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The UK Financial Conduct Authority’s (FCA) consultation paper on regulations for stablecoin issuers, issued in May 2025, outlines more rigorous compliance requirements than existing frameworks elsewhere.
The Stablecoin Issuance and Cryptoasset Custody consultation paper is 239 pages long, which indicates the level of detail it aims to capture in its forthcoming regulations, and the FCA has also published a 111-page consultation paper on a potential Prudential Regime For Cryptoasset Firms.
Not all the material in the two consultations is directly relevant to stablecoin issuers, but the regulator recommends that the papers be read together, given the high degree of overlap between them.
The papers are key milestones in the FCA’s Crypto Roadmap – the regulator aims to publish its final policy statements for the sector in early 2026, before going live with the new regime later in the year.
Both the Stablecoin Issuance and Cryptoasset Custody and the Prudential Regime For Cryptoasset Firms consultations are open for comment until July 31, 2025.
Detailed and prescriptive proposals
The UK rules are extensive and robust – the legal regimes in place in the EU, Japan, Singapore and Hong Kong, as well as the proposed regulations of the US, all demand less of the organisations subject to them than the FCA’s proposed regime.
In the first consultation paper, the regulator specifies the backing assets it plans to permit under its forthcoming stablecoin regime, which are divided into “core backing assets” and “expanded backing assets”.
Core backing assets include short-term cash deposits and government treasury debt instruments that mature in one year or less, and on-demand deposits must make up at least five percent of an issuer’s backing assets at all times.
Expanded backing assets include government debt instruments with maturities of more than one year, units in a public debt constant (stable) net asset value (CNAV) money market fund, and assets, rights, or money held as a counterparty to repurchase or reverse repurchase agreements, provided they meet the conditions set out in the FCA’s Client Assets Sourcebook (CASS).
Under the proposal, all qualified stablecoin issuers may use core backing assets, but those that wish to use expanded backing assets must notify the regulator before doing so.
As part of the notification, the issuer must demonstrate that it has sufficient “systems and controls” and “skills and expertise” to mitigate risk stemming from the use of these riskier assets.
The notification requirement would be supplementary to the firm’s overall backing asset risk management framework.
Complex rules
Once approved, issuers would also be required to comply with two complex rules known as the backing assets composition ratio (BACR) and the core asset backing requirement (CABR).
The BACR is a dynamic calculation based on an issuer's estimates of its gross daily redemptions over a 14-day period.
The CBAR is calculated through a so-called “error addend”, based on the number of errors in the issuer’s daily estimates vs actual redemptions over the preceding 180 redemption days.
The BACR and CBAR are then combined to determine what percentage of reserves an issuer must hold in core backing assets. This calculation must also be repeated every 14 days.
No other regulator has proposed such an elaborate and dynamic method of calculating an issuer’s required composition of reserve assets. Instead, other jurisdictions have opted for fixed regulations on reserve asset composition.
For example, Hong Kong’s Draft Guideline on Supervision of Licensed Stablecoin Issuers makes no mention of dynamic rules or conditions on reserve assets, nor does the US GENIUS Act, which looks likely to be enacted, having passed the Senate.
The EU’s Markets in Crypto-Assets (MiCA) regulation authorises the European Banking Authority (EBA) to develop technical standards on reserve asset composition, but the form these technical standards have taken is much less dynamic.
In its defence, the FCA said it has considered the regulations of these other jurisdictions, and believes that its proposals “cannot be compared like for like” with them.
Nonetheless, it believes that its proposals are “competitive” and will succeed in attracting firms to the UK, in line with its new secondary objective on growth.
An elaborate framework
The scale of the challenge of complying with the proposed regulation, and the fact that the FCA is aiming to impose more onerous requirements than are in place in other jurisdictions, means that firms should strongly consider engaging with the consultation.
In addition to the BACR and CBAR, the regulator has also proposed that issuers must hold all backing assets in a statutory trust through a third-party custodian that is not part of the issuer’s group.
The issuer would act as trustee and would have a fiduciary duty between the issuer and stablecoin holders.
In addition, all stablecoin issuers must appoint a CASS oversight officer, conduct client asset audits and submit Client Money and Asset Return (CMAR) reports to the regulator.
Further compliance overheads are then expected in the form of operational resilience and financial crime regulations.
For example, one novel proposal is that issuers must be able to redeem stablecoins on behalf of any holder, including those who acquired the stablecoins on the secondary market (i.e. not direct customers).
Redemption requests must be settled by the end of the next redemption day, even though know-your-customer (KYC) and anti-money laundering (AML) checks would need to be performed on these holders from scratch.
Engaging with the regulator
The FCA is seeking feedback on the key elements of the stablecoins framework, particularly the BACR and CBAR rules.
The regulator has shown itself to be receptive to new ideas, and has changed several of its key proposals along the way.
For example, in its 2023 discussion paper, the FCA proposed that only short-term cash deposits and short-term government treasury debt instruments may be used as reserves.
Following pushback from firms, it has expanded its permissible backing assets in its latest proposals, albeit with significant conditions, as described above.
Firms are therefore advised to subject each of the key proposals to a cost-benefit analysis, and to submit their findings to the FCA.
Whether the compliance overheads are sustainable, given the need for issuers to turn a profit, will be a key question that firms should ask themselves and should explore further with the regulator.
