FCA lays out ‘landmark’ crypto clampdown
The City watchdog has unveiled a “landmark” clampdown on the cryptocurrency market that will force companies to win approval from the regulator in order to deal with British customers.
The Financial Conduct Authority (FCA) set out rules on Tuesday that will subject companies to higher levels of regulatory scrutiny from October 2027.
Under current rules, crypto firms only have to deal with the regulator for anti-money laundering checks. The new framework will require every crypto platform, exchange, custodian and staker to hold a full financial licence to conduct business with UK clients.
Even companies who are already registered with the FCA for money-laundering requirements or as a payments company will be forced to reapply under the rule change. The FCA described the rules as a “landmark” moment for the industry.
“This is a significant moment for crypto regulation in the UK,” said David Geale, executive director of payments and digital finance at the FCA.
“We’ve created a framework that doesn’t force firms to choose between regulatory certainty and room to innovate, this regime means they can have both in a stable, competitive home to build and grow. For consumers, it means firms will be held to similar standards to other financial providers, though we can’t regulate away risk.”
All firms must also meet stronger resilience standards and will be subject to capital and stress testing to ensure they can withstand market shocks. The watchdog has also enacted a new industry-led framework aimed at detecting and preventing market manipulation, insider trading and illicit activity.
Lending and dealing
Retail investors will also receive greater protection from crippling losses, with the watchdog enacting safety nets for both lending and borrowing.
Platforms must force investors to put up collateral worth more than the amount being borrowed before they can receive the asset, while also enacting a hard stop on losses, meaning an investor can never end up owing an exchange money if a trade goes wrong.
The watchdog is also looking to shield investors from market drops, with firms being banned from automatically trading a customer’s crypto wallet to prop up a failing trade, but individual investors will still be able to make the decision to top up their account to stop their position being thrown into the red.
Stablecoins will also be pulled into the framework’s scope, and will be subject to “clear, strong and transparent standards”.
Stable coin shakeup
The UK stablecoin system will also be swept into the new rules, with the regulator focusing on how issuers must turn the asset into a “money-like instrument”.
Stablecoins are designed to maintain a fixed value against external currencies such as the dollar or gold.
The FCA is scrapping a proposed rule that would have forced stablecoin firms to estimate and forecast customer redemptions, admitting that it would have created greater complexity, and instead allowing companies to hold up to a five per cent surplus of cash within their backing asset pool to absorb sudden market swings.
Firms will also be forced to place all cash that guarantees stablecoin having actual value into a statutory trust which leaders will be unable to touch in cases of bankruptcy, with it instead legally reserved to pay token holders in those circumstances.
Stablecoin companies will also no longer be able to hide past financial records, in a bid to create greater transparency for consumers, making all data publicly available.
Will it work?
The industry welcomed the moves from the regulator but questioned whether the shakeup could quash innovation.
Dan Moczulski, Etoro UK managing director: “Clear rules can raise standards, protect consumers and give investors and firms greater confidence in the UK market.
“But regulation must also preserve choice and innovation… not every firm will secure a licence, and the real test will be whether that ultimately benefits consumers.”
Deep Patel, partner at Capco, said: “The future of payments will involve different forms of money sitting alongside each other… with stable coins increasingly being seen as a potential payments infrastructure.
“For payment firms, this creates opportunities around faster settlement, cross-border payments and programmable payments. For banks, it opens up new opportunities in custody, safeguarding, liquidity and settlement services, while also increasing pressure to develop tokenised deposit propositions of their own.”