UK's New Crypto Regulations May Catch Firms Off Guard

The UK's Financial Conduct Authority has introduced proposed crypto regulations that could broaden the definition of custody, potentially affecting platforms and software providers that do not consider themselves custodians. The FCA's Cryptoasset Perimeter Guidance, published on Wednesday, highlights several technical traps for firms handling client crypto assets. A key aspect of the rules is the 24-hour threshold for custody, where any firm holding client assets for more than a day during trade settlement may 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 yield tools may necessitate seeking full approval for arranging staking. The FCA aims to strengthen consumer protections and support fair markets with its new perimeter. Notably, the regulator has addressed the 'shadow custody' issue, clarifying that crypto service providers allowing theoretical override of client authority are considered custodians, even if they guarantee not to exert that power. The document emphasizes that the use of smart contracts, public blockchains, or decentralization elements does not determine the perimeter position or exempt an arrangement from regulation. For stablecoin issuers, the rules require establishment in the UK and management of 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 systems to a stricter approval regime under the UK's Financial Services and Markets Act. Firms have a five-month application window from September 30, 2026, to February 28, 2027, to apply for the new regime, with those who apply during this period able to benefit from 'savings provisions' allowing them to continue operating while the regulator deliberates.