UK: FCA issues Discussion Paper on regulating new cryptoasset activities

What has happened?

Just a few days after HM Treasury (“HMT”) published a draft statutory instrument (the “draft Order”) and an accompanying policy note expanding the financial services regime to cover new cryptoasset-related activities (see our key takeaways here), and in line with its Indicative Roadmap (see our article here), the Financial Conduct Authority (“FCA”) has now published a discussion paper (DP25/1) (the “Discussion Paper”) regarding its proposed approach to regulating cryptoasset activities.

The Discussion Paper gives an indication of the FCA’s proposed direction in relation to certain issues, but does not contain any draft proposals. In relation to some issues, the FCA appears to be genuinely undecided about the best approach, and so is using the Discussion Paper to raise its concerns and inviting the industry to help it find ways to meet those concerns.

The deadline for submitting feedback is 13 June 2025. The FCA will use the feedback to determine its next steps. The FCA says it will publish a further consultation paper containing any draft new FCA Handbook rules that it intends to implement.

The draft Order and the FCA’s Discussion Paper are significant milestones—these will set out much of the foundational elements for the development the UK cryptoasset regulatory regime.

It will be important for both UK-based and overseas businesses to consider these documents in terms of:

• understanding their likely position, and in particular whether they will be within the scope of the new UK regime; and
• having the immediate opportunity, through the discussion and consultation process, to shape the future UK regime.

It is worth noting that this Discussion Paper does not cover rules on issuing a qualifying stablecoin and on safeguarding (custody) (which were included in the draft Order) – the FCA expects to consult on rules and guidance applicable to these activities before the end of Q2 2025.

Overview

The FCA is inviting comments on the future regime in relation to regulating trading platforms, intermediaries, staking, lending and borrowing, and decentralised finance (“DeFi”).

The main issues considered in the Discussion Paper are as follows:

• Cryptoasset Trading Platforms

The Discussion Paper sets out proposals for entities authorised to carry out the new regulated activity (as introduced under the draft Order) of “operating a qualifying cryptoasset trading platform” (such entities to be referred to as “CATPs”). 

Aspects of the CATP regime explored in the Discussion Paper include:

a. obligations around retail access, algorithmic or automated trading and market making activity (recognising, in particular, that retail clients have direct electronic access to a CATP; 

b. arrangements for trading and execution, including a requirement that all CATPs will have to operate non-discretionary trading systems;

c. risks to be addressed when carrying out dealing activities as principal in the context of operating a CATP (including when transactions are executed on a matched-principal basis – a practice about which the FCA has concerns and is seeking specific feedback on),

d. managing conflicts of interests such as where a CATP (or an affiliated entity) issues its own cryptoassets. In relation to this, the FCA is considering whether it will require a firm operating a CATP to be legally or functionally separate from the issuer of cryptoassets admitted to trading on the CATP, and

e. transparency requirements, including considerations around a CATP’s obligations to maintain records arising from direct retail access to a platform (to be distinguished from traditional financial markets). This is in line with the FCA’s previous discussion paper on market abuse requirements (see our article here).

In many of these areas, it appears that the FCA is using as its starting point the requirements that apply to traditional financial markets (e.g. investment firms and platforms who provide services in relation to securities such as shares or bonds).

The Discussion Paper also considers the position of overseas firms. The FCA’s position is that UK retail customers that are served by a CATP should always have a relationship with a UK legal entity. This is likely to mean that an overseas firm that wishes to deal with retail clients will have to establish a subsidiary in the UK. In the Discussion Paper, the FCA floats a possible structure that it would consider acceptable, under which an overseas platform (i) establishes a branch in the UK (which would need to be authorised by the FCA) and the branch does the execution and settlement of trades; and (ii) establishes a separate subsidiary in the UK (which would also need to be authorised by the FCA) which carries out customer-facing functions. Such a structure, while feasible, does not sound particularly efficient or likely to be appealing to overseas platforms.

If an overseas firm is not intending to provide services to UK retail customers, this requirement will not apply. However, if it is doing regulated activities (as set out in the draft Order), the overseas firms is likely to require authorisation by the FCA, and the Discussion Paper suggests that the FCA will expect any such firm to establish a branch in the UK in order to obtain authorisation (which is also the FCA’s current practice regarding overseas firms in traditional financial markets).

• Cryptoasset intermediaries
  

Intermediaries include those carrying out the activities of “dealing in qualifying cryptoassets as principal”, “dealing in qualifying cryptoassets as agent”, and “arranging deals in qualifying cryptoassets” (in accordance with the draft Order).

The Discussion Paper draws parallels with intermediation activities in traditional financial markets, and proposes rules around:

a. Order handling and execution. This will include best execution rules similar to those that apply for traditional financial markets. Additional requirements will apply in the context of executing order for retail customers; for example, an intermediary may only deal in a cryptoasset or arrange deals in relation to it for retail consumers if the cryptoasset is admitted to trading on at least one UK authorised CATP.

b. Conflicts of interest. These requirements will draw from existing FCA Handbook requirements (in SYSC 10) for traditional finance firms. The key conflict scenarios identified in the Discussion Paper are: (i) when a firm executes client orders and transacts on its own account in the same cryptoassets (or related assets) – with functional separation between those likely to be required; and (ii) Payment for Order Flow (“PFOF”) where a firm receives payment, remuneration or commission from third parties. The FCA is proposing an express prohibition on PFOF.

c.Pre and post trade transparency requirements. These will take into account the FCA’s separate policy statements on the bond and derivative transparency regime and in the context of equity secondary markets. Among other things, the FCA is proposing that cryptoasset 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.

d. Client categorisation. The existing FCA Handbook rules for traditional financial markets (COBS 3) require firms to categorise their clients as “retail”, “professional” or “eligible counterparty”. The FCA is seeking feedback on how such rules can apply in the cryptoasset space or whether a different approach is required. The FCA is concerned, in particular, about the “opt up” framework in COBS 3, under which a retail customer may request to be “opted up” to become an elective professional client, which will result in them receiving fewer protections.

Notably the FCA also mentions that it intends to apply the Consumer Duty to cryptoasset intermediaries when they are dealing with consumers. The FCA says that will, in particular, include obligations to support customers by helping them make informed decisions – which is likely to put additional emphasis on firms ensuring that customers understand their position. The FCA will consult on the details of this in Q3 2025, in line with its Roadmap.

• Cryptoasset lending and borrowing
  

The Discussion Paper considers the following practices:

• Cryptoasset lending – an arrangement where a cryptoasset holder transfers ownership of their assets to a third-party - typically a person, firm or platform – 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 – an arrangement where a person, firm, or platform (known as 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 as per the contractual arrangement.

The Discussion Paper confirms that these practices are captured under the new regulated activities in the draft Order. The FCA also proposes having specific rules for these business models.

Significantly, the FCA proposes to restrict firms from offering cryptoasset lending and cryptoasset borrowing to retail customers – with the result that only institutional clients would be able to access cryptoasset lending and borrowing products. The FCA cites risks such as lack of consumer understanding, loss of ownership to cryptoassets, speculative yield generation, on-lending to unregulated or decentralised parties, volatility of the value of cryptoassets giving rise to margin calls, and absence of creditworthiness assessments leading to risk of borrower default.

That said, the FCA is also exploring proposals that could effectively reduce the risk profile of such lending and borrowing products such that they are appropriate for retail customers. Among other things, the proposals include applying elements of the CONC (Consumer Credit) sourcebook in cryptoasset borrowing (e.g. requirements to conduct creditworthiness assessments), methods to improve consumer understanding (e.g. requiring express consent), and restricting certain aspects of the services only to allow use of qualifying stablecoins.

• Restricting the use of credit to purchase cryptoassets
  

The FCA is considering restricting firms from accepting credit as a means for consumers to purchase cryptoassets. The restrictions it is considering include restricting the use of credit cards or credit lines provided by an e-money firm). 

If implemented, this would be a significant restriction for retail customers, and not one that currently applies in relation to traditional financial markets. The FCA appears to be concerned that the volatility of cryptoassets and the possibility that consumers could be left with unsustainable debt, particularly if the value of their cryptoasset drops and they were relying on its value to repay the loan.

However, the FCA’s initial expectation is that qualifying stablecoins would be exempt from such restrictions.

• Staking

The Discussion Paper confirms that the draft Order intends to bring intermediated cryptoasset staking activity within the regulatory remit. The FCA proposals primarily revolve around addressing:

e. technology risks - e.g. through operational resilience and third party management requirements as well as prudential safeguards. The proposals include that firms will be liable for financial losses suffered by retail consumers where the firm has inadequately assessment its technological and operational resilience, including third party dependencies;

f. lack of consumer understanding - e.g. through obtaining explicit consent from the customer regarding certain aspects of a transaction, and providing sufficient information about the staking arrangements (such as unstaking time periods and whether there is a transfer of beneficial and/or legal ownership of the staked cryptoassets); and 

g. safeguarding risks - e.g. through requirements on segregation of staked cryptoassets for each customer and for each staking product (although the FCA seeks feedback on whether this would be an operationally viable option)as well as reconciliation and recordkeeping requirements. The FCA notes that there will be a further consultation on the wider safeguarding regime for cryptoassets, but the Discussion Paper sets out proposed safeguarding requirements specifically in the context of staked cryptoassets.

• Decentralised Finance (DeFi)

The Discussion Paper reiterates HMT’s intention, as set out in the policy note accompanying the draft Order, for DeFi activities to be within the regulatory perimeter where there is a clear controlling person(s) carrying on an activity (i.e. where services involve an identifiable intermediary which has control over business operations and product features). “Truly” decentralised activities will not be covered by the regime. 

The FCA intends to introduce further guidance and to host a stakeholder forum to obtain insights from experts and market participants. The FCA specifically seeks feedback on understanding how to assess the degree of centralisation and decentralisation, how decentralised features interact with the regulatory perimeter, and industry practices that could support the implementation of proposed regulatory obligations.

Authored by Christina Wu and Dominic Hill.