UK Crypto Firms Can Now Apply for Authorization Ahead of 2027 Rules

FCA opens crypto authorization window

The UK Financial Conduct Authority (FCA) has opened applications for crypto firms to gain official authorization starting September 30. However, the new set of rules governing these activities will not begin until October 25, 2027. Applying now does not grant immediate permission or activate consumer protections.

This move creates a distinct path for companies offering services like holding digital assets, borrowing against them, or lending them for yield. The regulations aim to clarify how customer funds are treated, especially when a platform faces financial trouble.

Core differences in asset protection

• Crypto used as collateral for borrowing must be kept in a safeguarded trust.
• Crypto lent out for yield can operate under a trust exemption while the service runs.
• New authorized crypto activities do not qualify for Financial Services Compensation Scheme (FSCS) insurance.
• Safeguarding trusts do not guarantee that customers will recover all lost assets.

How borrowing collateral is handled

Under the upcoming rules, if a customer pledges cryptocurrency as collateral for a loan, those assets must remain safeguarded. This means the firm cannot simply take full ownership of the coins to use them elsewhere unless the customer explicitly agrees to transfer ownership to pay off the debt. Even with an agreement signed, the safeguarding rule stays in place until the firm actually exercises that right to seize the coins.

This distinction ensures that collateral for loans is treated differently from assets handed over for lending programs. The rules apply specifically to "qualifying cryptoasset borrowing," a defined service, and do not automatically cover every cash loan marketed as being backed by Bitcoin.

Lending services and trust exemptions

In contrast, firms offering qualifying cryptoasset lending can use an exemption from the standard trust requirement while the lending service is active. In this scenario, a customer transfers assets to earn yield, and the firm has an obligation to return equivalent assets later. Because the firm effectively owns the assets during the loan period, they are not held in a client safeguarding trust.

If a firm goes bankrupt while this exemption is active, customers rely on their contractual right to get equivalent assets back, rather than a claim on a specific trust fund. The actual recovery depends on whether the firm still has the assets available and follows the agreed-upon return schedule.

Recovery limits and compensation gaps

Even with these new safeguards, the Financial Services Compensation Scheme (FSCS) will not cover losses from these new crypto activities. The FCA has explicitly excluded crypto safeguarding, lending, and trading from the compensation rules. This means that if a firm fails, customers cannot rely on government-backed insurance to recover their funds.

Recovery efforts will depend on the specific legal structure of the service, the assets remaining in the firm's possession, and the costs of the insolvency process. Trusts are designed to protect client rights against other creditors, but they do not ensure full repayment if there is a shortage of assets.

What remains uncertain

The FCA plans to consult later in 2026 on how to manage the failure of crypto firms, including specific rules for distributing assets to customers. Until then, the exact process for handling insolvencies and shortfalls remains subject to future updates. Additionally, the rules distinguish between retail and wholesale clients, with some requirements applying broadly while others focus on domestic retail customers.

Next steps for firms and users

Firms can currently submit applications through the FCA's Connect system. Once authorized, they must provide clear information to customers about how their assets are treated, the risks involved, and what happens in case of insolvency. The full regulatory framework becomes mandatory on October 25, 2027.

Source

• CryptoSlate