UK Crypto Regulations: Hidden Pitfalls for Unwary Firms

The UK's Financial Conduct Authority has unveiled proposed crypto regulations that could significantly broaden the definition of custody, potentially ensnaring platforms and software providers that do not consider themselves custodians. The FCA's Cryptoasset Perimeter Guidance, published recently, outlines several technical traps that firms handling client crypto assets must be aware of. A key aspect of the rules is the 24-hour threshold for custody, whereby any firm or platform holding client assets for more than a day during trade settlement will likely be classified as a regulated custodian, requiring a full safeguarding license. Validators and node operators must also exercise caution, as they will lose their exemption from regulation if they provide 'added value' features such as user dashboards or yield tools. The regulator has emphasized that its new perimeter is designed to strengthen consumer protections and support fair, transparent, and orderly markets as the sector evolves. Notably, the FCA has addressed the issue of 'shadow custody' for the first time, clarifying that a crypto service provider is considered a custodian if it has the ability to override a client's authority, even if it guarantees it will not exercise that power. The guidance also sets out strict requirements for stablecoin issuers, mandating that they be established in the UK and manage the entire lifecycle of the stablecoin. The FCA has invited comments on these proposals until June 3, 2026, and intends to publish finalized rules later this summer, followed by the final perimeter guidance in September. The new regulations will require all entities providing crypto services to transition from the current money-laundering registration system to a stricter approval regime under the UK's Financial Services and Markets Act. Firms that wish to continue operating under the new regulations will have a five-month window to apply, from September 30, 2026, to February 28, 2027, and will be subject to potential fines and suspensions if they miss this deadline.