The Proposed UK Regulatory Framework for Regulating Stablecoin Issuance

Earlier this year, the United Kingdom (UK) Financial Conduct Authority (FCA) published Consultation Paper CP25/14 (CP) setting out a proposed regulatory framework for the issuance of qualifying stablecoins and the custody of qualifying cryptoassets. This initiative forms part of the UK’s broader effort to establish a comprehensive regime for cryptoassets following the legislative direction of the UK HM Treasury (the Treasury) and previous FCA discussion papers, and has gotten renewed attention in light of Bank of England Governor Andrew Bailey’s recent article articulating the role of stablecoins.

This Advisory, which is part of a series tracking global regulatory developments in stablecoins and cryptoassets, describes that part of the CP that addresses the issuance of stablecoins.

Policy Considerations

The Treasury does not intend to bring stablecoins into the UK payments regulation at this time. As such, the CP does not include proposed requirements for firms carrying out payments using qualifying stablecoins.

Issuers of systemic stablecoins used for payments, as recognized by the Treasury, will be brought into the scope of the Bank of England’s (the Bank) regime and subject to its requirements. This will occur alongside the requirements imposed by the FCA for firms carrying out activities set out in the Regulated Activities Order (RAO),¹ meaning that such providers will be dual-regulated by the Bank and the FCA.

For those stablecoins that expect to operate at systemic scale, the Bank will publish a complementary consultation paper later this year.

The FCA notes that if an existing stablecoin issuer were to fail today, it may be unclear to its holders how they could get their money back. The contractual rights that stablecoin holders may have over any money or assets held by the issuer may vary, and the issuer may not have strictly segregated the money or assets backing the stablecoin from its own assets. Regulating fiat-referenced stablecoins will not prevent failures, but it will help to reduce the probability and impact.

The rules the FCA proposes in the CP are in addition to broader conduct and firm standards rules applied to qualifying stablecoin issuers and prudential requirements, each of which is and was subject to separate FCA consultation.

Interpretation

The FCA defines these processes referred to in the CP:

“Issuing” is carrying on the proposed regulated activity of issuing a qualifying stablecoin in the UK.

“Creating” includes the technical design of a qualifying stablecoin.

“Minting” is the minting of a qualifying stablecoin such that it first exists as an identifiable asset on the blockchain in a transferable form.

“Burning” is the process by which a cryptoasset is permanently removed from circulation on the blockchain.

Current Regulatory Position

Currently, firms that provide cryptoasset services that come within the scope of the UK Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) must be registered with the FCA. In addition, cryptoasset businesses that wish to market to UK consumers must also be registered with the FCA under the MLRs unless an authorized person approves their financial promotions or they otherwise rely on an exemption.

Under the new regime set out in the CP, while qualifying stablecoin issuers will still be subject to the MLRs, they will no longer need to be separately registered with the FCA. Instead, they will need to be authorized by the FCA under the Financial Services and Markets Act 2000, and once authorized, they will continue to be subject to the FCA’s ongoing supervision.

Scope of Regulation

The proposed regime will cover a new regulated activity of issuing “qualifying stablecoins,” namely cryptoassets referencing a single fiat currency, issued from the UK, and backed by fiat or other assets.

Following the implementation of the proposed regime, qualifying stablecoin issuers will be required to be authorized by the FCA to engage in these activities in the UK. These activities will be brought into scope via amendments to the RAO, requiring firms to be authorized by the FCA and comply with new rules.

Proposals for Qualifying Stablecoin Issuers

Backing and safeguarding assets

Stablecoins must be fully backed at all times by secure, liquid assets. These assets are to be held in a statutory trust for the benefit of stablecoin holders, ensuring legal protection in case of issuer failure. The assets must be held with a third-party custodian that is independent and unconnected to the issuer’s group, reducing contagion risk.

Issuers must segregate backing assets for each stablecoin product, preventing co-mingling and ensuring clarity of ownership.

Composition and risk management of backing assets

The FCA proposes a two-tier system for backing assets to be comprised of:

• Core assets, including short-term deposits and government debt instruments with maturities of one year or less
• Expanded backing assets, including longer-term government debt, public debt, constant net asset value money market funds, and repurchase agreements, subject to additional risk management requirements

The FCA will not prescribe specific compositions of assets and proposes that issuers wishing to include expanded backing assets must notify the FCA of their intention to do so. Issuers must maintain a minimum of 5% of backing assets in on-demand bank deposits to ensure liquidity. For those using expanded assets, a Backing Asset Composition Ratio must be calculated every 14 redemption days according to a formula proposed by the FCA and based on redemption modelling and historical errors. This dynamic ratio ensures sufficient liquidity to meet redemption requests.

Issuers must also implement a comprehensive risk management framework, including policies for liquidity risk, contingency funding, and custody diversification. These frameworks must be documented and overseen by the issuer’s governing body.

On the FCA’s understanding that currently stablecoin issuers derive most of their revenue from the interest and returns from the backing assets, it proposes that regulated stablecoin issuers can continue to retain, for their own benefit, the revenue derived from interest and returns from the backing assets. Regulated stablecoin issuers should not be permitted to pay income or interest to consumers or to pass interest revenue to a third party and then onto consumers. This aligns with current market practice and will help establish a clear distinction between stablecoins and deposits.

Redemption requirements

The FCA proposes that all holders — retail and institutional — must be able to redeem stablecoins at par value, with payment orders placed by the end of the next business day following a valid request. There should be no minimum redemption amount, and fees must be proportionate to operational costs.

Redemption must be available in the reference currency, and issuers must not impose onerous conditions (e.g., requiring a specific bank account). Redemption may be suspended only in exceptional circumstances, such as insolvency or technological failure, with immediate notification to the FCA and a clear plan for resumption in place.

Use of third parties

Issuers may appoint third parties to carry out elements of the issuance activity, such as selling stablecoins, managing backing assets, or processing redemptions. However, the issuer remains fully responsible for compliance. Contracts must include due diligence, clear roles, and robust information-sharing arrangements.

Third parties must not be allowed to suspend redemption; this authority remains solely with the issuer.

Disclosures and transparency

Issuers must publish and regularly update information online, including:

• The number of stablecoins issued and backing asset composition (every three months)
• Redemption policies, fees, technology used, and third-party arrangements (updated when inaccurate)
• Confirmation of 1:1 backing

An annual independent review of disclosures must be conducted by a qualified auditor, with results made publicly available.

Record-keeping and reconciliations

Issuers must perform daily reconciliations of minted stablecoins and backing assets. Discrepancies must be resolved promptly. Excess assets must be removed within one business day, and shortfalls must be topped up within the same timeframe or reported to the FCA.

These measures are to ensure ongoing parity between the stablecoin pool and backing assets.

Multi-currency stablecoins

While the current proposals focus on single-currency stablecoins, the FCA has invited views on applying similar standards to multi-currency stablecoins, acknowledging additional risks such as foreign exchange volatility and liquidity management.

Creating a qualifying stablecoin

When qualifying stablecoins are created by or on behalf of the issuer, they may be issued using all forms of distributed ledger technology, including on private, public, permissioned, or permissionless blockchains. The technical design of a qualifying stablecoin (including its underlying coding) must be robust, enable the qualifying stablecoin to function, and allow the issuer to fulfill its regulatory requirements. The FCA proposes that the technical design of a qualifying stablecoin allows for innovation. Where appropriate, technology should be used to improve the functionality of the stablecoin and deter its use for illicit purposes.

Safeguarding qualifying stablecoin backing assets

The FCA proposes that an effective safeguarding regime needs to be based on segregating client assets from the issuer’s own assets and holding them on trust for the benefit of qualifying stablecoin holders. Therefore, backing assets will be held by the issuer subject to a statutory trust for the backing asset rules, which outline the safeguarding regime, and for the holders of a qualifying stablecoin, according to their respective interests in it.

An issuer must appoint third parties that are unconnected to the issuer or any of its group to safeguard backing assets. The issuer will, as trustee, remain legally responsible for the backing assets, including addressing discrepancies and managing redemption requests for stablecoin holders.

In selecting third parties to hold backing assets or funds, issuers must:

• Exercise all due skill, care, and diligence in that selection
• Make sure terms are included in the written agreement with each third party on the provision of information to enable the issuer to comply with the FCA’s rules
• Regularly review its arrangements with third parties
• Periodically review whether it is appropriate to diversify (or further diversify) the third parties it has appointed to safeguard the backing assets
• Keep records on these appointments and any periodic reviews

Issuers will be required to obtain signed acknowledgment letters from each appointed third party, acknowledging that safeguarded qualifying backing assets are held on trust for the benefit of stablecoin holders rather than for their client, the issuer acting as trustee.

Next Steps

The consultation period ended on July 31, 2025. Final rules will be published in 2026, following further consultations on conduct standards, disclosures, trading platforms, and remaining prudential requirements. The regime will go live following parliamentary approval.

Further, as noted above, the Bank is due to publish a consultation on the UK’s systemic stablecoin regime, which will apply to those used as money (i.e., for everyday payments or for settling tokenized core financial markets) and consider what standards they would need to meet. Among other things, the Bank will outline that widely used UK stablecoins should have access to accounts at the Bank of England in order to reinforce their status as a form of money. Separately, the Bank is under pressure to scrap a plan to limit stablecoin ownership to between £10,000 and £20,000 for individuals and £10 million for businesses. This plan would impose on the UK much stricter rules than the U.S. or the European Union, and has come under heavy criticism. The Governor of the Bank has indicated a more positive approach to the use of stablecoins and so we await the outcome of the caps debate with interest.

© Arnold & Porter Kaye Scholer LLP 2025 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.