeguarding officer and conduct audits, which broadly aligns with  the current requirements in FCA CASS rules for traditional finance.

The FCA will consider its approach to the reuse of client qualifying cryptoassets following feedback to its discussion paper, DP25/1 and any rules or restrictions relating to these activities will be consulted on in the forthcoming ’Trading platforms, intermediation, lending and staking’ consultation paper.

More FCA consultations are expected on proposed rules relating to how firms ensure that clients’ rights are clear in their contracts. This would include setting out safeguarding obligations and when the qualifying cryptoasset custodian (or any third party) would be liable, for any loss or diminution of clients’ qualifying cryptoassets. It will be important for firms to actively engage with the FCA as part of the consultation process.

 

Issues to consider

Whilst the rules are not in final form and may change following feedback from market participants, firms should start to:

• consider the impact of the proposed rules on their business model, governance arrangements, operations, IT systems, polices, processes and controls;
• establish an internal working group and ensure that the board is adequately engaged;
• identify and engage with relevant internal and external stakeholders;
• undertaking an initial gap analysis; and
• begin to map out a proposed approach to implementation.

Separate consultations in Q3 2025 will address the application of broader governance rules e.g. SMCR, operational resilience, financial crime and the Consumer Duty.