FCA Discussion Paper (DP25/1): Regulating Cryptoasset Activities

On 29 April 2025, HMT published draft legislation setting out the framework for the new cryptoasset regulatory regime in the UK. This establishes the new regulated activities and specified investments that will be within scope.

Shortly following this, on 2 May 2025, the FCA published a discussion paper (DP 25/1) on Regulating Cryptoasset Activities (“Discussion Paper”), providing much of the detail on how the FCA will regulate some of the newly defined activities.

1. HMT’s DRAFT LEGISLATION FOR THE NEW UK CRYPTOASSET REGIME

The draft legislation will amend the Regulated Activities Order 2001 (“RAO”) by creating new categories of “specified investments" and associated new “specified activities” for cryptoassets, within scope of the Financial Services and Markets Act 2000 (“FSMA”), which means that firms will need to be authorised where they carry out activities in relation to these investments. 

This builds on the existing FSMA definition of “cryptoassets”, by creating new definitions of specified investments, including (i) “qualifying cryptoassets” – a subcategory of “cryptoassets” which excludes “specified investment cryptoassets” (being cryptoassets that already meet both the FSMA definition of a “cryptoasset” and a specified investment, such as tokenised securities), tokenised e-money or tokenised deposits – and (ii) “qualifying stablecoins”, which importantly must reference a fiat currency (and therefore a stablecoin which does not reference a fiat currency will not be a qualifying stablecoin). Only firms issuing stablecoins in the UK will be caught by the regulatory regime.

Additionally, the draft legislation will create a number of new specified activities, including issuing a qualifying stablecoin in the UK, safeguarding (“custody”) of qualifying cryptoassets, operating a qualifying cryptoasset trading platform, dealing in qualifying cryptoassets (as principal or agent), arranging deals in qualifying cryptoassets, and qualifying cryptoasset staking.

The draft legislation also amends FSMA to establish the geographic perimeter for the new regulated activities. Firms issuing stablecoins will need to be established in the UK. For the other activities, firms that are dealing directly or indirectly with a UK consumer will generally need to be authorised in the UK. However, authorisation will not be required for overseas firms where they are (i) dealing with a UK consumer through an authorised intermediary; (ii) serving only UK institutional customers; or (iii) issuing non-UK based stablecoin.

Finally, there are also changes to the existing regulatory regime. Firms will no longer be required to register separately under the Money Laundering regime. However, importantly and as previously announced, the draft legislation does not make any amendments to the Payment Services Regulations 2017 to capture the use of stablecoins in payments.

2. HOW WILL THE FCA REGULATE CRYPTOASSET TRADING PLATFORMS?

The Discussion Paper sets out proposals for entities authorised to carry out the new regulated activity of “operating a qualifying cryptoasset trading platform”, which will apply to cryptoasset trading platforms (“CATPs”).

How will overseas firms be regulated?

As outlined in HMT’s draft legislation, firms operating a CATP in the UK, or providing services to UK clients, will generally need to be authorised in the UK. The FCA’s view is that retail customers of overseas firms should always have a relationship with a UK legal entity.  However, the FCA is keen to strike a balance in its approach to overseas firms that will allow customers to access international liquidity, helping the UK maintain open and competitive markets. One proposed structure would require that an overseas platform establishes (i) an authorised branch in the UK responsible for the execution and settlement of trades; and (ii) a separate authorised UK subsidiary responsible for all client-facing functions. 

According to the FCA this would give UK retail clients a relationship with a UK entity and enable the FCA to assess the conduct of the firm’s overall UK activities more effectively. However this may not be an appealing model for overseas firms as they would be authorised on a case-by-case basis, and would need to meet FCA’s threshold conditions and expectations.

What systems and controls will apply to CATPs for different market participants?

The FCA proposes additional systems and controls to address the heightened risks posed by the following practices in crypto markets: (i) retail customers trading in their own name; (ii) algorithmic and automated trading; and (iii) reliance on market makers who may be affiliated with the platform, creating risks of anti-competitive or collusive business practices, including:

1. Direct retail access – the FCA recognises that it is common in crypto markets for retail customers to trade in their own name via direct electronic access to the CATP.  In order to retain this approach but also not subject retail customers to additional responsibilities and obligations, the CATP would be subject to additional rules and responsibilities. The FCA proposes among other things to require that CATPs: (i) ensure that customers comply with the platform rules, (ii) monitor customers’ trading to identify infringements of the rules, (iii) set controls for each type of customer profile to monitor trade activity and (iv) have the ability to revoke platform access.
2. Algorithmic or automated trading – the FCA suggests applying the same requirements as for authorised firms in traditional finance. However, noting that automated trading in crypto markets can be operated by retail customers, who are not authorised persons, the FCA is considering whether to adopt a more pragmatic approach. Regardless, CATPs will at a minimum be required to ensure fair and non-discriminatory access to trading and to ensure orderly markets.
3. Market making arrangements – the FCA is considering requiring CATPs to disclose potential legal, contractual, or commercial relationships with market makers and set up appropriate contracts with them. Alternatively, the FCA may limit these requirements to a subset of ‘significant’ market makers for each CATP.

Will discretionary trading systems be permitted?

The FCA has proposed that all CATPs must operate non-discretionary trading systems, applying a consistent set of predetermined rules to treat all orders identically. This means that CATPs will not be allowed to operate discretionary trading models, whereby they exercise judgment to match off orders against each other.

Will CATPs be able to engage in principal dealing activities?

CATPs currently engage in various principal dealing activities. These expose the CATP to market risks, resilience risks, and conflicts of interest which may undermine fair and non-discretionary operation of markets. The FCA is therefore considering prohibiting CATPs from trading in a principal capacity on their own platform.

Additionally, the FCA is concerned about the risks of the CATP trading in principal capacity off platform, where the trading activity is not related to their CATP’s operation, and the risks in allowing affiliated principal trading firms, including market makers, to trade as principal on the CATP.  The FCA is therefore seeking feedback on how to manage these conflicts.  One solution may be to permit principal trading where there is operational or legal separation from the CATP – e.g. the UK subsidiary in a branch-subsidiary model. However, the FCA notes that this would depend on the structure and extent of the separation.

Will CATPs be able to issue their own cryptoassets?

Where a CATP (or affiliated entity) issues its own cryptoassets, this could create a conflict of interest between the investors, the issuers and the CATP admitting the token for trading. Rather than prohibiting CATPs from admitting cryptoassets issued by affiliated entities or which the CATP has a financial interest in, the FCA is considering requiring the operator of the CATP to be legally or functionally separate from the issuer of cryptoassets.

How can CATPs manage market and counterparty risk?

Cryptoasset exchanges currently pre-fund or provide credit to their counterparties, to compensate for the lack of financial market infrastructure to manage trading risks. The FCA considers that this risks price distortion and market disorder. It therefore proposes to prohibit CATPs from extending credit to counterparties. However, CATPs must still have adequate arrangements in place to ensure that trades finalised on their platforms can be concluded.

How will settlement work?

Unlike in traditional markets, CATPs may not have control of the blockchain protocols upon which settlement takes place. Given that HM Treasury does not propose to regulate the blockchain protocols themselves, the FCA is seeking feedback on how to define settlement for CATPs and the risks posed by current models. Ultimately, the FCA expects CATPs to have satisfactory arrangements for securing timely and effective transfer of control over cryptoassets traded on their platform, whether settlement is arranged or facilitated by a separate entity, or internalised by the CATP.  

What transparency requirements will be applicable?

Cryptoasset market data is not widely available in reliable and consistent form, which may adversely impact consumers. The FCA has therefore proposed that CATPs be subject to transparency requirements, both for pre-trade order book data and historical data on executed transactions. Data will be publicly available rather than only to the clients or members. CATPs will not be required to report transaction data to the FCA, but CATPs (and intermediaries) should still maintain transaction records for 5 years and provide them on request. CATPs may also be required to receive and store transaction records from intermediaries, to limit the risk of any inconsistencies.

3. CRYPTOASSET INTERMEDIARIES

HMT’s draft legislation covers activities of cryptoasset intermediaries including those dealing in qualifying cryptoassets as principal or as agent, and arranging deals in qualifying cryptoassets. The FCA recognises that a substantial proportion of UK customers buy cryptoassets through intermediaries, including both retail and wholesale brokers; and many crypto firms act both as CATPs and as intermediaries.

What order handling and execution requirements apply to intermediaries?

Firms must implement procedures to ensure prompt, fair and expeditious execution of client orders. This will be similar to ‘best execution’ rules that apply to execution of orders of traditional financial instruments, but adapted to the challenges of fragmented crypto markets. Intermediaries will not be required to meet best execution obligations when dealing with eligible counterparties, but may when dealing with professional clients. Where executing orders for UK consumers, firms will also be required to ensure that orders are ultimately executed only on UK-authorised execution venues.

There are also additional requirements if an intermediary is dealing with retail customers. For example, an intermediary will only be permitted to deal in a cryptoasset on behalf of a retail customer once the cryptoasset has been admitted to trading on at least one authorised CATP. Importantly, the FCA also plans to apply the Consumer Duty to intermediaries.

The FCA is also considering requiring intermediaries to make certain disclosures to clients, before executing their orders, including whether they may act as principal or agent, whether orders may be executed outside the trading platform, and to explain the risks. Following execution, they must tell the client where the order was executed. Intermediaries will not be required to systematically report transaction data to the FCA, but they should store transaction details for 5 years and make them available upon request. 

How will CATPs be expected to manage conflicts of interest?

The FCA is seeking to address two primary conflicts of interest that apply to cryptoasset intermediaries. Firstly, there is a potential conflict where a firm executing client orders also transacts on its own account in the same cryptoassets, given that it may be incentivised to prioritise its own positions. To address this, the FCA proposes that firms ensure there is at least a functional separation of their principal trading and client order execution operations.  Separately, firms must have systems and controls to address market abuse risks.

Secondly, the FCA is concerned by the risks posed by “Payment for Order Flow” where, for example, a broker receives payment from a trading platform for having routed client orders to the platform. The FCA is considering prohibiting this  practice, given that it may encourage intermediaries to build close relationships with certain CATPs, harming market competition.

What transparency requirements will apply to intermediaries?

Given the importance of transparency for liquidity and market confidence, the FCA proposes that intermediaries be subject to transparency requirements. This would include post-trade requirements, to make the details of all transactions executed as principal publicly available as close to real-time as possible, including volume, price, and time. It may also include pre-trade requirements, such as publishing firm or indicative quotes. The FCA invites input on any potential exemptions and thresholds.

What client categorisation requirements apply to intermediaries?

The FCA is considering how the existing client categorisation regime in COBS should apply to crypto firms. Specifically, the existing regime for traditional finance firms allows retail customers to request to be ‘opted up’ to become elective professional clients, where the firm is satisfied with the client’s expertise, experience and knowledge. However, the FCA has recently been very clear about the risk of firms encouraging clients to ‘opt up’ to professional status to avoid providing consumer protections that are available to retail clients.

The FCA is also conscious that crypto firms may face challenges in assessing the client’s expertise, experience and knowledge of cryptoasset trading activities, given the regular developments in new tokens and technologies. It is therefore seeking feedback on whether crypto-specific criteria or guidance on opting up would encourage more consistent approaches across firms.

4. CRYPTOASSET LENDING AND BORROWING  

Under HMT’s proposed new legislative framework, cryptoasset lending and borrowing will be captured within the new regulated activities of ‘cryptoasset dealing as principal’ and ‘arranging deals in cryptoassets’.

 What rules will apply to cryptoasset lending and borrowing?

There is currently low demand for cryptoasset lending and borrowing, although the FCA still considers that these products are not suitable for retail consumers in their existing form. The FCA therefore proposes to limit the offering of such products to only non-retail customers.

Nevertheless, the FCA proposes restrictions and risk mitigation measures for cryptoasset lending and borrowing which could reduce the risk profile to make them appropriate for retail customers. These include requiring compliance by lenders with aspects of the FCA’s consumer credit rules (CONC); requiring borrowers to provide collateral to protect from loss in the event of default; and consumer protection measures such as a ‘key features’ document to be provided to borrowers and a separate appropriateness assessment. Further, cryptoasset firms must not use their own issued cryptoassets (“Platform Tokens”) for cryptoasset lending or borrowing. The FCA proposes an exemption for firms lending qualifying stablecoins and borrowing using qualifying stablecoin as collateral, on the basis that use of qualifying stablecoins can reduce price volatility and risk.

5. RESTRICTING USE OF CREDIT TO PURCHASE CRYPTOASSETS

The FCA notes that buying cryptoassets with credit is growing in popularity among consumers. The FCA is concerned that these consumers may take on unsustainable debt, particularly if the value of their cryptoasset drops and they were relying on its value to repay.

To address this risk, the FCA is considering restrictions on the use of credit cards or credit lines offered by e-money firms to buy cryptoassets. Importantly, however, the FCA expects that qualifying stablecoins would be exempt from these restrictions.

6. STAKING

Staking is the use of cryptoassets for blockchain validation, by ‘locking’ them down for a given period of time, using a smart contract or other software solution. Usually this is done in exchange for a cryptoasset reward or a reduction in staking fees. Penalties may apply where validation fails. Given that staking is typically subject to a high minimum, some staking firms offer opportunities for retail consumers to pool their assets and share staking rewards.

What are the FCA’s key concerns?

The FCA’s key concerns and proposals relating to staking are as follows:

1. Technological, cyber and third party risk – staking usually depends on third party ‘validators’. This gives rise to operational and technological risks. Staked assets are also vulnerable to a financial penalty (‘slashing’) where validators fail to meet certain requirements or where their actions negatively affect the blockchain. The FCA therefore proposes making firms liable for all financial losses suffered by retail consumers where the firm has inadequately assessed its technological and operational resilience. Firms will also have to comply with the FCA’s forthcoming operational resilience framework for cryptoassets, and with new prudential requirements to ensure they hold sufficient capital to recover from losses caused by third party software providers.
2. Consumer understanding – staking products are often promoted to consumers as simple ‘earn’ or ‘yield’ products, without explaining the process or implications. Many consumers therefore do not understand that staking time periods, rewards and fees will depend on the specific blockchain, that they may be unable to access their staked assets while they are locked down, or that their assets may be subject to price volatility. To address this, the FCA proposes that staking firms be required to provide retail consumers with a ‘key features document’ on the staking product and risks. The FCA may also require that retail consumers sign a declaration giving express consent as to the amount staked, the conditions for payment or return of staked assets, and fees.
3. Safeguarding – the FCA proposes that staked cryptoassets should be segregated both from other consumers’ cryptoassets and from the firm’s own cryptoassets, in a separate wallet. The FCA may also require firms to segregate a single consumer’s staked cryptoassets into separate wallets for each staking product. These proposals are intended to protect staked cryptoassets in the event of hacking, by limiting loss to the segregated wallet. Staking firms must also keep accurate records of cryptoassets staked, including on whose behalf they are staked, the expected rewards, and custody information, and must conduct regular reconciliations.

7. HOW DO THE FCA’S PROPOSALS AFFECT DECENTRALISED FINANCE (‘DeFi’)?

‘Decentralised finance’ (DeFi) is used to market a range of financial services with a high degree of automation. FCA proposes that DeFi activities will not be in scope of the new crypto regime where they are ‘truly’ decentralised. Only where there is a clear, identifiable controlling person, carrying on an activity, will they come within scope.

The FCA proposes to introduce separate guidance for DeFi. However, the FCA also recognises that DeFi is dynamic, so it has proposed to host a stakeholder forum to get insights on DeFi from market participants.  The FCA is seeking input on how it should assess whether a service is truly decentralised, and how decentralised features interact with the regulatory perimeter.