Client Fiat Flows in Crypto Can Fall Within CASS 7
CP26/8, published as part of the FCA’s quarterly consultation on miscellaneous amendments to the FCA handbook, gives practical effect to one of the most important consequences of the wider crypto regime proposed in CP25/25 and CP26/4. Once specified cryptoasset activities are brought within the FCA Handbook definition of “Designated Investment Business”, firms that receive or hold money on behalf of clients in connection with crypto transactions, including as part of execution, dealing or arranging activities, may fall within the CASS 7 client money regime.
In practical terms, this is particularly relevant to business models where firms receive or hold client fiat as part of execution, dealing or arranging activity involving cryptoassets. This may include brokers that buy or sell crypto as principal to the client, a broker or intermediary that executes trades as agent, a firm that arranges deals between the client and another party or venue, or potentially a platform operator where the fiat leg forms part of the firm’s trading or intermediation model.
The key point is that fiat used to acquire or dispose of cryptoassets is no longer merely an ancillary operational flow. On the FCA’s proposed approach, it can engage the existing CASS 7 client money framework. That is one of the most significant messages to emerge from Chapter 2 and the implications are substantial. If a platform receives client GBP before a crypto purchase, or holds fiat sale proceeds before withdrawal, that money may sit within the CASS 7 framework, with all the operational and legal consequences that follow. In practice, where firms hold client money in connection with Designated Investment Business, this may bring that money within the scope of CASS 7, together with the related client money requirements such as segregation, reconciliations, audits etc.
Custody Related Cash Also Sits Within the Client Money Perimeter
CP26/8 goes further. It does not simply confirm that fiat flows around crypto transactions may be pulled into CASS 7. It also clarifies how that outcome is meant to interact with the bespoke safeguarding regimes proposed under CASS 16 and CASS 17.
One of the most important proposals is that money arising from, or in connection with, the safeguarding of client cryptoassets should also be treated as CASS 7 client money. The FCA notes that CASS 7 already treats money arising from, or in connection with, the holding of safe custody assets as client money, but says the position may become unclear once CASS 17 is introduced for crypto custody. It therefore proposes to clarify that a firm should treat money arising from, or in connection with, the safeguarding of client cryptoassets as CASS 7 client money, including where the safeguarding is carried out by a third party appointed by the firm. It also proposes that third parties used to safeguard crypto assets should deposit such money into one of the firm’s client bank accounts. This captures related cash generated by custody activity.
Stablecoin Reserve Money Is Carved Out into CASS 16
CASS 7 applies where a firm receives or holds money in the course of, or in connection with, designated investment business. Therefore the proposed expansion of DIB in CP25/25 would otherwise bring UK issuance of qualifying stablecoins into scope of CASS 7. But CP25/14 had already proposed a bespoke stablecoin safeguarding regime in CASS 16, including the concept of a backing funds account as a bank account where the issuer holds the money making up the pool backing a qualifying stablecoin. CASS 16 is therefore designed specifically for stablecoin backing funds, rather than for general client money. CP26/8 therefore proposes a new application rule stating that money required or permitted under CASS 16 to be held in backing funds accounts is not client money for the purposes of CASS 7.
In other words, where money is held solely to back qualifying stablecoins, CASS 16 rather than CASS 7 should apply. Ensuring that stablecoin reserve money is not accidentally reclassified as ordinary client money merely because stablecoin issuance is being pulled within the wider perimeter of “Designated Investment Business”.
The FCA then reinforces that separation. CP26/8 notes that CASS 1.2.11R already requires money held under different CASS chapters to be kept in separate accounts so that funds subject to different regimes are not co-mingled. It proposes to amend that provision to make clear that it also applies to money held under CASS 16.
How Flawless Money Can Help
For firms assessing the impact of the proposed regime, the key challenge is often not the headline rule, but how the rules apply to the details of the operating model. Flawless Money can help firms analyse their business models against the proposed framework, identify which CASS regime is likely to apply to which activity and transaction flow, and assess what this means in practice going forward.
Flawless Money is a regulatory consultancy that advises international and domestic payment service providers, including banks, payment institutions, e-money institutions, cryptoasset firms and other businesses wishing to offer payment products. We have over 25 years experience in assisting firms with compliance obligations arising from UK and EU payments, e-money and cryptoasset rules.
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