Following the publication by HM Treasury of the draft legislation establishing a financial services regulatory regime for cryptoassets in the UK, on 28 May 2025 the UK Financial Conduct Authority (FCA) published Consultation Paper 25/14 (following Discussion Paper 23/4 (DP23/4)) seeking views on its proposed rules and guidance for issuing qualifying stablecoins and safeguarding qualifying cryptoassets. The FCA concurrently published Consultation Paper 25/15 on the proposals for a prudential regime for cryptoasset firms.
In this update, we provide an overview of the proposed requirements for stablecoin issuers and custodians. The deadline for feedback is 31 July 2025, and the FCA intends to publish final rules in 2026. The Bank of England will also publish a related consultation paper later this year. Firms involved in stablecoin issuance and cryptoasset custody should consider submitting responses to the consultation paper ahead of the end of July deadline, as timing for preparing responses will be tight given the volume of changes and the concurrent review and consultation periods on HM Treasury’s draft legislation and Consultation Paper 25/15.
Stablecoin Issuance
Approach to Regulation
The FCA confirmed that it intends to regulate qualifying stablecoins as money-like instruments rather than as investment products, which has shaped the drafting of the proposed rules. The FCA also reiterated that stablecoins will be regulated as distinct from e-money (with the consultation paper indicating that a firm that is both issuing e-money and qualifying stablecoins will need permission for both activities, although the detail of how this will work in practice is not discussed further). This is likely to inhibit some of the business models and use cases of stablecoin issuers, and will restrict the ability of market participants to use stablecoins for payments in the UK.
In line with this approach, the FCA proposed that issuers may retain, but not pass down to consumers, interest or dividends received from the qualifying stablecoin’s backing asset pool.
The rules will apply to firms authorised to carry out the activity specified in the new Article 9M (issuing qualifying stablecoin) of the Regulated Activities Order. The extent to which the new rules will apply to third-country issuers (or groups comprised of third-country issuers and UK subsidiaries participating in the offering) will depend on the final drafting of the new rules.
As currently drafted, the FCA’s rules apply to issuers of qualifying stablecoins referencing a single fiat currency; however, the FCA is also seeking views on how to apply the rules to issuers of qualifying stablecoins referencing more than one fiat currency.
Redemption
Under the draft rules, all issuers will be required to provide stablecoin holders (both retail and non-retail, and whether or not the holder is based in the UK) with the direct right to redeem for money (rather than any other asset) qualifying stablecoins at par value with the relevant reference currency. This must take place by the end of the business day following receipt of a valid request. The proposal also requires issuers to complete redemption requests in an order that is fair and objective under normal circumstances (meaning that a holder should not be disadvantaged based on the type of holder they are or the size of the request). This T+1 redemption obligation shapes many of the other proposals in the consultation paper, including the composition of the backing assets (as discussed below).
The proposed rules allow for limited circumstances where the T+1 redemption obligation will be disapplied, namely where:
- completion of the redemption would breach a legal requirement or court order (including where the issuer has a reasonable suspicion that a redemption would breach requirements under financial crime legislation); or
- the holder requests redemption in a currency other than the reference currency of the qualifying stablecoin (although the issuer is not obligated to allow redemption in another currency).
Because stablecoin issuers will be required to comply with relevant customer due diligence (CDD) requirements in relation to each holder, where the issuer has not received all information from a holder to complete CDD checks on the day that redemption is requested, the T+1 obligation will be calculated from the day on which all information required to complete CDD checks is received.
The proposed rules will also require an issuer to suspend all redemptions in exceptional circumstances where this is necessary to protect the rights of the holders and the integrity of the stablecoin.
Where a qualifying stablecoin is transferred between holders (rather than from the issuer to a holder directly), the right of redemption must also transfer. The FCA is seeking feedback on how issuers can ensure this requirement is met.
Managing Backing Assets
As anticipated following the proposals in DP23/4, issuers will be required to always hold fiat currency and other permitted assets in amounts equivalent to the value of their minted qualifying stablecoins (including where for operational reasons the stablecoins are minted prior to being issued to the public). Despite opposition from respondents to the discussion paper, the FCA retained its proposal to limit the default composition of the backing assets to short-term government treasury debt instruments issued by the UK or Zone A countries (defined as countries that (i) are full members of the Organisation for Economic Co-operation and Development or (ii) have concluded special lending arrangements with the International Monetary Fund (IMF) associated with the IMF’s general arrangements to borrow), and short-term cash deposits.
However, an element of flexibility has been introduced in response to the discussion paper feedback, albeit with strict limitations. If issuers provide the FCA with prior notice, and the FCA considers that the issuer has established appropriate systems and controls and backing asset risk-management tools to comply with the backing assets composition ratio (BACR), the FCA will also permit issuers to hold the following as backing assets:
- longer-term government debt instruments (issued by the UK or Zone A countries) that mature in over one year;
- units in a Public Debt CNAV Money Market Fund; and/or
- assets, rights or money held as a counterparty to a repurchase agreement or a reverse repurchase agreement (subject to conditions as set out in CASS 16).
Regardless of whether an issuer is using any of the “expanded” backing assets listed above, the draft rules also require issuers to hold at least 5% of their backing assets in the form of on-demand UK bank deposits (ODDR) to avoid an issuer’s over-reliance on immediate access to the markets. An issuer will also be required to have a backing assets risk-management framework, including a liquidity risk-management policy, contingent funding plan and custody policy.
Where an issuer intends to use expanded backing assets, it must comply with the BACR to ensure that it has sufficient “core” backing assets. Unlike with the ODDR requirement, the FCA does not specify any fixed minimum percentages. Instead, the issuer will need to calculate its own required minimum percentage of core backing assets by adding together the peak estimated daily redemption amount of the particular stablecoin and a “core backing asset requirement” (which accounts for the variance between estimated and actual redemptions), and then dividing this by the total value of assets in the backing pool. The resulting percentage will be the minimum of the backing assets that must be held as short-term treasury debt instruments or short-term cash deposits.
The intention of applying the BACR is to ensure that core backing assets will be sufficiently liquid to meet all redemptions within the T+1 time frame.
The FCA’s proposals do not currently allow issuers to use backing assets that are not in the same denomination as the reference currency/currencies of the relevant qualifying stablecoin; however the FCA is seeking views on how the risks of using differing currencies could be effectively managed.
Safeguarding Backing Assets
Following consideration of the several approaches proposed in DP23/4, the FCA has proposed that an issuer will need to hold backing assets in a statutory trust (for the benefit of the qualifying stablecoin holders). The issuer as trustee would therefore have fiduciary duties to the holders as beneficiaries. Issuers that issue multiple qualifying stablecoins will need to hold the backing assets for each under separate trust arrangements.
Further, each issuer will be required to appoint third parties that are unconnected to it and its group to hold the backing assets (although, as discussed above, the issuer as trustee would remain legally responsible), and each issuer will be required to procure that each appointed third party signs a letter acknowledging that the backing assets are held on trust for the benefit of the stablecoin holders rather than for the issuer.
Use of Third Parties in Issuing Stablecoins
Consultation Paper 25/14 does not address the application of the FCA’s outsourcing rules and guidance to cryptoasset firms, which the FCA will consult on separately. However, the consultation paper does propose how an issuer may use third parties to carry out the core elements of issuing a qualifying stablecoin, including selling, redemption and managing backing assets.
The issuer will be required to carry out due diligence of any third party it proposes to use before appointment to ensure the party has sufficient experience and competence. The issuer must also have in place a contract that sets out the roles and responsibilities of each party and permits sufficient information-sharing arrangements to allow the issuer to comply with its own obligations under the FCA’s rules.
Communicating Information to Consumers
The draft rules require issuers to publish online and keep updated information that will allow holders and potential holders of qualifying stablecoins to understand and make informed decisions when buying, selling and redeeming stablecoins. The FCA expects issuers to update the information whenever it becomes inaccurate (although where this would not be proportionate, such as in relation to every single change to the number of issued stablecoins or size of the backing asset pool, the information must be updated at least once every three months).
Issuers must also provide a statement confirming that they meet the requirement for the relevant qualifying stablecoin to be backed on a 1:1 basis by the backing asset pool, and undertake an independent review annually to verify that this remains accurate.
Cryptoasset Custody
The draft rules for cryptoasset custody have been prepared by the FCA as a bespoke regime based on the existing CASS framework, which is broadly in line with expectations and the feedback received on the discussion paper.
A number of issues remain unsettled, including related to exiting trust arrangements, reusing client cryptoassets as collateral, and governance and control requirements. The FCA anticipates setting out specific proposals for rules in these areas in the upcoming “Trading Platforms, Intermediation, Lending and Staking” and “Conduct of Business and Firm Standards” consultation papers.
Safeguarding Clients’ Rights
The FCA is proposing to permit the use of both individually segregated and omnibus wallets to safeguard clients’ qualifying cryptoassets (provided that these are at all times held separately from the custodian’s own cryptoassets). To mitigate some of the challenges relating to evidencing ownership rights for cryptoassets, the draft rules require custodians to hold clients’ qualifying cryptoassets in non-statutory trusts. The draft rules allow for operational flexibility regarding each custodian’s operation of the trusts. The FCA is seeking industry views on how to best effect the trust arrangements.
Recording Clients’ Holdings
For each client, a firm providing safeguarding services will be required to maintain records (independently from the distributed ledger technology used by the firm) of the type and quantities of cryptoassets held, the blockchain address of each qualifying cryptoasset, the nature of the client’s claim, and the identities of any other parties that have capacity/control to affect a transfer.
Custodians will be required to carry out a qualifying cryptoasset reconciliation for all clients on each business day to check that the records are accurate. Custodians must resolve any identified shortfalls.
Loss Minimisation
As proposed in the discussion paper, custodians must maintain adequate organisational requirements, policies and procedures to minimise the risk of loss or diminution of clients’ cryptoassets.
Where private keys are used to exercise control of cryptoassets, firms must ensure the keys are generated, stored and controlled securely through their life cycle; maintain detailed key-mapping records; and have strategies in place to mitigate loss or compromised access. The FCA will address the proposed rules for disaster recovery plans in a separate consultation.
Governance and Control
Based on the feedback received in response to the discussion paper, the proposed rules will permit cryptoasset custodians to use third parties in the provision of custody services. However, this is subject to strict requirements, including that:
- The appointment must be in the best interests of the client and necessary for safeguarding.
- The custodian has undertaken appropriate due diligence and confirmed that the third party has the appropriate expertise and market reputation.
- Any cryptoassets held a third party are identifiable separately from the custodian’s and third party’s own assets.
Written agreements between the custodian and third party must be in place where any qualifying cryptoassets or the means of accessing them are placed with a third party.
As mentioned above, further proposed rules relating to governance and control — including for client disclosures, audit, CASS oversight and regulatory reporting — are expected to follow separately.
Conclusion and Future Developments
Consultation Paper 25/14 takes a cautious position, and the FCA’s conservative approach to the composition of the backing asset pool and decision not to classify stablecoins as investment products may disappoint stakeholders. The prohibition on passing on interest or dividends from the backing asset pool to stablecoin holders will raise industry concern, but aligns with the EU’s approach in MiCA Regulation (Regulation (EU) 2023/1114). As the UK regime develops, deviations from the EU approach will need to be monitored. The approach proposed by the FCA could also diverge significantly from other regulatory regimes being introduced in other jurisdictions, including the United States. This will cause challenges for issuers seeking to operate on a cross-border basis and limit applications for the use cases of stablecoins. On a day-to-day basis, the most challenging aspect of the proposals for qualifying stablecoin issuers will likely be the operational complexity of ensuring T+1 redemption, particularly given the strict CDD checks that must be completed before such redemption can occur.
We will continue to consider the draft rules alongside the other detailed proposals set out in both consultation papers, and provide updates as the regime is developed.
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.