UK: FCA consultation on application of the FCA Handbook to cryptoasset firms – high level standards

This briefing focuses on the proposals on the application of high level standards to cryptoasset firms. It is the second 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 - the context of the consultation and the categorisation of firms
• 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 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).

For more details on the background to and purpose of the consultation, please see our previous briefing:

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

What is the FCA consulting on?

High Level Standards

The FCA is proposing to apply the rules set out in the Threshold Conditions (COND), Principles for Businesses (PRIN) and General Provisions (GEN) parts of its Handbook to cryptoasset firms.

COND

It is a condition of being authorised under the Financial Services and Markets Act 2000 (FSMA) that a firm meets the threshold conditions contained in FSMA. All such firms must also comply with the rules in COND. Authorised cryptoasset firms will also be required comply with the rules in COND when authorised under FSMA.  The FCA is not consulting the content of COND, only the application of those rules to such firms.

PRIN

The FCA are proposing to apply rules in PRIN to cryptoasset firms, with minor amendments, including that the definition of customer and client in PRIN for such firms will include a holder of a qualifying stablecoin.

There will be limited exceptions to this general principle:

• cryptoasset firms doing business with eligible counterparties (ECPs) will have various parts of PRIN disapplied, as is the case at present for FSMA-authorised firms that only service institutional clients or professional clients
• Principles 1, 2, 6 and 9 will not apply to transactions entered into on a cryptoasset trading platform (CATP) by its members. These are similar to the exceptions for transactions on multi-lateral trading venues in traditional finance
• Principles 6 and 9 will not apply when a firm provides the service of operating a CATP for professional clients

The proposed exceptions recognise the role of platform operators in monitoring and overseeing compliance with the CATP’s own trading rules, when it comes to transactions on their own platforms.

It is worth noting that the Consumer Duty is contained in Principle 12. The FCA is not consulting on the application of the Consumer Duty to cryptoasset activities at present, so is silent on the application of Principle 12.

GEN

The proposals are to apply GEN in full to all cryptoasset firms.

Supervision Manual (SUP)

The FCA is proposing to extend and apply the relevant sections of SUP to cryptoasset firms, including requirements to notify the FCA of significant changes to cryptoasset firms’ businesses (i.e. make notifications under SUP 15).

Senior Management Arrangements, System and Controls (SYSC)

The FCA propose to apply SYSC and related sourcebooks (COCON, FIT, SUP 10C, FCG, FCTR) to cryptoasset firms, in a similar way to how they apply to most FSMA-authorised firms.  The FCA believes that cryptoasset firms do not generally pose systemic risks, so will be classified, like consumer credit firms, as ‘other firms’ under SYSC, rather than ‘common platform firms’ (e.g. banks and investment firms), which face more complex and stringent requirements.

Because cryptoasset firms will be brought within the definition of designated investment business (DIB), they will be subject to consumer protections comparable with traditional finance firms.

Firms conducting multiple regulated activities will need to follow the highest standards applicable to any of those activities under SYSC.  Thus a cryptoasset firm with permissions that qualify it as a common platform firm will need to meet those higher standards across all of its regulated activities.

The FCA recognise that unless previously authorised for other regulated activities, cryptoasset firms will not have been subject to a regulatory regime under FSMA and that cryptoasset firms will need to put in place policies and procedures to assess risks and ensure compliance.  The lack of previous regulatory oversight may also mean there is a greater risk of undiscovered and unresolved misconduct within firms, which will have to be addressed prior to application for authorisation. 

The business models of cryptoasset firms (in particular vertical integration) pose specific conflicts of interest risks which will be addressed in a further consultation paper.

Senior Managers & Certification Regime (SMCR)

The existing SMCR is designed so that senior management functions (SMFs), categorisation criteria and certification functions are not sector specific.  The FCA believe these elements of the regime remain relevant and applicable across different business models within financial services, and are technologically agnostic.

The FCA are concerned that senior individuals at cryptoasset firms may historically have failed to maintain a clear and appropriate apportionment of responsibilities.  In the worst cases this has manifested in overconcentration of responsibilities in hands of too few individuals who were not constructively challenged by other members of senior management. This means that in applying the SMCR regime to cryptoasset firms, there is a clear need for clear and appropriate apportionment of responsibilities and robust governance standards.

Application and categorisation

The FCA propose to apply all the existing elements and rules of SMCR to cryptoasset firms, in line with the current approach for authorised firms.  As previously noted, all cryptoasset firms will be DIB firms, including for SMCR purposes. 

Cryptoasset firms will be categorised as enhanced or core firms in accordance with the existing SMCR practice, with the FCA to consult on the criteria that will make a cryptoasset firm an enhanced firm for SMCR purposes. The FCA does not expect any authorised cryptoasset firm to be a limited scope firm for SMCR purposes.

There will be no additional SMFs or prescribed responsibilities specifically for cryptoasset firms.

Certification

Firms dealing in cryptoassets as agent, and/or firms arranging (bringing about) deals in cryptoassets, will be required to certify the relevant employees carrying out these activities under the ‘client dealing’ function.  The definition of proprietary trading will be amended so that the proprietary trading certification function covers dealing in cryptoassets as principal and issuing qualifying stablecoins in the United Kingdom.

Whether or not cryptoasset firms will be subject to the algorithmic trading certification function will be determined following future consultations on proposals relating to the use of algorithms for trading qualifying cryptoassets.

Operational Resilience

The FCA is consulting extensively on the application of operational resilience rules to cryptoasset firms. For more details on this element specifically, see our client briefing:

• UK: FCA consults on application of the FCA Handbook to cryptoasset firms – operational resilience

Financial Crime

When brought within the scope of the FSMA regulatory regime cryptoasset firms to be subject to the same financial crime rules as other FSMA authorised firms, including the MLRs.

The FCA proposals are to apply the guidance contained in the Financial Crime Guide (FCG) and the Financial Crime Thematic Reviews (FCTR) to cryptoasset firms, so they have practical help and information on actions they can take to counter financial crime risks.

Business standards – ESG Sourcebook

The FCA propose to apply the ESG Sourcebook to cryptoasset firms in the same way as it applies generally to all FSMA-authorised firms.  However, the proposals will not extend ESG provisions that only apply to specific firm types, such as asset managers, asset owners, and distributors, to cryptoasset firms.

The FCA have no plans introduce new cryptoasset-specific climate related or sustainability disclosure requirements for this sector at this time.  Given the concerns about the energy intensive nature of the mining of certain cryptocurrencies, in particular Bitcoin, which uses vast amounts of computing power, some may consider this an oversight or missed opportunity.

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.