UK Cryptoasset regulation: FCA starts discussions on the shape of regulation

Introduction

On 2 May 2025, the UK Financial Conduct Authority (FCA) published a discussion paper, which seeks views on the rules that should apply to persons undertaking some of the new cryptoassets and stablecoin activities outlined in the HMT draft statutory instrument (the Draft Instrument) and policy note (the Discussion Paper).

This Discussion Paper starts the process for establishing outcomes and implementation pathways for regulation.

There is much that takes inspiration from UK MiFID. The proposals cover the breadth of client types. In line with overarching policy and FCA approach to date, there is a particular focus on customer protection for the retail clients and cross border business practices targeting retail clients, with proposals requiring on-shoring.

The Discussion Paper does not cover rules on issuing a qualifying stablecoin and safeguarding. These will be addressed in a separate consultation paper issued in Q2 of 2025. This will be published alongside a consultation paper on the prudential framework for cryptoassets and prudential requirements for qualifying stablecoins and the safeguarding activity.

 

Cryptoasset Trading Platforms (referred to as CATPs in the Discussion Paper)

In developing rules for operators of CATPs, the FCA draws on the rules that currently apply to operators of multilateral trading platforms (so-called MTFs) under UK MiFID. Rules under consideration include:

• No discretion: requiring operators to operate the CATP in accordance with non-discretionary rules - according to a consistent set of predetermined rules that treat orders identically. This would mean that the operator of the CATP would not have discretion on how, whether, and when orders should interact on the CATP;
• Conflicts of interest - dealing: prohibiting a CATP from dealing as principal on the CATP. The FCA is also considering restricting the operator's ability to trade in cryptoassets off the CATP as this could give rise to conflicts of interests, market manipulation and may cause resiliency issues that undermine orderly markets. The FCA is also concerned about the potential conflicts that may arise when an affiliate of the operator of a CATP trades on the CATP. The FCA is open to exploring options on how such risks could be managed through effective rules and oversight;
• Higher risk – higher conduct standards: imposing higher standards of conduct where the CATP: (a) allows retail customers to access the platform, (b) permits algorithmic or automated trading activities on the platform, and (c) allows market making activities to be undertaken on the platform.
  The FCA is considering:
  • whether to impose similar requirements that apply to algorithmic and automated trading under UK MiFID (e.g., requiring such firms to have robust systems and controls in place such as trading thresholds and limits, procedures to prevent erroneous trades being executed on the platform, as well as maintaining testing and monitoring arrangements) and compliance with market abuse rules; and
  • imposing additional requirements on the operator of the CATPs to "identify entities operating market making strategies on their platform, disclose potential legal, contractual, or commercial relationships and set up appropriate contractual agreements with them";
• Conflicts of interest – operator/issuer: requiring CATPs to eliminate or, where this is not possible, manage conflicts of interest. In particular, the FCA seeks views on whether the operator of a CATP needs to be legally or functionally separate from the issuer of cryptoassets admitted to trading on the CATP and how to manage the conflicts of an affiliated entity issuing a cryptoasset that is traded on the CATP;
• No clearing house or lending activity: preventing a CATP from acting as a clearing house and directly managing or internalising risk exposures between the counterparties that interact on their platform. The FCA is proposing that the operator should not be permitted to provide credit lines or make credit arrangements with their clients. This would also prevent CATPs from directly setting up lending arrangements with their clients;
• Transparency: imposing pre and post trade transparency requirements on operators of the CATP. This would mean that operators of CATPs would be required to ensure public and non-discriminatory access to order book data; and publish post-trade data on transactions executed on the CATP; and
• Settlement requiring the operator of the CATP to have satisfactory arrangements in place for securing the timely and effective transfer of control over the cryptoassets traded on the CATP.

STORS: Operators of CATPs and intermediaries will not be required to submit suspicious transaction reports (so-called STORS) to the FCA. Instead they will be required to maintain transaction records and make them available to the FCA on request.

Cross-border retail business: The FCA is proposing that non-UK firms interacting with UK retail consumers, must either establish a subsidiary in the UK or operate via a UK branch and a subsidiary. The UK branch would be able to route orders to non-UK liquidity pools and the subsidiary would be required to deal with onboarding clients, e-money issues and as applicable client money. It is not entirely obvious that this option would be commercially attractive to international firms.

 

Cryptoasset Intermediaries

The Discussion Paper refers to cryptoasset intermediaries as persons who deal in qualifying cryptoassets as principal, deal in qualifying cryptoassets as agent, and arrange deals in qualifying cryptoassets. These are three separate activities that are defined in the Draft Instrument.

Again, the Discussion Paper draws heavily on rules that apply to investment firms under UK MiFID including imposing:

• Client categorisation rules: The FCA is considering requiring intermediaries to categorise their clients as “retail”, “professional” or “eligible counterparty”. Although, the FCA is concerned that the “opt up” provisions may allow a retail customer to request to be “opted up” to elective professional client status, which would result in the loss of certain client protections;
• Conflicts of interest rules: Intermediaries may be required to implement procedures to prevent and/or manage conflicts of interest, which are similar to those that apply to investment firms under SYSC 10 of the FCA Handbook. Functional separation may be required where an intermediary trades on own account and executes client orders in the same cryptoassets (or related assets). The FCA is minded to expressly prohibit payment for order flow arrangements (e.g., where a firm receives payment, remuneration or commission from third parties for placing orders from clients);
• Best execution: Intermediaries may be required to ensure that they deliver the best possible results for clients when executing client orders in cryptoassets. This will require intermediaries to have arrangements in place to gather market data to evidence compliance with the best execution requirement. For retail customers, the FCA considers that best execution should always apply with regard to total consideration. Of note, the Discussion Paper states that intermediaries will not automatically comply with best execution requirements solely because a client has accepted a quote;
• Order handling rules: Intermediaries will be required to implement processes to ensure the prompt, fair and expeditious execution of client orders in cryptoassets;
• Pre and post trade transparency rules: The FCA is proposing that intermediaries who execute transactions as principal should make transaction details publicly available as close to real-time as is technically possible and publish quotes pre-trade; and
• Disclosure and record-keeping rules: The FCA is considering requiring intermediaries to disclose: their role to clients before executing client orders (e.g., whether they may act as a principal or agent for each order); if they intend to execute orders outside a trading platform, and explain the associated risks.

Consumer Duty: The FCA intends to apply the Consumer Duty rules to intermediaries when they deal with retail consumers. This will require firms to act to deliver good outcomes for retail customers and include obligations to support customers by helping them make informed decisions. The FCA will further consult on such proposals in Q3 of 2025.

 

Cryptoasset Lending and Borrowing

Although the activities of operating a cryptoasset lending platform and cryptoasset lending and borrowing have been identified in the Draft Instrument as consisting of the regulated activities of dealing as principal and/or arranging, the FCA Discussion Paper refers to the following types of practices and business models, to which it intends to apply specific rules:

• Cryptoasset lending – where a cryptoasset holder transfers ownership of their assets to a third-party (typically a person, firm or platform). This transfer occurs pursuant to a contractual agreement under which the cryptoasset holder will receive a yield, or reward, and an equivalent value of the assets transferred will be returned to them at the end of the lending arrangement.
• Cryptoasset borrowing –where a person, firm, or platform (the “borrower”) receives a loan in cryptoassets or fiat from a third-party firm, platform or person with an obligation for the borrower to pay back the loan and any associated fees or interest pursuant to the contractual arrangement.

Due to concerns about the nature of the risks associated with conducting such activities with retail customers, the proposes preventing firms from providing these services to retail customers. However, it open to permitting access for retail customers to the extent that rules can be developed to reduce the risk profile of such services to a point they could be appropriate.

The FCA is considering drawing on certain requirements in the CONC (Consumer Credit) sourcebook such as requiring firms to undertake creditworthiness assessments, applying forbearance, undertaking appropriateness assessments, improving retail consumer understanding of the services and associated risk by requiring firms to obtain express consent in certain circumstances, and restricting certain aspects of the lending and services only to allow use of qualifying stablecoins.

 

Restricting the use of credit to purchase cryptoassets

Informed by consumer harm concerns, the FCA is considering preventing firms from accepting credit as a means for consumers (as a narrower subset of "retail" customers) to buy cryptoassets. Informed by volatility risk, the FCA is concerned that mismatched asset value and consumer debt could cause unsustainable debt along with associated fees, charges, credit scores and related consumer issues.

Proposals include restricting the use of credit cards to directly buy cryptoassets, and using a credit line provided by an e-money firm. This would represent a significant restriction on retail customers, although the FCA acknowledges that some market participants voluntarily prevent credit card use already.

The FCA does not intend to restrict credit use to purchase qualifying stablecoins issued by an FCA authorised stablecoin issuer.

 

Staking

Again, the FCA focus is very much on the risk posted to retail consumers, particularly around asset loss and understanding. Reiterating the confirmation that staking arrangements don't amount to collective investment schemes, the FCA proposes rules that aim to mitigate the following risks, which are of the same family as existing frameworks imposed on regulated firms in the UK: 

• technology risks: The FCA is proposing to manage this risk by requiring firms to implement robust operational resilience and third party management procedures, and comply with regulatory capital requirements. In particular, the FCA indicates that firms will be liable for financial losses suffered by retail consumers where the firm has inadequately assessed its technological and operational resilience, including third party dependencies;
• lack of consumer understanding: The FCA is proposing to manage this risk by requiring firms to obtain explicit consent from the customer regarding the amount of staked cryptoassets, conditions for payment, commissions, repayment, return on cryptoassets and fees charged prior to the firm staking their cryptoassets. Firms will also be required to provide retail customers with key information on staking products and the associated risks (including ownership transfer) in a key features document; and 
• safeguarding risks: The FCA is proposing to manage this risk by requiring firms to maintain separate wallets for consumers’ staked cryptoassets, distinct from the firm’s and other consumers’ cryptoassets. Firms will also be required to maintain accurate records of staked cryptoassets at all times, and undertake regular reconciliations of staked cryptoassets.

The FCA refers to a forthcoming consultation paper on the wider prudential and safeguarding regimes for qualifying cryptoassets and specified investment cryptoassets. This is worth monitoring in the context of the FCA's wider concerns and scrutiny of firm failure and safeguarding.

 

DeFi

This Discussion Paper does not include specific rules that will be applicable to Decentralised Finance. The FCA intends to publish guidance and as an initial step seeks feedback from market participants on how to assess the degree of centralisation and decentralisation, and how market practices could support the implementation of regulatory obligations. The emphatic message is that while genuinely decentralised DeFi is not covered by the draft RAO SI, the FCA wants to ensure that the same regulatory outcomes are achieved for the same activity.

 

Next Steps

Market participants will have until 13 June 2025 to comment on the Discussion Paper. The FCA will publish a further consultation paper containing draft rules that it intends to implement.

This will be a good opportunity for market participants to actively engage with the FCA to ensure that any new rules are fit for purpose and are as future proof as possible.