Digital Settlement Assets — UK Regulatory Framework Explained

The UK government has committed to establishing a comprehensive regulatory framework for digital settlement assets — a category that primarily encompasses fiat-backed stablecoins used for payment purposes. Unlike the EU's MiCA regime, which takes a broad approach to cryptoasset regulation, the UK framework is being developed in phases, with payment-focused stablecoins as the first priority. This guide explains the emerging framework and what it means for issuers, payment firms and intermediaries.

What Are Digital Settlement Assets?

The term 'digital settlement asset' (DSA) was introduced in the Financial Services and Markets Act 2023 (FSMA 2023). It refers to a digital representation of value or rights that can be used for the settlement of payment obligations, is transferable and storable electronically, and uses technology supporting the recording or storage of data (which includes but is not limited to distributed ledger technology). In practice, the primary focus of the initial regulatory framework is fiat-backed stablecoins — tokens whose value is pegged to a traditional currency (most commonly GBP or USD) and backed by reserves of fiat currency or highly liquid assets.

The definition is deliberately technology-neutral. It does not require the use of blockchain or DLT — any digital token meeting the functional criteria could fall within scope. However, central bank digital currencies (CBDCs) are excluded from the DSA framework, as are existing forms of electronic money that are already regulated under the Electronic Money Regulations 2011.

Legislative Framework

The regulatory architecture for DSAs is built on several legislative pillars:

• FSMA 2023 — Provides the primary legislation, including powers for HM Treasury to bring specific cryptoassets into the regulatory perimeter and for the FCA and Bank of England to make rules.
• Designated activities regime — FSMA 2023 creates a new 'designated activities regime' (DAR) that allows HM Treasury to regulate specific activities related to cryptoassets without requiring full authorisation. This is intended for activities that pose risks but do not fit neatly into the existing authorisation framework.
• Payment systems designation — The Banking Act 2009 has been amended to allow HM Treasury to designate DSA payment systems as 'recognised' for Bank of England oversight, and to bring DSA service providers within the Bank's regulatory perimeter.
• FCA authorisation — Issuers of fiat-backed stablecoins used for payment in the UK will require FCA authorisation under a new bespoke regime. The FCA is developing the detailed rules covering issuance requirements, reserve backing, redemption rights, governance and disclosure.

Issuance Requirements

The FCA's emerging framework for stablecoin issuers includes several key requirements. Reserve backing — Issuers must hold reserves equal to the value of outstanding tokens, invested in high-quality liquid assets (cash, short-dated government bonds) with clear custody arrangements. Redemption rights — Token holders must have a clear legal right to redeem their tokens for fiat currency at par value, with redemption processed within a specified timeframe. Governance — Issuers must have robust governance arrangements, including a board with appropriate expertise, risk management frameworks and internal controls proportionate to the scale and complexity of the business. Disclosure — Regular public disclosure of reserve composition, attestation reports and key risk factors.

Systemic Designation and Bank of England Oversight

Where a DSA payment system becomes systemically important — processing volumes or values that could pose risks to financial stability if the system failed — it may be designated by HM Treasury for Bank of England oversight under the amended Banking Act 2009. Systemic designation brings the payment system and its key service providers within a more intensive supervisory regime, including requirements for financial resilience, operational resilience, recovery and resolution planning, and access to the Bank of England's settlement infrastructure.

The Bank of England has indicated that it expects systemically important stablecoin issuers to meet standards broadly equivalent to those applied to commercial bank money — reflecting the principle that where stablecoins are used as money, they should provide equivalent protections to other forms of regulated money.

Implications for Payment Firms

The DSA framework has important implications for payment institutions and EMIs that interact with stablecoins. Firms that facilitate payments using stablecoins — whether as acquirers, processors or wallet providers — may need to consider whether their activities bring them within the new regulatory perimeter. Firms already authorised as PIs or EMIs may find that some stablecoin-related activities fall within their existing permissions, while others require additional authorisation or notification. The interaction between the DSA regime, existing payment services regulation and the broader cryptoasset regulatory framework (including the FCA's current registration regime under the MLRs) will need careful analysis on a firm-by-firm basis.

Timeline and Next Steps

The UK government has indicated that the phased approach will see payment-focused stablecoins regulated first, with broader cryptoasset regulation (covering trading platforms, intermediaries and other token types) following in subsequent phases. Firms that issue, facilitate or otherwise interact with fiat-backed stablecoins should begin assessing their position against the emerging requirements now, rather than waiting for final rules.

Regulatory Counsel advises firms on the UK cryptoasset regulatory framework, stablecoin issuance requirements and FCA authorisation. Contact us for a free initial consultation. See our cryptoasset registration page for more.