FCA Consultation Paper CP25/42: Building a Prudential Regime for Cryptoasset Firms in the UK
The Financial Conduct Authority has published CP25/42, its most comprehensive attempt yet to build a fully fledged prudential framework for UK cryptoasset firms. The consultation marks a significant shift in the UK’s regulatory stance, moving the sector closer to the standards applied to traditional financial institutions while attempting to preserve space for innovation.
The new regime seeks to bring cryptoasset service providers into a prudential perimeter similar to the investment-firm regime introduced through MIFIDPRU. The aim is clear: ensure that firms entering the UK’s newly regulated cryptoasset market have enough capital, liquidity and operational resilience to meet obligations to clients, withstand volatility and, if necessary, wind down without causing wider market disruption.
A Three-Pillar Capital Framework
At the heart of CP25/42 is the own funds requirement (OFR), a three-part capital standard. A firm’s minimum capital will be the highest of:
1. A permanent minimum requirement (PMR)
Ranges from £75,000 for arrangers and agency brokers to £750,000 for principal-trading firms. The higher PMR for principal dealers reflects the FCA’s view that proprietary trading in cryptoassets introduces risks well above those in other business models.
2. A fixed-overhead requirement (FOR)
Designed to ensure firms can wind down in an orderly fashion. It mirrors the approach used in MIFIDPRU, with minor modifications for crypto-specific business lines.
3. A set of activity-based and exposure-based K-factors
These metrics link capital requirements to the scale of a firm’s operations.
Key K-factors include:
K-CCO: client cryptoasset orders handled
K-CTF: trading flow in the firm’s own name
K-CCS: client cryptoassets staked
K-NCP: net cryptoasset position (market risk)
K-CCD: counterparty default exposures
K-CON: concentration risk beyond prescribed limits
Together, these bring a risk-sensitive method of calculating capital that directly mirrors the activity-based prudential logic that regulators apply in traditional finance.
Market Risk: Categorising Cryptoassets
The FCA proposes a two-tier categorisation of cryptoassets for the purposes of the K-NCP market-risk charge:
Category A: cryptoassets with three years’ trading history, deep and active markets, low average volatility, tight spreads, and exchangeability into fiat or a UK-regulated stablecoin. These attract a 40% position charge.
Category B: all other cryptoassets, attracting a 100% charge.
This is one of the most consequential proposals in the paper. It means that, for most tokens in circulation today, capital requirements may be extremely high unless they meet strict liquidity, volatility and market-quality tests.
Counterparty Default: Over-Collateralisation Becomes Essential
The paper proposes a structured counterparty default calculation (K-CCD) that mirrors derivatives-style exposures. Crucially, retail exposures attract a risk factor of 83.33%, effectively requiring firms to hold capital equal to the full exposure after collateral adjustments. The FCA’s message is unequivocal: lending to retail clients must be significantly over-collateralised or avoided entirely.
The Overall Risk Assessment (ORA)
The FCA introduces a cross-sectoral, MIFIDPRU-style Overall Risk Assessment, requiring firms to:
Continuously identify and monitor risks
Assess business-model sustainability
Undertake stress tests and reverse stress tests
Prepare recovery and wind-down plans
Set own funds threshold requirements and liquid asset threshold requirements
Senior management will be directly accountable. Firms unable to meet their threshold conditions are expected to self-identify and initiate wind-down—a significant cultural shift for a sector where risk governance is often informal.
Public Disclosure and Governance
Cryptoasset firms will need to publish annual prudential disclosures, including group structures and risk management arrangements. This aligns crypto regulation with mainstream financial-services transparency standards.
What This Means for the Industry
1. Capital Light Business Models Will Struggle
Many existing crypto firms operate with limited capital, especially exchanges and staking providers. The proposed PMRs alone will require significant recapitalisation, and the K-factor calculations—particularly for staking, proprietary trading and client order handling—will lift total capital requirements far above current industry norms.
Expect consolidation, withdrawals from the UK market, or business-model redesigns.
2. Principal Trading, Market-Making and Lending Become Expensive
Category B assets face a 100% market-risk charge, while retail lending faces an 83.33% default factor. Taken together:
Crypto lenders must redesign collateral policies
Exchanges acting as market makers will need materially larger balance sheets
Tokens without deep, liquid markets become economically unattractive to trade in size
This will reshape liquidity provision in the UK crypto ecosystem.
3. Staking Providers Face New Operational Risk Charges
The K-CCS factor formalises a capital charge for staking activity, covering technological, reconciliation and slashing-related risks. It raises the bar for firms offering staking to retail clients and is likely to accelerate institutional-grade custody-staking models.
4. Governance Expectations Rise Dramatically
The Overall Risk Assessment brings crypto firms into line with traditional investment firms. Required capabilities include:
Stress testing and scenario modelling
Reverse stress testing
Recovery planning
Structured wind-down planning
Board-level accountability and documented governance frameworks
Firms without experienced risk and finance functions will need to upgrade quickly.
5. The UK Moves Towards a Globally Leading, Institutional-Grade Framework
The FCA is signalling a long-term ambition: the UK will regulate cryptoassets as a professionalised financial-services sector, not as a tech experiment. The approach is materially more robust than regimes in several competing jurisdictions.
For institutional firms, the regime provides clarity and reduces counterparty uncertainty. For retail-facing players, the bar is significantly higher—and much more costly.
6. Token Issuers and Platforms Must Prove Market Quality
Because Category A classification determines capital efficiency, cryptoasset projects will face new pressures to:
Improve transparency
Maintain deeper liquidity
Reduce volatility
Provide reliable market data
Operate in ways that minimise governance and technology failures
Tokens without substance will be structurally penalised.
7. Expect a Regulatory Halo Effect
Once the UK regime is finalised, banks, asset managers and fintechs may be more willing to engage with regulated crypto firms. Prudential clarity reduces perceived contagion risk and could unlock mainstream partnerships.
Conclusion
CP25/42 is the FCA’s most ambitious step toward integrating cryptoassets into the UK’s regulated financial system. Its message is clear: if crypto is to operate like financial services, it will be supervised like financial services.
The proposed regime rewards well-capitalised, well-run, institution-grade firms, while challenging lightly capitalised, loosely governed operators. For the industry, this is both a test and an opportunity—a move that could reshape the UK crypto landscape for the next decade.
How Lagom Consulting can help
The FCA’s proposals in CP25/42 signal a decisive shift in the UK’s crypto landscape. Firms that adapt early will be in the strongest position to win market share, attract institutional capital and scale sustainably. Lagom helps crypto and fintech businesses turn this regulatory moment into a strategic advantage.
Lagom works with firms looking to enter or expand in the UK, providing clear guidance on what the new prudential environment means for commercial models, product design, fundraising, and growth strategy. We help businesses understand the commercial impact of CP25/42, reshape their UK expansion plans, and position themselves for long term success in a more mature and institutionally aligned market.
For firms exploring investment, partnership or consolidation opportunities, Lagom also supports M&A strategy, transaction preparation and market positioning. The new prudential standards will influence valuations and deal dynamics across the sector, and we help clients navigate that shift with confidence.
While Lagom is not a compliance consultancy, we maintain close relationships with specialist regulatory advisers. Where required, we can introduce trusted experts who can support authorisation, detailed prudential interpretation or the technical implementation of compliance frameworks. This gives clients access to a complete ecosystem of support, from commercial strategy to specialist regulatory input.
If you are planning to expand into the UK, reassess your model in light of CP25/42 or explore strategic opportunities in the evolving crypto market, Lagom can help you take the next step with clarity and confidence.