United Kingdom's Financial Conduct Authority deliberates on loosened guidelines for stablecoins and cryptocurrencies
UK's Financial Conduct Authority Proposes Prudential Regime for Crypto-Asset Firms
In a significant move, the Financial Conduct Authority (FCA) in the UK has proposed a prudential regime for crypto-asset firms, as outlined in its Consultation Paper CP25/15 published in May 2025. This regime focuses on setting regulatory capital requirements that authorised cryptoasset firms must maintain continuously.
The core element is the “own funds” requirement, which mandates holding sufficient regulatory capital modeled largely on existing investment firm rules. The own funds requirement has three main components: Common Equity Tier 1 (CET1), Additional Tier 1, and Tier 2. CET1, which must comprise at least 56% of the total capital held, includes ordinary shares. Additional Tier 1 includes certain preferred shares, while Tier 2 includes subordinated loans. Authorised cryptoasset firms must use instruments falling within these classes to meet capital requirements, ensuring financial resilience.
Separately, in Consultation Paper CP25/14, the FCA specifically addresses stablecoin issuance and custody with additional prudential and conduct obligations. Stablecoin issuers must be authorised and comply with rules around the design, creation/minting, and management of risks stemming from stablecoins. Stablecoins must be backed by qualifying “core backing assets” such as short-term cash deposits and government debt with maturity under one year.
Holding “expanded backing assets” like longer maturity government debts and certain money market funds requires FCA approval and subjects issuers to stricter composition rules. At least 5% of backing assets must be held as bank deposits. Issuers must also ensure safeguarding and disclosure of backing assets appropriately to protect users and maintain stability.
Custodians of the reserves must be independent of the issuer. Responses to the consultation are expected by 31 July. The FCA's stated secondary objective is to make the UK an attractive place for stablecoin issuers. The counterparty in a repo or reverse repo agreement for stablecoin reserves does not have to be based in the UK. Stablecoin issuers are not allowed to pay holders interest.
The inclusion of longer dated government debt in the allowed assets for stablecoin reserves might be influenced by the Trump administration's talk of using stablecoins to increase demand for Treasury debt. This growing international competition in the stablecoin space is reflected in recent developments such as Hong Kong passing stablecoin legislation last week, while the US is advancing its GENIUS Act stablecoin bill.
In April, HM Treasury published draft regulations for crypto-assets and stablecoins, which excluded foreign issuers of stablecoins from regulations. Much of the detailed rulemaking is delegated to the FCA, and in the case of systemic stablecoins, to the Bank of England. The UK's relaxed reserve requirements may be part of its strategy to remain competitive in attracting stablecoin issuers amid global regulatory competition.
The FCA envisages one of the use cases for stablecoins as the settlement of wholesale or institutional transactions. Higher quality stablecoins such as PayPal's PYUSD and USDC surpass the reserve requirements significantly, with assets entirely in cash, short dated Treasuries of less than 90 days, and reverse repo. Redemption demand in normal times will be tiny compared to a crisis, which is usually unpredictable. Any stablecoin holder can request direct redemption of any amount, which should be actioned by the end of the following working day.
References: [1] FCA (2025). Consultation Paper CP25/15: Prudential regime for crypto-asset firms. [Online] Available at: https://www.fca.org.uk/publications/consultation/cp25-15 [2] FCA (2025). Consultation Paper CP25/14: Stablecoin issuance and custody. [Online] Available at: https://www.fca.org.uk/publications/consultation/cp25-14 [3] FCA (2025). Policy Statement PS25/1: Prudential regime for crypto-asset firms. [Online] Available at: https://www.fca.org.uk/publications/policy-statements/ps25-1 [4] FCA (2025). Policy Statement PS25/2: Stablecoin issuance and custody. [Online] Available at: https://www.fca.org.uk/publications/policy-statements/ps25-2
- The Financial Conduct Authority (FCA) aims to regulate the ins and outs of stablecoin issuance and custody due to its Consultation Paper CP25/14, set to be attractive for business in the industry.
- The United Kingdom requires that stablecoins be backed by qualifying "core backing assets," mainly short-term cash deposits and government debt with maturity under one year, following the FCA's proposed prudential regime for crypto-asset firms.
- Stablecoin issuers must meet regulatory capital requirements in a regime with three main components: Common Equity Tier 1 (CET1), Additional Tier 1, and Tier 2, as outlined in the FCA's Consultation Paper CP25/15.
- The industry is witnessing a growing international competition in the stablecoin space, with recent developments such as Hong Kong passing stablecoin legislation and the US advancing its GENIUS Act stablecoin bill.
- The FCA envisions one of the use cases for stablecoins as the settlement of wholesale or institutional transactions, while areas like personal-finance and technology are likely to be impacted by the stablecoin news and regulation.
- Authorised cryptoasset firms must hold "expanded backing assets," including longer maturity government debts and certain money market funds, but undergo stricter composition rules according to the FCA's Consultation Paper CP25/14.
