UK Financial Conduct Authority Proposes Stablecoin and Crypto Custody Regulations to Foster Safe Innovation

On May 28, the UK’s Financial Conduct Authority (FCA) unveiled a set of consultation papers outlining proposed regulations for stablecoin issuance, cryptoasset custody, and the financial resilience of crypto firms, marking a significant step toward formalizing the UK’s crypto regulatory framework. The proposals, detailed in Consultation Paper CP25/14 and CP25/15, aim to create a secure and competitive environment for the cryptocurrency industry while prioritizing consumer protection and market integrity FCA Consultation CP25/14.

Key Elements of the FCA’s Proposals

The FCA’s regulatory framework focuses on two primary areas: stablecoin issuance and cryptoasset custody.

For stablecoins, the proposals mandate that issuers maintain a 1:1 backing with robust asset management systems to ensure value stability. This requirement aims to mitigate risks associated with stablecoin volatility, a concern highlighted by past incidents like the 2022 collapse of TerraUSD. Additionally, stablecoin issuers must provide transparent information to customers about asset management practices, ensuring clarity on how funds are safeguarded. For crypto custody services, the FCA proposes stringent requirements to protect consumer assets. Firms responsible for safeguarding cryptoassets will need to implement robust systems to prevent losses due to hacks or operational failures, addressing risks seen in high-profile cases like the 2022 FTX collapse. The proposals also include prudential rules to ensure the financial resilience of crypto firms, such as capital adequacy requirements to withstand market shocks. David Geale, FCA’s Executive Director, emphasized the regulator’s dual focus: “At present, crypto is largely unregulated in the UK. We want to strike a balance in support of a sector that enables innovation and is underpinned by market integrity and trust.” The FCA is collaborating with the Bank of England, which is expected to release a supplementary consultation paper later this year to align systemic stablecoin regulations with the broader financial system.

Background of the Proposal

The FCA’s proposals build on earlier regulatory efforts outlined by HM Treasury on April 29, which introduced draft statutory provisions for cryptoasset activities, including operating trading platforms and custody services. These efforts reflect the UK’s ambition to become a global crypto hub while addressing risks exposed by past market turbulence. For example, the 2021-2022 crypto market crash, which saw over $2 trillion in market value erased, underscored the need for robust oversight.

Meanwhile, cryptocurrencies are gradually entering the mainstream, achieving a scale of adoption far surpassing that of 2021-2022. Stablecoins, pegged to fiat currencies like the pound or dollar, have grown significantly, with a global market cap exceeding $247.25 billion as of now. In the UK, stablecoins are increasingly used for payments and cross-border transactions, necessitating clear rules to protect consumers and ensure market stability.

Implications for the Crypto Industry

The FCA’s consultation, open until July 2025, invites feedback from stakeholders, including issuers, custodians, and consumers, to shape the final regulations expected by 2026. The proposed rules could position the UK as a leader in regulated crypto markets, potentially attracting firms seeking a stable regulatory environment. However, overly stringent requirements could drive smaller players to less-regulated jurisdictions.

The collaboration with the Bank of England signals a comprehensive approach, particularly for systemic stablecoins that could impact the broader financial system. This partnership aims to align crypto regulations with existing financial frameworks, ensuring consistency across payment systems.