UK's New Crypto Regulations May Catch Firms Off Guard

The UK's Financial Conduct Authority has introduced new crypto regulations that could significantly broaden the definition of custody, potentially affecting 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 clients' crypto assets must watch out for. According to the rules, any firm or crypto platform holding client assets for more than 24 hours during trade settlement may be classified as a regulated custodian, requiring a full safeguarding license. The regulator has also warned validators and node operators to exercise caution, as providing 'added value' features such as user dashboards or yield tools may lead to the loss of their pure tech exemption, necessitating full approval for arranging staking. The FCA aims to strengthen consumer protections and support fair, transparent, and orderly markets as the sector evolves. Notably, the regulator has addressed the issue of 'shadow custody' for the first time, clarifying that if a crypto service provider can theoretically override a client's authority, it is considered a custodian, regardless of whether it guarantees not to exert that power. The document emphasizes that the use of smart contracts, public blockchains, or decentralized elements does not determine the regulatory perimeter or exempt an arrangement from regulation. For stablecoin issuers, the rules are clear: issuance is only legal 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 policy statements this summer, followed by the final perimeter guidance in September. The new regulations require all entities providing crypto services to transition from the current money-laundering registration systems to a stricter approval regime under the UK's Financial Services and Markets Act. Firms that intend to continue operating under the new regulations have a five-month application window, from September 30, 2026, to February 28, 2027, and those that apply during this period will benefit from 'savings provisions' allowing them to continue operating while the regulator reviews their applications.