In early April, we published an article arguing that the UK needed to move quickly to regulate stablecoins, and advocating a number of legislative solutions to some real blockers to the industry's success.
At Innovate Finance Global Summit on 29 April, Chancellor Rachel Reeves personally announced draft legislation implementing HM Treasury's (HMT) stated policy of bringing cryptoassets (including stablecoins) into UK financial services regulation. The legislation was presented by her as "backing the builders" and "making Britain the best place in the world to innovate – and the safest place for consumers."
This was greeted with a predictable mixture of euphoria, scepticism, and outrage from various corners: euphoria from those who have been pleading with the government to accelerate the process, scepticism from those who continue to worry about "crypto", and outrage from those who appear to think the proposed regulatory framework is a stab in the back for the sector. (Much the same mixture has accompanied the progress through the House of Lords of the Property (Digital Assets etc) Bill, a topic on which we have also written more than once.)
Our view is that none of those knee-jerk reactions are entirely right. All those with an intention to use or invest in cryptoassets should carefully consider this draft legislation, which is open for "technical comments" until 23 May 2025. However (as is common in a legal field that is both novel and complex), there are aspects that are either quirky or outright negative.
This briefing unpacks the key questions raised by this legislation and highlights key issues that cryptoasset firms will need to consider.
The passage of this legislation will undoubtedly be a watershed moment, galvanising investment in and adoption of a technology that has the potential to transform financial markets, maintain the UK's position in the very top tier of jurisdictions for fintech, and ultimately spread benefits through the real economy.
Unlike the approach taken by the EU in its Markets in Crypto-Assets Regulation (MiCA), the UK is incorporating cryptoassets into its existing regulatory framework. That approach benefits from familiarity with elements of the existing regime.
Moreover, in certain areas, it is apparent that the UK is seeking to take advantage of its "second-mover" status, reacting in near real-time both to MiCA and to developments in the US, where a Senate vote on stablecoin legislation is now expected in weeks.
Some of those expressing the outrage described above should wait for the FCA's more detailed rules (which will surely follow swiftly on the heels of this legislation). That, along with draft legislation on admissions and disclosures, and market abuse, is the next key point at which to engage.
1 What does this legislation do?
The Financial Services and Markets Act 2000 (Regulated Activities and Miscellaneous Provisions) (Cryptoassets) Order 2025 (the New Order) will, if enacted, amend the Regulated Activities Order (RAO) to extend the regulatory perimeter to cover cryptoassets, making them subject to regulation by the Financial Conduct Authority (FCA).
There are three foundational definitions key to grasping the scope:
"Cryptoassets": this definition already exists in the Financial Services and Markets Act 2000 (FSMA), being "any cryptographically secured digital representation of value or contractual rights that:
(a) can be transferred, stored or traded electronically, and
(b) that uses technology supporting the recording or storage of data (which may include distributed ledger technology)."
"Qualifying cryptoasset" will be defined in a new Article 88F of the RAO to mean "a cryptoasset which is:
(a) fungible and
(b) transferable."
This definition is drafted to exclude electronic money, central bank digital currencies and fiat currencies (meaning that tokenised deposits are not in scope), as well as "specified investment cryptoassets", which are cryptoassets that are already themselves specified investments (this would include, for example, tokenised securities).
"Qualifying stablecoin" will be defined in a new Article 88G to mean "a qualifying cryptoasset that:
(a) references a fiat currency; and
(b) seeks or purports to maintain a stable value in relation to that referenced fiat currency by the issuer holding, or arranging for the holding of:
i. fiat currency; or
ii. fiat currency and other assets."
The New Order then builds on these concepts to create seven new regulated activities:
- Issuing a qualifying stablecoin (Article 9M).
- Safeguarding of qualifying cryptoassets and relevant specified investment cryptoassets (which essentially means tokenised versions of securities and contractually based investments) (Article 9O). This will be referred to in this briefing as "cryptoasset custody".
- Operating a qualifying cryptoasset trading platform (Article 9T).
- Dealing in qualifying cryptoassets as principal (Article 9U).
- Dealing in qualifying cryptoassets as agent (Article 9X).
- Arranging deals in qualifying cryptoassets (Article 9Z). Based as it is on the current RAO Article 25 activities, this imports the existing complexity surrounding the precise scope of "arranging".
- Making arrangements for qualifying cryptoasset staking (Article 9Z7). This is an activity which has no direct equivalent outside the realm of DLT.
The New Order also amends various other pieces of legislation to reflect the expansion of the RAO's perimeter. For example, the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) are amended to remove the existing requirement for cryptoasset exchange providers and custodian wallet providers (as defined in the MLRs) to register with the FCA, where they are authorised by the FCA to carry out the relevant new regulated activities. Such firms will, however, be subject to a requirement to inform the FCA that they intend to conduct those activities. The timing of this notification will depend on whether the firm is new, or is already providing those services when the New Order enters into force.
The Alternative Investment Fund Managers Regulations 2013 and Financial Services and Markets Act 2000 (Collective Investment Schemes) Order 2001 will both be amended to expressly exclude the backing assets or stabilisation mechanism for a qualifying stablecoin from their scope. This will not apply to stablecoins that do not reference a fiat currency.
Once the New Order is in force, the FCA will have the power to make rules and guidance, as well as its authorisation, supervision and enforcement powers in respect of these firms.
In short, "cryptocurrencies" and stablecoins move from the fringes to the mainstream in terms of their regulation as an asset class. This is to be welcomed in principle, even if (as this briefing goes on to discuss) points of detail remain (even setting aside the blizzard of FCA consultation papers and feedback statements we will ultimately see).
2 Has this solved the problems set out in the earlier article?
Unfortunately, we do not consider that all of the problems we identified in our April article have been solved by the New Order. In particular, our concerns about the liabilities faced by custodians and operators of trading platforms, and the prudential requirements for stablecoin issuers remain.
Aspects of two of our other concerns – overseas stablecoins and backing assets – are addressed in the New Order, and these are discussed respectively in sections 5-7 below.
3 How does the legislation treat payment services and electronic money?
As previously announced by HM Treasury, and reiterated in the Policy Note accompanying it, the New Order does not seek to amend the Payment Services Regulations 2017 (PSRs) to deal in detail with the use of stablecoins in payments. While this should not actively hinder the evolution of stablecoin-based payment methods (and the Policy Note is at pains to say that HMT will "respond" to developments in this area), it does leave providers of payment services based on stablecoins in a degree of limbo, seeking to innovate but unsure of the guardrails when it comes to conduct of business.
This might be thought to be a particularly odd position given that HMT already has the power, in the Banking Act 2009 (as amended by the Financial Services and Markets Act 2023), to make recognition orders in respect of systemic payment systems using stablecoins (albeit founded on the differently-defined concept of "digital settlement asset" in that legislation). This would bring such systems into the scope of Bank of England supervision.
Our previous article discussed the severe risks to growth and innovation by stablecoin issuers posed by the cliff edge represented by the differences between the FCA and Bank of England's proposed requirements on backing assets. The New Order does nothing to allay those concerns.
On electronic money, the New Order diverges sharply from MiCA. The latter, in Article 48(2), expressly deems tokens that reference a single fiat currency to be electronic money, and therefore within the scope of that framework. The New Order instead separates the regimes not once but twice: first, by expressly excluding tokenised electronic money from the definition of a qualifying cryptoasset in Article 88F(4)(b); and secondly, by amending the Electronic Money Regulations 2011 (EMRs) so as to exclude qualifying stablecoins and their backing assets from the concept of "stored monetary value", which is an integral element of the definition of electronic money.
4 When will a firm be issuing a qualifying stablecoin?
A firm will issue a qualifying stablecoin in the UK when, being established in the UK, it:
(a) offers, or arranges for another to offer, a qualifying stablecoin created by it or on its behalf for sale or subscription (this includes accepting an offer to buy from another person);
(b) undertakes, or arranges for another to undertake, to redeem a qualifying stablecoin created by it or on its behalf; or
(c) carries on, or arranges for another to carry on, activities designed to maintain the value of the qualifying stablecoin created by it or on its behalf.
It is important to note that a cryptoasset that is labelled a stablecoin, but that which does not reference a fiat currency, is not a "qualifying stablecoin", and is therefore not covered by this activity. It may, of course, already require some other permission (such as for a collective investment scheme, depending on its precise structure).
5 What does the legislation say about the geographic scope?
The stated policy of HMT, before publication of the New Order, was that cryptoasset firms should be caught by FCA regulation if they provided cryptoasset services "in or to the UK". This led the FCA to moot the creation of a new cohort of regulated "payment arrangers", who would bear the regulatory responsibility for putting overseas-issued stablecoins onto the UK market. In our article, we argued, for the sake of the UK digital assets ecosystem as a whole, that instead the overseas persons exclusion (OPE) in Article 72 of the RAO should be widened to cover stablecoin issuers.
HMT have implicitly abandoned the original policy, without giving a rationale. This is the aspect of the New Order that has garnered much of the mainstream media attention. Rather than adopt our solution, however, HMT have instead simply left certain overseas stablecoin issuers out of section 418 of FSMA. That provision operates to bring certain overseas activities into scope of UK regulation.
This also marks a clear divergence from MiCA's strictly localised approach, and should solve the problem we identified about the risk of rendering the UK an isolated (and therefore shallow) pool of liquidity. It is well-known that we are strongly in favour of encouraging the adoption and use of stablecoins. However, looked at from the perspective of the UK-based stablecoin sector, we consider that there could be unintended consequences. Specifically, there are two reasons why we are not wholly convinced by this approach.
First, the benefit of using the OPE is that it would have formed a clear exclusion from regulation. Omitting an activity from section 418 means that firms will still need to analyse the factual pattern to determine whether they are carrying on the activity in the UK. Section 418 deems an activity to be regarded as carried on in the UK, and therefore caught. The converse does not apply – there is no safe harbour to be derived from the absence of an activity from section 418. This could be avoided through the use of the OPE. There is therefore a question as to whether the approach adopted has truly achieved the clearly-stated policy intention of HMT.
Secondly, we envisaged relaxing the approach for overseas stablecoins to be part of the overall package of changes for which we advocated earlier (and summarised very briefly in section 2 above). The problem with HMT's new approach is that it could be said to leave stablecoin issuers that are established in the UK (and therefore subject to the regime created by the New Order) with the worst possible outcome: constrained by strict and complex prudential requirements, but now also facing unrestrained competition from overseas issuers not subject to those requirements. The OPE includes an exclusion for transactions resulting from a "legitimate approach" (often also referred to as "reverse solicitation"); i.e. where the buyer of the stablecoin goes out and finds the issuer. This operates to constrain the ability of those firms to market into the UK, which may not apply in the same way under the New Order as drafted.
It also seems unlikely to be reciprocated by other jurisdictions in the form of mutual recognition: both MiCA and the emerging US approach are not consistent with giving explicit support to different regimes.
Moreover – and this is a significant subject in its own right – it could raise complex and delicate questions on monetary and financial policy for the Bank of England. There are two aspects to this:
- The vast majority of global stablecoins are denominated in USD. Given the vociferous backing for stablecoins from US policymakers, this is likely to continue. There are also arguments that the approach taken in MiCA is actually reinforcing this.
- If the cumulative result is to discourage and hinder the emergence of UK-based issuers (especially those issuing GBP-denominated stablecoins), this could actually accelerate the availability and use of the already dominant USD-denominated stablecoins within the UK.
In effect, the outcome could be an increase in the "dollarisation" of the UK economy (at least in parts). As well as implications for the Bank of England's ability to manage monetary policy and financial stability, it also raises questions about the Bank's approach (and firm commitment) to the concept of singleness of money.
To deal with this, it may be tempting for UK-based firms intending to issue a stablecoin to set up a subsidiary or sister company offshore to issue the stablecoin. However, the new Article 9M(5)(a) will deem the UK entity to be the issuer. For a government committed to economic growth, this is an unfortunate incentive for businesses to leave the UK entirely. (New Article 9M(4) is also an anti-avoidance provision that will deem firms that assume another's undertaking to redeem a stablecoin to be the issuer.)
A second issue that impacts the geographic scope is whether services are provided to consumers.
The amendments to section 418 of FSMA mean that the other six new activities set out in section 1 above will fall into FCA regulation where they are supplied to consumers in the UK.
If an overseas entity is carrying on a "regulated cryptoasset activity" involving the sale or subscription of a qualifying cryptoasset to or by a UK consumer, it will not need to be authorised if it is using an intermediary which is itself authorised in the UK to deal as principal or operate a cryptoasset trading platform (the application of this exclusion is different to the application of the OPE).
However, where firms are not carrying on business in the UK, the policy intention of HMT is that they will not require authorisation to provide these services to business clients (described in the Policy Note as "institutional customers", although given the possibilities offered by stablecoins in payments, this may not always be quite the right phrase) for their own use. As with overseas stablecoin issuing, it is not certain that an omission from section 418 will always operate to put these outside the UK perimeter. (A UK firm dealing with a UK institutional customer will need authorisation for those activities.)
Firms issuing qualifying stablecoins will need to assess whether they are "established" in the UK; a concept with which electronic money institutions, for example, will be accustomed to having to grapple.
6 What is the approach to backing assets for qualifying stablecoins?
As set out in section 3 above, the potential cliff edge between the (proposed) separate FCA and Bank of England regimes for backing assets remains.
However, the New Order has addressed our earlier point that the FCA's current power to impose a statutory trust over backing assets is limited to "money", as opposed to assets such as commodities or real estate. The New Order extends the scope of the FCA's power to "include a sum or asset received or held as a backing asset" (our emphasis).
7 How are asset-referencing stablecoins and tokens treated?
The definition of qualifying stablecoin, as explained above, is limited to those that reference a single fiat currency.
This means that cryptoassets (whether they are labelled a stablecoin or not) that reference assets such as commodities or real estate will fall within the definition of a "qualifying cryptoasset" but outside the definition of "qualifying stablecoin". This means that they will, in essence, be treated as pure investments. In most cases, this is a sensible outcome, but it will mean that business models such as tokenised gold or tokenised real estate will not be within the scope of the FCA's power to impose a statutory trust over the backing assets. Depending on how the FCA draft their more detailed rules on backing assets, this could give rise to a very bright demarcation between fiat-referencing and asset-referencing tokens. That level of bifurcation could go beyond the approach taken in MiCA. No rationale for this distinction is given in the Policy Note.
This does explain why the New Order has not taken up our suggestion that, for physical backing assets, bailment can be an entirely reasonable alternative to a statutory trust – but it does raise the unfortunate consequence that the New Order creates a competitive distinction between qualifying stablecoins (where the statutory trust provisions apply) and non-qualifying stablecoins (which will have neither statutory trust or bailment safeguarding rule protections for their backing assets – whether they are tangible or not).
8 What does the legislation say about cryptoasset custody?
The new Article 9O activity is "safeguarding of qualifying cryptoassets or relevant specified investments on behalf of another", or arranging such.
"Safeguarding" is the term used in existing regulated custody activities and should not be confused with the concept of safeguarding funds received for payment transactions or electronic money under the PSRs and EMRs.
It is defined by the New Order as meaning "circumstances in which a person ("C") has control of the cryptoasset through any means that would enable C to bring about a transfer of the benefit of the cryptoasset to another person, including to C."
In turn, "on behalf of another", as well as covering the other person having beneficial or legal and beneficial title, also includes cases where the person has "a right against C for the return of" the cryptoasset.
As drafted, safeguarding will include cases where the client has both legal and beneficial title. That means (in addition to the case where the cryptoasset custodian is a mere agent), that this might allow for and contemplate the Law Commission's broader advocacy of a limited legal interest (akin to possessory title like a bailee) in the cryptoasset custodian.
Cryptoasset custody in this form is obviously distinct from the "traditional form" of custody (safeguarding and administration of assets, defined in Article 40 of the RAO), which relates to assets "belonging to another".
In addition, it is fortunate that self-custody is clearly not caught.
It does, however, raise a technical question about whether the drafting is intended, via its reference to "a right against C for the return" of the cryptoasset, to capture circumstances when the person has lent the cryptoasset to C. On its face, this would mean that borrowing cryptoassets is de facto a regulated activity by being classed as a form of cryptoasset custody. This also raises a question about fungibility (is it a right for the return of a specific cryptoasset?), as well as other questions, such as whether this applies to a contingent right to return. This is clearly an area where technical comments on the New Order may be worthwhile.
Moreover, certain forms of custody of cryptoassets are already subject to regulation in the UK. Regulation 14A of the MLRs brings into scope custodian wallet providers (CWPs), defined as one "who by way of business provides services to safeguard, or to safeguard and administer -
(a) cryptoassets on behalf of its customers, or
(b) private cryptographic keys on behalf of its customers in order to hold, store and transfer cryptoassets."
Safeguarding is undefined in the MLRs or Article 40 of the RAO, in contrast to the more developed concept included in the New Order, which goes on to explain that control includes "holding or storing of the means of access, or part of the means of access, to the cryptoasset", or appointing someone else to do so under an arrangement operated by C.
"Means of access" is itself defined to include all or part of the private cryptographic key to the cryptoasset (so sharding is certainly caught).
There is no discussion in the Policy Note on the conceptual alignment between cryptoasset custody in the New Order and a CWP in the MLRs.
On its face, however, cryptoasset custody as defined by the New Order has a different, and narrower root than being a CWP, as it is clear that it requires that "C" can bring about a transfer of the benefit of the cryptoasset. Negative control – i.e. being able to prevent a transfer through inaction – would not on the face of the drafting be sufficient to render the firm a cryptoasset custodian within the meaning of Article 9O. There is a clear overlap between the limbs in regulation 14A of the MLRs and the elements of cryptoasset custody in the New Order, but the distinction is the reference to an ability to enable a transfer in the latter.
This is also consistent with the drafting of the amendments to the registration requirement in the MLRs, which maintain the requirement to register for CWPs that are not authorised for the new cryptoasset activities.
9 What should firms do now?
- Consider submitting "technical comments" by 23 May 2025. The Policy Note rather sharply describes the policy intention as settled, but the drafting remains open for feedback.
- Engage, when published, with separate legislation on the admissions and disclosures and market abuse regimes. These will be particularly important for any firm looking to operate a cryptoasset trading platform.
- Review the FCA's Crypto Roadmap and prepare to review and respond to the many discussion/consultation papers that, in fact, have started to land immediately. The stablecoins consultation is likely to arrive soon after the enactment of the New Order.
- Engage with – via trade bodies or bilaterally – and educate legislators and regulators on the sector in the broadest sense.
We consider that this is unlikely to be an exhaustive list of issues with the regime.
We use our expertise with both traditional financial markets and cryptoassets to help firms design their services, identify legal and regulatory risks and engage with policymakers and regulators on these and other issues. Do get in touch if you would like to discuss.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
