UK rules let firms remove trust safeguards from Bitcoin lending

The Financial Conduct Authority finalized new crypto rules on June 30 and opened its Connect system for firms to apply or vary permissions on Sept. 30. The regime takes full effect on Oct. 25, 2027. The rules distinguish between Bitcoin pledged as collateral for borrowing and Bitcoin transferred into lending services that pay yield.

Under the retail collateral provisions, a firm providing qualifying cryptoasset borrowing must ensure pledged Bitcoin is held in a safeguarding trust under CASS 17. A firm or another person may not take full ownership of pledged coins unless the retail client gave prior, express consent to an ownership transfer, a written binding agreement permits the firm to take ownership to discharge a defined debt, and the firm actually exercises that right. Until those conditions are met the coins remain subject to trustee safeguards and may not be treated as the platform’s usable inventory.

A qualifying cryptoasset lending service typically involves a customer disposing of cryptoassets to or through another party in return for a contractual right or obligation to receive the same or equivalent assets, often in exchange for yield. CASS 17 allows firms that provide qualifying lending to be exempt from trustee duties for those assets while the lending is active. Firms that already hold assets in a safeguarding trust may stop treating them as client cryptoassets during the lending if the exemption applies. The exemption ends when the lending terminates or when a client exercises a right to end the service.

The legal basis for a customer’s claim differs between safeguarded collateral and assets moved into lending. Safeguarded assets create a trust-based claim against a separate pool of assets. Assets put into lending create a contractual return right and are subject to the insolvency treatment of the borrower. Recovery outcomes will depend on the firm’s actual holdings, how trust terms allocate shortfalls among clients, and any costs the trust permits to be deducted.

Firms must keep records and perform daily reconciliations to calculate what must be held for each client and asset class. Those reconciliations help identify entitlements but do not guarantee sufficient assets exist to meet them. Trust terms must state how shortfalls are allocated and whether client assets can be used to pay distribution costs following trustee failure.

Authorization under the new rules does not extend Financial Services Compensation Scheme protection to crypto safeguarding, arranging safeguarding, trading platforms, dealing in qualifying cryptoassets, stablecoin issuance or arranging staking. Customers may still bring eligible complaints about regulated conduct to the Financial Ombudsman Service under its jurisdiction rules.

Contracts and disclosures must explain whether assets are transferred, when and how they will be returned, any access limits, how yield is calculated and the risks involved, including what happens if the firm or a counterparty becomes insolvent. The rules treat staking separately: eligible collateral may be staked only in compliance with staking-specific requirements and, where applicable, with continued trust safeguarding.

The FCA said it will consult later in 2026 on additional measures to manage crypto firm failures, including distribution rules for failed custodians and stablecoin issuers. The practical outcomes for customers will depend on the structure of the service, the contractual terms and the assets available at the time of a failure.