UK's FCA Will Force Crypto Firms to Protect Your Money or Face the Axe - Brave New Coin

The UK's Financial Conduct Authority (FCA) has unveiled sweeping proposals to regulate stablecoin issuance and cryptocurrency custody services, potentially marking a significant shift in digital asset security protections for UK consumers.

Under the proposed regulations outlined in consultation paper CP25/14, firms providing cryptocurrency custody services in the UK or to UK consumers would face stringent new requirements designed to protect client assets. The proposals establish requirements for qualifying stablecoin issuers and requirements for qualifying cryptoasset custodians , creating a regulatory framework that extends beyond current anti-money laundering requirements.

Enhanced Asset Protection Through Trust Structures

To date, UK firms have not been at all prominent globally in providing cryptocurrency custody services. While bank deposits in the UK are covered by the Financial Services Compensation Scheme (FSCS**)**, which protects deposits in authorized banks, building societies, and credit unions, no such protection exists for crypto assets under UJ law. Although the proposed regulations do not go so far as to set up a similar scheme for crypto, or mandate insurance coverage, they do attempt to close the gap somewhat with;

• Trust structures – requiring firms to hold client crypto in legal trusts
• Asset segregation – keeping client assets separate from firm assets
• Capital requirements – firms must hold reserves to cover potential losses
• Daily reconciliations – to quickly identify and address any shortfalls

Central to the custody proposals is a requirement that firms must segregate client crypto assets from their own, hold those qualifying crypto assets on behalf of clients in a trust, have accurate books and records of clients’ crypto assets holdings, and have adequate controls and governance to protect clients’ crypto assets holdings .

This trust requirement represents a significant departure from current practices where many firms co-mingle client and company assets. The FCA notes that such practices have contributed to substantial losses in recent exchange failures, including FTX where consumers faced delays or complete loss of assets due to inadequate segregation.

The proposals mandate daily reconciliations of client assets and require firms to immediately address any shortfalls. Firms will be required to segregate client crypto assets from their own and maintain detailed records enabling them to distinguish assets held for different clients at any time.

Stablecoin Backing and Redemption Requirements

For stablecoin issuers, the FCA proposes robust backing requirements ensuring qualifying stablecoins are fully backed at all times with specific asset classes. Backing assets would be limited to highly liquid, low-risk instruments including cash deposits, short-term government debt, and in some cases, longer-term government bonds and money market funds.

A key consumer protection is the proposed redemption guarantee: Qualifying stablecoin issuers will be required to offer redemption of qualifying stablecoins in exchange for money to all holders. Payment orders to transfer redeemed funds to qualifying stablecoin holders should be placed at the latest by the end of the next business day following receipt of a redemption request .

This would address a significant current market failure where many stablecoin issuers restrict redemption rights to institutional users only, leaving retail consumers dependent on secondary market trading during market stress.

Market Context and Consumer Impact

The proposals come as cryptocurrency adoption in the UK has surged. The FCA’s recent survey found that 12% of UK adults now own crypto assets, up from 10% in previous findings. Just over a quarter (27%) of crypto asset users who responded to this survey had bought stablecoins .

However, current consumer protections remain limited. The FCA identifies custody of crypto assets by firms offering these services in the UK or to UK consumers will be in scope of the custody regime , covering an estimated £12.6 billion in UK consumer holdings.

The regulatory framework aims to address repeated instances of consumer harm, with poor organisational arrangements and hacks being the most frequent reason for harm associated with custody failures . Historical data suggests approximately 0.7% of the global crypto asset market value is lost annually due to custody failures.

Implementation Timeline and Industry Response

The consultation runs until July 31, 2025, with final rules expected to be implemented in 2026. The FCA estimates the proposals would affect approximately 50 custody firms and 10 potential UK stablecoin issuers.

For firms providing custody services, compliance costs are estimated at £1.8 million in initial implementation expenses and £500,000 in ongoing annual costs per firm. However, the FCA projects £395 million in consumer benefits over 10 years through avoided losses.

The proposals include scaled prudential requirements, with smaller firms facing a £150,000 minimum capital requirement while larger operations must hold capital equivalent to 0.04% of assets under custody.

Market Structure Changes

The regulatory framework would fundamentally alter the UK’s digital asset landscape. Currently, most UK consumers custody their cryptocurrencies with overseas platforms, with 72% storing assets on the exchange where they made their purchase.

Under the new regime, qualifying stablecoin issuers and qualifying crypto asset custodians will be required to be authorised by the FCA to carry on these activities by way of business in the UK .

The FCA emphasizes that these protections would not extend to overseas stablecoins or unregulated cryptocurrency products, maintaining the distinction that the majority of crypto assets remain high risk, speculative investments and consumers should be prepared to lose all their money if they buy them .

The proposals represent one of the most comprehensive regulatory frameworks for digital assets globally, potentially positioning the UK as a leader in cryptocurrency consumer protection while maintaining space for innovation in the rapidly evolving digital asset sector.