UK: FCA consults on stablecoin issuance and cryptoasset custody rules

What has happened?

On 28 May 2025, the FCA published a Consultation Paper (CP25/14) (the “CP”) on proposed rules and guidance on the activities of issuing stablecoins and safeguarding cryptoassets (including stablecoins).  The draft rules will include amendments to the FCA Handbook (e.g. new chapters 16 and 17 in the Client Assets sourcebook (CASS), and a new Cryptoasset sourcebook (CRYPTO)).  The FCA is inviting feedback on its proposals until 31 July 2025.

This follows the recent publication of the draft Statutory Instrument by HM Treasury (the “draft SI”) in April, which introduces new regulated activities relating to cryptoassets, including the activities of issuing qualifying stablecoins and safeguarding qualifying cryptoassets (see our article here).  The CP is a highly welcome and much anticipated development, as it builds on the FCA’s previous Discussion Paper (DP23/4) published in 2023 on proposed requirements relating to stablecoins (see our previous summary here)

The FCA is also currently consulting on its proposed approach to a number of other regulated cryptoasset activities introduced in the draft SI in a separate Discussion Paper (DP25/1) including with regard to trading platforms, intermediaries, staking, lending and borrowing and decentralised finance (DeFi) (see our key takeaways here).

Additionally, the FCA has also on the same day published a Consultation Paper (CP25/15) on a prudential regime for crypto firms (see our separate article here).

Issuing qualifying stablecoins

Qualifying stablecoins are defined in the draft SI as cryptoassets which seek or purport to maintain their value with reference to a fiat currency (a government-issued currency, such as pound sterling or US dollar) by the issuer holding, or arranging for the holding, of fiat currency or fiat currency and other assets.  While the draft SI introduces the regulated activity of issuing qualifying stablecoins, the CP sets out more specific rules applicable to qualifying stablecoin issuers relating to backing assets, redemption, and disclosures.

It is worth noting that the CP does not include proposed rules for firms carrying out payments using qualifying stablecoins.  It also does not cover all the rules that will be applicable to qualifying stablecoin issuers—a separate Consultation Paper (CP25/15) on a prudential regime for cryptoasset firms has been published on the same day.  The FCA will also consult on further conduct and firm standards in a future consultation paper (including on the application of Consumer Duty, appointment of a CASS oversight officer and on client assets audit requirements) which is expected in Q3 2025, according to the FCA’s roadmap).

Key aspects of the proposals include:

• Creation and design

  The FCA proposes requirements on the technical design of a qualifying stablecoin (including its underlying code), including that the design must allow the issuer to fulfil its regulatory requirements and also allow for innovation.  Issuers must identify and manage the risks associated with the design and build of a stablecoin before it is issued. 

• Backing assets

  Composition of backing assets

  Issuers must maintain the value of a qualifying stablecoin by holding backing assets in amounts equivalent to the value of the stablecoins that have been minted.

  The backing assets pool must include a minimum proportion of on-demand bank deposits (i.e. the on-demand deposit requirement or “ODDR”).  The ODDR is to be set at 5%.

  Other assets making up the backing assets pool must by default be comprised of short-term deposits and short-term government debt instruments (“core backing assets”).  

  Issuers may also be permitted to include an expanded range of backing assets provided that issuers give prior notice to the FCA and that they have the right skills, competence, systems and controls to do so. Such expanded range of assets may include longer term government debt instruments that mature in over one year, units in a Public Debt CNAV Money Market Fund, and assets held as a counterparty to a repo agreement. Issuers who use the expanded backing assets must apply a backing asset composition ratio (BACR) which relates to the minimum proportion of the backing asset pool that an issuer will need to hold as core backing assets.  The CP sets out further details on how (and how often) the BACR is to be calculated.

  Backing assets risk management

  A qualifying stablecoin issuer must also implement a robust backing assets risk management framework, which should include a liquidity risk management policy, a contingency funding plan (e.g. in case where the firm no longer has liquid assets available to meet its ongoing obligations), and a custody policy (e.g. to ensure there is prompt access to the backing assets held by third party custodians).

  Safeguarding backing assets

  The proposed rules for safeguarding the backing assets build on the existing FCA Client Assets Sourcebook (CASS), and primarily involve (i) segregating client assets from an issuer’s own assets, and (ii) establishing a statutory trust for the benefit of qualifying stablecoin holders.  

  Issuers will be subject to fiduciary duties (as a trustee) to act in the best interest of the beneficiaries (i.e. stablecoin holders), and assets held on trust will be ringfenced from creditor claims in the event of an issuer experiencing financial difficulties.

  The FCA expects all minted qualifying stablecoins to be fully backed at all times (including those that are held by the issuer for their own benefit), with the exception that where stablecoins have been redeemed (and therefore are unbacked), issuers must either re-back or burn such stablecoins (i.e. take them permanently out of circulation) within 24 hours.

  Importantly, the FCA also proposes to require issuers to use an independent third party that is unconnected to the issuer (or any of the issuer’s group) to safeguard the backing assets (although there is nothing preventing a stablecoin issuer from appointing different third parties who are themselves connected with each other to hold different types of backing assets which ). The issuer (as trustee) will remain legally responsible, and the issuer will need to obtain signed letters from each appointed third party acknowledging that the backing assets are held on trust for the benefit of the stablecoin holders (and not the issuer). Further, the issuer must follow certain rules in engaging such third parties (e.g. in relation to the written agreement and in selecting such third party).  The intention is to limit intragroup contagion risk, and to allow for the qualifying stablecoin to continue even if the issuer (and its group) fails.

  Prohibition on granting interest

  Although issuers of qualifying stablecoins may retain any interest earned on its backing assets pool, the FCA proposes to prohibit issuers from granting interest or otherwise passing down other benefits from the backing asset pool directly or indirectly to consumers, on the basis that qualifying stablecoins should be treated as a money-like instruments and not as investments.  Allowing stablecoin holders to participate in any benefits arising from the backing asset pool would make the stablecoin more like a collective investment scheme. 

• Record keeping and reconciliation

  The FCA proposes that issuers record the number of qualifying stablecoins minted, rather than keeping records relating to specific clients, on the basis that issuers may not necessarily know who is the holder of a stablecoin at any given time (given that stablecoins may be traded without the issuer’s involvement on secondary markets).

  Issuers will need to conduct daily reconciliations, which will involve comparing the number of qualifying stablecoins against the value of backing assets, and against the records of third parties holding backing assets.  Excesses or shortfalls in the value of backing assets must be resolved within 1 business day.

• Redemption

  Issuers must provide all holders (both retail and non-retail, and regardless of whether such holder is in the UK) with the right to redeem qualifying stablecoins for money at par value with the reference currency.

  Any fees charged to holders for redemption must be commensurate with operational costs, must not be comprised of costs passed on from the issuer arising from sale of backing assets, and must not exceed the value of the stablecoins being redeemed.

  In line with previous FCA proposals, the issuer will be required to redeem a qualifying stablecoin by placing a payment order within one business day of receiving a valid redemption request. A valid redemption request must be made by the holder, in a manner that meets relevant terms and conditions between issuer and holder, and where the issuer has received all information required to carry out customer due diligence checks in accordance with financial crime legislation. 

  Certain information must be provided by the issuer to holders prior to any redemption request being executed (e.g. payment methods for receipt of redeemed funds and likely timeframes).  Additionally, the FCA proposes to require issuers to ensure that a contract between the issuer and holder clearly states (i) the conditions of redemption, and (ii) that the contractual rights are transferable between holders (e.g. when the qualifying stablecoin is traded on a secondary market).

  The ‘next business day’ requirement may be disapplied under certain legitimate circumstances, such as where such redemption would breach a legal requirement or court order, or where the holder requests redemption in a different currency and such currency exchange would require a longer timeframe.

  The FCA also proposes that issuers must temporarily suspend all redemptions in exceptional circumstances, such as when there is a failure in the underlying distributed ledger technology, the insolvency of the issuer, or a sudden loss in confidence in the qualifying stablecoin leading to an exceptionally high volume or value of redemption requests.  In such cases, issuers will be subject to certain FCA notification requirements.

  Redeemed stablecoins must be backed within 24 hours or burned.

• Use of third parties 

  The draft SI permits qualifying stablecoin issuers to use third parties to carry out certain elements of the regulated issuance activity on their behalf.  The FCA clarifies that the issuer will remain responsible for complying with all relevant regulatory requirements, and makes reference to general outsourcing rules and guidance under its Senior Management Arrangements, Systems and Controls Sourcebook (SYSC).

  In addition, the FCA proposes new rules in its CRYPTO 2 sourcebook, such as requiring issuers to carry out due diligence on third parties and having appropriate contracts in place with the third parties (which must include sufficient information sharing arrangements).

  Other specific requirements will apply depending on what activity a third party is carrying out on behalf of the issuer.  For example, if third parties are selling qualifying stablecoins on the issuer’s behalf, the FCA proposes to require that the third party does not receive any of the funds itself, and that the issuer receives the incoming funds directly into an account in its own name. 

• Disclosure requirements

  Under the proposed rules, issuers would be required to publish information that allows holders (or potential holders) to make informed decisions when buying, selling, or requesting to redeem a qualifying stablecoin.  Among other requirements, issuers must publish the relevant information online and such information must be clear, fair and not misleading.

  The issuer will be required to keep published information up to date.  The FCA notes that depending on the type of information, it may not be proportionate to require such information to be updated each time a change occurs.  Accordingly, the FCA intends to prescribe what type of information would need to be updated either (i) whenever it becomes inaccurate (e.g. names of relevant third parties carrying out issuing activities, redemption fees), or (ii) at least once every three months (e.g. the total number of stablecoins minted and issued, and the value and percentage breakdown of the backing assets pool).

  The FCA also proposes more detailed rules on certain types of information that must be disclosed.  For example, in relation to redemption, the issuer must publish the steps that an issuer will take to redeem a qualifying stablecoin and the information they may need to provide.  Issuers will also be required to undertake a review at least annually to verify the accuracy of statements made over the previous 12 months in respect of the 1:1 ratio between stablecoins and backing assets, to be carried out by an independent auditor possessing certain qualifications.  Issuers will need to disclose information regarding the review and its outcome.

• Approach to multi-currency stablecoins

  The CP addresses stablecoins which reference a single fiat currency.  The FCA does not currently see significant presence of multi-currency stablecoins in the UK, but it welcomes views on the standards that should apply to multi-currency stablecoins.

• Areas requiring further guidance

  The FCA also indicates in the CP that, once the relevant legislation is made, it intends to consult on further guidance in its Perimeter Guidance sourcebook (PERG) to clarify the differences between e-money and qualifying stablecoins, as well as the differences between collective investment schemes or Alternative Investment Funds (including money market funds) and qualifying stablecoins.

  Separately, the Bank of England (BoE) is still developing its proposed approach to systemic payment systems using stablecoins (see our previous article here).  The FCA and the BoE will continue to work together to clarify how the transition from the FCA’s regime to the BoE regime will work (for those stablecoins that gain systemic significance).

Cryptoasset custody

The CP sets out proposed rules applicable to firms which are authorised by the FCA to safeguard qualifying cryptoassets (custodian firms).  In line with the previous Discussion Paper (DP23/4), the proposals use the existing CASS rules as a framework.

It is worth noting that the FCA plans to consult on proposals relating to the safeguarding of “specified investment cryptoassets” (defined in the draft SI as cryptoassets that meet the definition of specified investments under Part 3 of the RAO, such as security tokens) in a future CP on ‘Trading platforms, intermediation, lending and staking’, which is expected in Q4 2025/ Q1 2026 (according to the FCA’s roadmap).  

Additionally, as with the rules relating to stablecoin issuers, the FCA notes that the separate consultation paper on prudential requirements and future consultations on conduct and firm standards will also be applicable to custodian firms carrying out the safeguarding activity.

Key aspects of the proposed custody rules include:

• Segregation of client assets via non-statutory trust

  The FCA proposes that clients’ qualifying cryptoassets must be held by the custodian firm by way of a trust.  The FCA considers that this will better protect clients’ rights in the event of a custodian’s insolvency.  The FCA considered whether this should be a statutory trust (as the FCA currently uses in relation to client money) or a non-statutory trust and concluded that a non-statutory trust should be sufficient.

  In terms of wallet structure, the proposed rules permit the use of individually segregated or omnibus wallets to safeguard client assets (although, in either case, clients’ cryptoassets must be distinct and separate from the custodian firm’s own qualifying cryptoassets).  On the basis that qualifying cryptoassets are fungible assets, the FCA notes that the proposed rules would not prevent custodians from being able to allocate a certain proportion of cryptoassets held in an omnibus wallet to a client (rather than returning a specific cryptoasset).

  There may be instances when a custodian firm receives qualifying cryptoassets on behalf of clients and where a trust arrangement may not be appropriate.  This may be when client assets are reused (e.g. when cryptoassets are staked, used as collateral or lent to other clients), in such a way that clients may no longer be beneficial owners of such assets under a trust.  The FCA intends to further consult on rules around reuse of client assets following feedback on Discussion Paper (DP25/1), via the future consultation paper on ‘Trading platforms, intermediation, lending and staking’ (which is likely to be published in Q4 2025/Q1 2026).

• Books and records, and reconciliations

  Custodian firms will be required to maintain records, which will include identifying the means of access to the qualifying cryptoassets held in custody.  Such records must be client-specific, and must correctly identify the type, quantity, the relevant blockchain address, nature of the client’s claim, and whether other parties have the capacity or control to affect a transfer of such qualifying cryptoasset. 

  Additionally, the FCA proposes that custodian firms carry out a qualifying cryptoasset reconciliation each business day - which will involve checking the total amount of qualifying cryptoassets in the firm’s records against the content of the wallet addresses controlled by the firm and against qualifying cryptoassets held by third parties (if any).

  A custodian firm will also be required to notify the FCA if it is unable to meet proposed reconciliation requirements or maintain accurate records, or if it is unlikely to resolve any identified shortfall prior to the next reconciliation.  If a shortfall has arisen and the custodian firm concludes that neither it nor the third party is responsible for the shortfall, the firm will need to notify both the FCA and affected clients of the revised balances as a result of this shortfall.  The FCA notes that, if a shortfall arises, the custodian firm could face private law claims and the matter could develop into an insolvency (in which case the FCA would have its usual supervisory powers available).

• Organisational arrangements and private key management

  In line with proposals in the previous Discussion Paper (DP23/4), custodian firms will need to have adequate organisational arrangements relating to its operations, systems and controls, in order to minimise risk of loss or diminution of clients’ qualifying cryptoassets.

  These will include ensuring that private keys and the means of access to qualifying cryptoassets are kept secure (and implementing strategies to mitigate loss or compromised security).  They will also involve custodian firms in maintaining “key-mapping” records that detail the qualifying cryptoassets being held, the relevant wallets, the means of access, and how they correspond to the relevant clients.

• Liability

  As discussed in DP23/4, the government intends to take a proportionate approach to liability, and so will not impose full, uncapped liability on custodian firms (e.g. in the event of a hack that was not within its control). 

  However, the FCA notes that custodian firms may still be liable for the loss of qualifying cryptoassets due to (i) negligence or breach of contract, or (ii) breaches of FCA rules (including where private persons are able to make claims under s.138D of the Financial Services and Markets Act 2000 (FSMA 2000), and other complaints made in accordance with the FCA’s Dispute Resolution (DISP) sourcebook).

  The FCA intends to further consult on rules aimed at ensuring that clients’ rights are clear in their contracts with custodian firms.  This will be covered in the future consultation paper on ‘Conduct of business and firm standards’, which is expected in Q3 2025.

• Appointing third parties

  The proposed rules will permit custodian firms to use third parties in custody arrangements (e.g. for multi-party computation or key sharding), subject to a number of conditions. These include the custodian firm (i) ensuring that the appointment of a third party is necessary and in the best interests of the client (which must be evidenced in a written policy), (ii) carrying out due diligence and periodic reviews of the third party, (iii) putting in place an appropriate written agreement with the third party (which will be subject to content requirements under the FCA rules – including an acknowledgement from the third party that the qualifying cryptoassets are held on trust for the clients of the custodian firm), and (iv)  obtaining approval by its own governing body to appoint the third party.

• Client disclosures and CASS oversight

  The FCA is currently considering a number of rules relating to client disclosures, such as whether custodian firms should be required to (i) provide clients with access up to date statements via an online system, (ii) disclose in their custody agreements the wallet structures chosen (and why), and (iii) disclose to clients any changes in how their qualifying cryptoassets are being held since the last disclosure.  The FCA does not propose to mandate the disclosure of Proof of Reserves (PoR) at this stage.

  Other rules that the FCA is considering include the appointment of a CASS oversight officer to be accountable for overseeing custody arrangements, annual audit requirements, and regulatory reporting requirements.

  The FCA intends to consult on proposed rules relating to client disclosures, appointment of a CASS oversight officer and annual audit requirements in its future consultation paper on ‘Conduct of business and firm standards’ (expected in Q3 2025).  Regulatory reporting requirements will be consulted on via the future consultation paper on ‘Trading platforms, intermediation, lending and staking’ (expected in Q4 2025/Q1 2026).

• Ancillary activities to custody

The FCA is not proposing at this stage to require firms carrying out ancillary services (such as operating a trading platform, brokerage, market-making, margin trading and staking) to maintain separate legal entities for different service lines.

However, the FCA notes that it may revisit this proposal following feedback on its Discussion Paper (DP25/1) published earlier this month (see our article here) and consult on proposed requirements in its future CP on ‘Trading platforms, intermediation, lending and staking’, which is expected in Q4 2025/ Q1 2026 (according to the FCA’s roadmap).

Where custodian firms hold client money arising out of their cryptoasset custody activities, the FCA expects the existing client money rules in CASS 7 to apply.  The FCA says that it may consult further on this issue in its future consultation paper on ‘Conduct of business and firm standards’ (which is expected in Q3 2025).

Additional points of note

Currently,certain cryptoasset businesses are required to register with the FCA under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs).  Under the incoming regime, as set out in the CP, qualifying stablecoin issuers and qualifying cryptoasset custodians will no longer need a separate registration with the FCA under the MLRs, but would instead need to be authorised under FSMA 2000.  That being said, firms will still be subject to relevant requirements under the MLRs.  The FCA makes clear that it intends to apply the same regulatory approach and standards to the new category of regulated entities as it does with other regulated entities, notwithstanding that for many such entities it will be the first time they will be required to comply with the rules under FSMA 2000.

As mentioned above, the FCA is welcoming feedback on the proposed rules in this CP by 31 July 2025.  Please reach out to the Hogan Lovells team if you would like assistance with your submission.

In accordance with the FCA’s roadmap, the FCA expects to publish a number of consultations throughout 2025 – Q1 2026, with the aim to publish final rules with accompanying policy statements in 2026. 

Authored by Dominic Hill and Christina Wu.