UK Crypto Regulations: Hidden Pitfalls for Unwary Companies

The UK's Financial Conduct Authority has unveiled proposed cryptocurrency regulations that could broaden the definition of custody, potentially ensnaring platforms and software providers that do not consider themselves custodians. The recently published Cryptoasset Perimeter Guidance outlines several technical pitfalls for firms handling client crypto assets. A key provision draws a line at the 24-hour mark for custody, with any firm holding client assets for more than a day during trade settlement likely to be classified as a regulated custodian, requiring a full safeguarding license. Validators and node operators must also exercise caution, as providing 'added value' features such as user dashboards or reward-compounding tools may trigger the need for full approval for arranging staking. The regulator has stressed that the new perimeter will strengthen consumer protections and support fair, transparent markets as the sector evolves. Notably, the FCA has addressed the issue of 'shadow custody,' clarifying that a crypto service provider is considered a custodian if it can theoretically override a client's authority, even if it guarantees it will never exert that power. For stablecoin issuers, the rules are straightforward: issuance is only permissible if the issuer is established in the UK and manages the entire lifecycle, from initial offering to redemption and reserve maintenance. The FCA is seeking feedback on these proposals until June 3, 2026, and intends to publish finalized rules in the 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. Companies that fail to apply during the designated five-month window, from September 30, 2026, to February 28, 2027, risk facing fines, suspensions, and potential closures. Only those who apply during this period will be eligible for 'savings provisions' that allow them to continue operating while their application is being reviewed.