Introduction
The FCA’s latest Discussion Paper DP25/1, titled “Regulating Cryptoasset Activities,” outlines its proposed approach to regulating the cryptoasset sector in the United Kingdom. This initiative follows HM Treasury’s 2023 announcement to legislate a comprehensive financial regulatory regime for cryptoassets, expanding the FCA’s current limited oversight, which is confined to Anti-Money Laundering (AML), financial promotions, and consumer protection regulations.
The paper aims to foster a safe, competitive and sustainable crypto sector that balances innovation with consumer protection and market integrity. The FCA invites feedback by the 13th of June 2025 to shape its final rules, aligning with international standards and the FCA’s objectives of consumer protection, market integrity and international competitiveness.
Scope
The Discussion Paper is aimed towards a varied audience, including:
- Cryptoasset Firms: Those operating trading platforms, intermediation, lending, borrowing, staking, or DeFi services.
- Traditional Finance Participants: Banks, asset managers and other financial institutions engaging with cryptoassets.
- Consumer Groups and Individual Consumers: Retail investors seeking clarity on protections and risks.
- Industry Groups, Trade Bodies and Professional Advisors: Entities influencing or advising on cryptoasset activities.
- Policy Makers, Regulators, Academics and Think-Tanks: Stakeholders shaping the regulatory and intellectual landscape.
The FCA proposes to bring a wide range of cryptoasset activities within its regulatory perimeter via the draft Statutory Instrument (SI) amending the Regulated Activities Order (RAO). These activities include:
- Operating a Cryptoasset Trading Platform (CATP): Entities facilitating the exchange of cryptoassets for money or other cryptoassets.
- Intermediation: Firms dealing in cryptoassets as principals, agents, or arrangers of deals.
- Cryptoasset Lending and Borrowing: Arrangements involving the transfer of cryptoassets for yield or loans secured by cryptoasset collateral.
- Staking: Services where firms manage or delegate cryptoassets for blockchain validation to earn rewards.
- Decentralised Finance (DeFi): Activities mimicking centralised services but involving automation or smart contracts, regulated when a controlling entity is identifiable.
Requirements for Firms
The FCA proposes a comprehensive set of requirements to mitigate risks and achieve its key strategic outcomes such as consumer protection, market integrity and effective competition.
Key proposed requirements include:
-
Cryptoasset Trading Platforms (CATPs)
- Authorisation and Location: Firms operating CATPs in the UK or serving UK retail clients must be UK-authorised, with no Overseas Person Exclusion. Overseas firms may operate via a UK branch if paired with a UK subsidiary handling client-facing functions, subject to supervisory cooperation with home regulators.
- Trading Systems: CATPs must operate non-discretionary trading systems to ensure fair, rule-based order execution, prohibiting proprietary trading on their platforms to avoid conflicts of interest, according to COBS 11.
- Retail Access and Controls: CATPs offering direct retail access must manage risks through clear responsibility disclosures, trading activity monitoring, and controls for algorithmic trading and market making.
- Transparency: Pre-trade and post-trade transparency requirements ensure fair and efficient markets, with considerations for on-chain and off-chain transaction recording standards, consistent with MiFID II influences.
-
Intermediaries
- Order Handling and Best Execution: Firms must check pricing across at least three UK-authorised platforms and prioritise total consideration for retail clients, with restrictions on serving retail clients only for cryptoassets traded on authorised CATPs.
- Conflict Management: Legal separation may be required to prevent conflicts between executing own and client orders.
-
Lending and Borrowing
- Retail Restrictions: Lending and borrowing may be restricted for retail clients due to high risk levels, with potential exemptions for qualifying stablecoins.
- Credit and Collateral Assessments: Firms must assess borrower creditworthiness and manage collateral top-ups to reduce consumer risk.
-
Staking
- Consumer Understanding: Firms must obtain express consumer consent for staking, provide a key features document detailing fees, delays, ownership transfers, and risks and ensure transparency in promotions.
- Safeguarding: Staked cryptoassets must be segregated from other client assets in separate wallets, with accurate record-keeping and regular reconciliations, in accordance with SYSC 6 and 13.
- Operational Resilience: Firms should absorb consumer losses from preventable technological failures, aligning with the FCA’s operational resilience framework (SYSC 15A).
-
DeFi
- Consistent Regulation: DeFi services with identifiable controllers must comply with the same requirements as centralised services, supported by guidance to clarify obligations.
- Automation Risk Mitigation: Firms must address operational risks from automation and smart contracts, ensuring consumer protection and market integrity.
Next Steps for Firms
Firms involved in cryptoasset activities must take proactive steps to align with the FCA’s proposed regime:
- Submit Feedback: Interested firms should respond to the Discussion Paper by 13 June 2025.
- Prepare for Compliance: Firms should assess their business models for compliance with proposed rules, particularly on authorisation, transparency, consumer protection, and safeguarding.
- Monitor FCA Updates: Stay informed on the post-consultation final rules, including updates to the FCA Handbook.
- Assess Costs and Risks: Evaluate direct and indirect costs of compliance, including potential impacts on competition and market access.
How Complyport Can Help
Complyport offers tailored compliance services to help firms meet regulatory expectations. Our services include:
- FCA Authorisation Support: Guiding your firm on the regulatory requirements and threshold conditions and offering comprehensive application preparation support up to submission;
- Compliance Framework reviews: Conducting full-scope compliance healthchecks on your firm’s existing compliance framework;
- AML and Financial Crime Systems and Controls: In-depth review of the firm’s financial crime prevention and mitigation measures, including KYT review.
Get in Touch
Book a consultation with one of our Subject Matter Experts today to ensure your organisation is well-positioned to stay ahead of the curve with the proposed cryptoasset regulations.
Ask ViCA, your Virtual Compliance Assistant. Claim your complimentary 20 queries today! Register here: https://vica.chat
