UK: FCA consultation on application of the FCA Handbook to cryptoasset firms - context and categorisation

This briefing focuses on the context of the consultation and the categorisation of firms. It is the first of four briefings on CP25/25

See also the other briefings in this series:

• UK: FCA consultation on application of the FCA Handbook to cryptoasset firms – high level standards
• UK: FCA consults on application of the FCA Handbook to cryptoasset firms – operational resilience 
• UK: FCA consults on application of the FCA Handbook to cryptoasset firms – Consumer Duty

The context of the consultation

In consultation paper CP25/25 “Application of FCA Handbook for Regulated Cryptoasset Activities” the FCA are consulting on how their existing Handbook rules will apply to firms which will come under its remit for the first time when new regulated activities related to cryptoasset are included in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO) for the first time. The rules on whose application they are consulting include High Level Standards such as the Senior Management Arrangements, Systems and Controls (SYSC) Sourcebook (including governance, Senior Managers and Certification Regime, financial crime and operational resilience), and Business Standards (specifically the ESG Sourcebook).

The FCA are also seeking views on their approach to applying the Consumer Duty, Business Standards including the Conduct of Business Sourcebook, Product Intervention and Product Governance Sourcebook, Redress (Dispute Resolution: Complaints) and application of the Financial Ombudsman Service to firms carrying on the new cryptoasset regulated activities.

The expansion of the RAO to include cryptoasset-related activities, and the associated application of FCA rules to such firms marks a material expansion of the requirements applying to such firms. At present, firms carrying on such activities are subject only to requirements relating to the prevention of money laundering (and associated registration requirements) and rules restricting the promotion of cryptoasset activities. The proposed new rules and guidance will apply generally to firms, regardless of the specific cryptoasset activities the firm undertakes.

The key point to note from the consultation and associated policy change is that cryptoasset firms will be regulated in substantially the same way as any other financial services firm.  For the most part, the regulation of cryptoasset firms will only differ as necessary to accommodate the technology that underpins cryptoasset (and the relevant activities), for instance to take account of the way in which distributed ledgers operate.

See also our previous client briefing:

• UK: HM Treasury and FCA propose new regulatory regime for cryptoassets

Cryptoasset risks

The FCA remain wary of cryptoassets and note that while the proposed standards, if adopted, will help reduce some of the risks prevalent in business practices in the cryptoasset sector, they do not address the underlying and inherent risks posed by cryptoassets themselves.  The FCA warn that:

“Anyone who buys cryptoassets should be aware of the risk that they may lose all of their money, and the potential for significant volatility in most cryptoassets’ value.”

Although the FCA proposals are based on the principle of ‘same risk, same regulatory outcome’, some risks posed by cryptoassets are due to the novel features and business models of the technology used, and the FCA recognises that in the consultation.

Authorisation and categorisation of firms

The effect of the changes to the RAO is that cryptoasset firms registered with the FCA under the money laundering regime will be required to seek RAO authorisations for those activities brought within the scope of the RAO. Depending on their existing regulatory status, such firms will either need to become authorised for the first time or to extend their existing permissions.

The FCA are consulting on the application of the Handbook to:

• currently regulated firms seeking authorisation to extend their permissions to undertake qualifying cryptoasset activities for the first time
• currently unregulated firms seeking to become authorised so that they can (in many cases continue) to undertake qualifying cryptoasset activities,

in each case when the changes to the RAO relating to these activities take effect.

Qualifying cryptoasset activities will be categorised as designated investment business (DIB). Accordingly CASS client money rules will apply to cryptoasset firms that hold client money in connection with regulated activities involving qualifying cryptoassets, for instance firms holding fiat currency on behalf of clients to facilitate on and off ramping.

A firm which is already authorised and which is subject to stricter requirements in respect of its existing activities than it would be if it only carried on cryptoasset activities will be subject to those stricter requirements at a firm level (i.e. applying to all of its activities).

Practical implications for cryptoasset firms

The proposed application of the FCA Handbook rules to cryptoasset firms will have huge implications for previously unregulated cryptoasset firms that want to continue to operate in the UK and firms that would like to now start carrying on regulated cryptoasset activities, exposing them to materially expanded regulatory requirements and expectations.  Firms wishing to do so should begin preparing now. 

Although the final and precise rules will only be finalised when the FCA publishes its response to the consultation, the outline of the regulatory framework is clear.  Existing cryptoasset firms will need to build out their compliance functions and governance and put in place policies and procedures in preparation for seeking authorisation.  They will need help to do so.  Some assistance with the authorisation process will be available from the FCA’s PASS service, however, firms will also need to seek legal advice.

Firms already authorised to carry on regulated activities and which are expanding those activities to include cryptoasset-related regulated activities will not need to become authorised, but will need to apply to vary their permissions and will still have much to do to understand and prepare for the implications of doing so.

Both currently unauthorised firms and currently authorised firms will need to follow the consultations and the development of new rules closely.

Next steps

The consultation has now closed.  

The FCA plans to set out its final rules in Policy Statements which it intends to publish in 2026 in accordance with its Crypto Roadmap.

How Eversheds Sutherland can help

We offer specialised advice to all firms involved in the provision of cryptoasset-related products or services, including exchanges, lenders, brokers, investment managers, custodians, and token issuers.  We advise on the authorisation of cryptoasset firms, the safekeeping of cryptoassets, exchanges, and compliance with international regulations. Our services include guidance on custody models and infrastructure for cryptoassets, as well as advice on legal and regulatory aspects, including AIFMD and UCITS Directives. We support clients with regulatory frameworks, and assist with security mechanisms and using cryptoassets as collateral. Additionally, we apply traditional custody principles to new technology models to safeguard business interests. Our cybersecurity team collaborates with our award-winning cryptoassets team to protect assets and mitigate cyber risks.  Our disputes team has acted and continues to act in some of the highest profile cryptoasset disputes in the courts.