The UK's Financial Conduct Authority (FCA) has initiated a public consultation on proposed regulations for fiat-backed stablecoin issuers and crypto custody service providers. This move follows HM Treasury's draft legislation published in April 2025 and aims to establish a comprehensive regulatory framework for cryptoassets in the UK. The consultation period is open until 31 July 2025, with final rules expected to be published in 2026.

Key Proposals

1. Regulation of Stablecoin Issuers

Under the proposed framework, issuers of fiat-backed stablecoins operating in or from the UK would be required to obtain authorization under the Financial Services and Markets Act 2000. These issuers must:

• Hold backing assets, such as fiat currency or short-term government bonds, in a statutory trust for the benefit of stablecoin holders.

• Ensure that consumers have the right to redeem stablecoins at par value within one business day, subject to standard anti-money laundering and know-your-customer checks.

• Comply with prudential requirements outlined in a new sourcebook, 'CRYPTOPRU', which will set activity-based capital and liquidity standards .

2. Custody of Stablecoins

Firms providing custody services for stablecoins would need to:

• Obtain FCA authorization under Part 4A of the Financial Services and Markets Act 2000.

• Implement robust safeguarding measures, including segregation of client assets, accurate record-keeping, and regular reconciliations.

• Adhere to organizational requirements to minimize risks such as fraud, mismanagement, or operational failures .

3. Application of Consumer Protection Standards

Both issuers and custodians would be subject to the FCA's Consumer Duty, requiring them to act in the best interests of retail customers, ensure fair treatment, and communicate clearly .

4. Regulation of Payment Arrangers

The FCA plans to extend the Payment Services Regulations to cover entities facilitating payments using stablecoins, ensuring that these intermediaries meet conduct and operational standards similar to traditional payment service providers .

Industry Feedback and Considerations

The FCA's proposals have elicited varied responses from industry stakeholders:

• Redemption Rights: While the proposed right to redeem stablecoins at par within one business day is seen as enhancing consumer protection, some industry participants express concerns about the operational challenges and costs associated with meeting this requirement, especially under stress conditions.

• Backing Assets: The limitation of backing assets to short-term government debt and cash equivalents is viewed by some as too restrictive, potentially impacting the revenue models of stablecoin issuers who rely on returns from reserve assets.

• Custody Definitions: There is a call for the FCA to broaden its definition of 'custody' to encompass various forms of control over cryptoassets, beyond just holding private keys, to prevent regulatory arbitrage and ensure comprehensive oversight.

• Consumer Compensation: The FCA's decision not to extend the Financial Services Compensation Scheme (FSCS) to stablecoin holders has raised concerns about consumer protection in cases of firm insolvency or fraud.

By initiating this consultation, the FCA aims to provide regulatory clarity and foster innovation within the UK's cryptoasset sector. The proposed framework seeks to balance consumer protection with the need to support the growth and integration of stablecoins into the financial system.

The consultation period allows stakeholders to provide feedback, ensuring that the final regulations are well-informed and effective in addressing the unique characteristics and risks associated with stablecoins and their custody.