As part of the UK government’s aim to create legislation establishing a regulatory framework for cryptoassets, on 2 May 2025 the UK Financial Conduct Authority (FCA) published Discussion Paper DP25/1.
The discussion paper covers key areas of the proposed new regulatory framework, including the potential impact on:
- Cryptoasset trading platforms (CATPs).
- Cryptoasset intermediaries.
- Lending and borrowing in relation to cryptoassets.
- Staking and decentralised finance (DeFi).
We outline some of the key points below.
The proposed framework will look familiar to many — it clearly builds off the existing approach used for traditional finance, and in particular the multilateral trading facility (MTF) regime for CATPs and existing broker rules for intermediaries. The discussion paper is also cautious, reflecting the FCA’s view that “cryptoassets will remain high-risk, speculative investments,” and accordingly is more restrictive than other areas of financial regulation in terms of (in particular) the UK retail market, territoriality requirements and the need for UK-centric infrastructure.
The FCA is seeking feedback by 13 June 2025 to inform the next steps, which will be followed by a Consultation Paper. This is a relatively short time frame for participants to respond, particularly given the concurrent HM Treasury (HMT) technical consultations on its proposed new statutory provisions to create new regulated activities for cryptoassets.
Cryptoasset Trading Platforms
Territoriality
The FCA has built on HMT’s proposals to make it clear that entities operating a CATP in the UK will need to be authorised. In addition, overseas CATPs that serve UK retail customers will also need to be authorised, and this will require the establishment of a UK authorised firm.
However, the FCA has stated that it would like CATPs that provide services to UK retail clients to have an authorised subsidiary in the UK. This means a branch by itself will not be sufficient, given concerns around the veracity of home-state supervision as well as the ability for UK retail to trade directly on CATPs on an unintermediated basis.
The FCA has indicated that a model it is receptive to includes an overseas firm establishing a UK branch for the purpose of running the matching engine and ensuring a singular liquidity pool, but with an affiliate UK-authorised subsidiary responsible for (broadly) client-facing and protection obligations.
In addition, authorisation to operate a CATP through UK branches will only be given to an overseas firm on a case-by-case basis if it can meet the fundamental threshold conditions and general FCA expectations. A branch should only be authorised for non-UK firms, and not as a gateway to operate a predominantly UK business from an overseas jurisdiction.
A firm operating an offshore trading platform for cryptoassets that is only serving professional investors in the UK will not require FCA authorisation. It is not intended to extend the overseas persons exclusion to cryptoassets.
As frameworks and cooperation among regulators mature, the discussion paper envisages the potential for greater reliance on overseas entities to carry out UK customer-facing regulated activities. That means branch-only models may become more palatable.
Participation in Trading Arrangements
The discussion paper proposes that CATPs be subject to additional rules and obligations where there is direct retail access, algorithmic or automated trading, and market-making activity. Regarding the operation of algorithmic trading and automated trading software, the FCA appears open to considering whether to adopt rules similar to those in traditional finance or develop alternative approaches.
CATPs should also identify entities operating market-making strategies, disclose potential conflicts and establish appropriate contractual agreements with them. It is possible that the scope of these rules may be limited to significant market-makers.
Trading and Execution
The FCA has indicated that all CATPs must operate nondiscretionary trading systems — i.e., as per MTFs. This would mean a disapplication of best-execution requirements for those accessing CATPs directly.
The FCA has also indicated that it dislikes matched-principal trading, and that it favours a ban on operators of a CATP trading on their own platform, as well as the operator trading off-platform. The FCA is also sceptical about allowing entities affiliated with a CATP operator trading on the CATP, given the potential conflicts this can generate. However, the FCA is open to feedback on this position, especially in respect of affiliate principal trading.
Pre- and Post-Trade Considerations
The FCA has expressed concern around CATPs’ involvement in:
- Primary and secondary market activities. The FCA is considering requiring legal (or functional) separation between a CATP and issuers of cryptoassets traded on that platform.
- Internalising and managing counterparty credit risk. The FCA is keen to ensure that operators of CATPs are risk-neutral trading systems and therefore should be prevented from acting as a clearinghouse or extending credit to clients.
- Settlement risk. The FCA is considering the extent to which the operator of a CATP should be involved in managing settlement risk, but is receptive to views on the risks and market approaches.
Transparency
The FCA is proposing to impose both pre- and post-trade transparency requirements on CATPs; it would not impose pre-trade transparency waivers but is open to looking at (short) post-trade deferrals. In addition, CATPs will need to make their transparency data available to the public.
The FCA is not proposing to introduce a transaction reporting regime on CATPs but will require five years of transaction records to be kept. That said, the FCA is open to feedback as to how to best operationalise this requirement. The FCA is also keen to receive feedback on how to balance retail customer privacy with the need to have a personal identifier.
Cryptoasset Intermediaries
The discussion paper considers rules to regulate the conduct of intermediaries, following the principle of “same risk, same regulatory outcome” where possible.
The rules aim to address the risks and harms associated with intermediary activities such as consumer understanding, execution quality, order handling, and a lack of appropriate systems and controls.
The FCA is proposing to introduce the following investor protection measures in respect of order handing and execution:
- A requirement that any cryptoasset needs to be admitted to trading on at least one UK-authorised CATP before any intermediary can deal in it or arrange deals for UK retail customers.
- Extending the Consumer Duty to cryptoasset intermediaries.
- Requiring order execution procedures to be put in provide for the “prompt, fair an expeditious” execution of client order.
- Imposing MiFID-like best-execution standards, with a focus on “total consideration” as the key factor for retail clients, but with crypto-specific amendments, such as (i) potentially requiring an intermediary to check prices on at least three platforms, and (ii) limiting the ability to give specific instructions.
- Requiring orders for UK consumers to be executed on UK-authorised venues.
- Requiring additional disclosures to clients around trading capacity and order execution details.
- As per the position with CATPs, transaction reporting would not be required. Instead, record-keeping of client orders would be required for five years.
In respect of conflicts of interest, the FCA will expect firms to manage these as appropriate to their business model. However, the FCA identifies two specific types of conflicts it is concerned with for intermediaries:
- Principal trading and client order execution. The FCA expects firms to have as a minimum “functional separation” between principal trading and client order execution functions.
- Payments for order flow. Cryptoasset intermediaries will be prohibited from receiving payments for order flow.
In respect of the FCA’s thinking on transparency requirements, it is proposing to impose post-trade transparency requirements on intermediaries, requiring the publication of details of executed transactions “as close to real-time as technically possible.” The FCA is less developed in its approach to pre-trade transparency and welcomes views as to whether this should be introduced, and in what form.
In respect of client categorisation by intermediaries, regulations in traditional finance allow retail customers to request to be “opted up” to become elective professional clients. The necessity of crypto-specific rules or guidance on retail customer opting-up practices is under consideration, with the FCA taking into account Consumer Duty guidance.
Cryptoasset Lending and Borrowing
The FCA proposes to have specific rules for cryptoasset lending and borrowing business models.
The key proposal is the banning of firms from offering cryptoasset lending and borrowing products to retail clients; the FCA is of the view that the volatility of cryptoassets makes them unsuitable for retail lending or borrowing.
However, the FCA has asked for feedback on proposed risk mitigation measures that could make cryptoasset lending and borrowing more appropriate for retail clients. These are summarised in the table below.
Suggested Measures for Cryptoassets
| Borrowing | Lending and Borrowing |
|---|---|
| Require firms to conduct creditworthiness checks and provide forbearance for those in or nearing arrears, in line with key Consumer Credit sourcebook rules. | Improve consumer understanding of cryptoasset lending and borrowing business models by introducing various requirements, such as express consent from consumers to firms before the contractual arrangement commences, as well as appropriateness assessments. |
| Require express consent from retail customers before collateral top-ups. | Restrict firms’ use of their own platform tokens for cryptoasset lending and borrowing where there is a conflict of interest. |
| Limit how much a cryptoasset borrowing firm can automatically top up a consumer’s collateral over the duration of the loan. | Restrict certain aspects of the cryptoasset lending and borrowing to only allow the use of qualifying stablecoins. |
The FCA has proposed that institutional clients be permitted to access cryptoasset lending and borrowing products. This includes where a lender is facilitating lending and borrowing between different institutional clients.
Use of Credit To Purchase Cryptoassets
The FCA is exploring the appropriateness of restricting firms from accepting credit as a means for consumers to buy cryptoassets. A range of restrictions are under consideration, including those on the use of credit cards to directly buy cryptoassets, and using a credit line provided by an e-money firm to do so.
The initial expectation is that qualifying stablecoins from an FCA-authorised stablecoin issuer would be exempt from potential restrictions, and firms would not be restricted from offering credit options for the purchase of these qualifying stablecoins.
Staking
The FCA is concerned about a number of associated risks with staking, including technological, lack of consumer understanding and safeguarding. The table below summarises the key proposals for addressing these three risk categories.
Proposals To Mitigate Staking Risks
| Technological | Consumer Understanding | Safeguarding |
|---|---|---|
| Make firms liable for financial losses suffered by retail consumers where the firm has inadequately assessed its technological and operational resilience, including third-party dependencies. | Prior to staking, firms must receive explicit consent from retail consumers on the amount of staked cryptoassets, conditions for payment, repayment, return of cryptoassets and fee-charging arrangements. |
Firms should maintain:
|
| Require firms to implement robust arrangements as part of prudential requirements to ensure they hold sufficient capital to absorb losses, e.g., through slashing. | Retail consumers must receive key information on staking products and the associated risks in a key features document. | Firms will need to conduct regular reconciliations of staked cryptoassets. |
Decentralised Finance
DeFi activities that could be considered “truly decentralised” would not be covered by the regime outlined in the discussion paper.
DeFi that involves the proposed regulated activities, and where there is a clear controlling person carrying on an activity, would be covered by the regime. This would include, for example, services that involve an identifiable intermediary or entity that has control over business operations and product features. The FCA would provide guidance to help firms understand their obligations and is seeking feedback on how to assess centralisation and support compliance in the DeFi sector.
The discussion paper invites feedback on:
- How to assess the degree of centralisation and decentralisation.
- How decentralised features interact with the regulatory perimeter.
- Emerging industry practices that could support the implementation of the proposed regulatory obligations.
Crypto Road Map – Next Steps
In Q2 2025, the FCA will publish a consultation paper on the proposed rules and guidance for:
- Issuing a qualifying stablecoin.
- Safeguarding qualifying cryptoassets.
- Specified investment cryptoassets.
The consultation paper will be published alongside a second one on the prudential framework for cryptoassets and prudential requirements for qualifying stablecoins and safeguarding.
These activities will also be subject to wider conduct and firm standards, such as the Consumer Duty and rules within the Conduct of Business sourcebook. The FCA will consult on these standards in a third consultation paper on conduct and firm standards for regulated activities planned for Q3 2025.
Final Thoughts
The FCA’s discussion paper helps drive the discussion around creating a UK crypto framework forward. However, the FCA proposals are cautious and prepared through the lens of (in particular) protecting retail customers; they will not fit neatly into many existing crypto business models and, if implemented as proposed, would require significant UK investment.
The FCA has indicated in most of the topics raised that it is amenable and keen to receive feedback as to how it can better tailor this regime to address its articulated concerns whilst also supporting growth. Firms should consider this an opportunity to weigh in before the regime is finalized.
This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.