UK Crypto Regulations: Hidden Pitfalls for Unwary Firms

The UK's Financial Conduct Authority has introduced proposed crypto regulations that could broaden the definition of custody, potentially impacting platforms and software providers that do not consider themselves custodians. The FCA's Cryptoasset Perimeter Guidance, published recently, outlines several technical complexities that firms handling clients' crypto assets must be aware of. A key aspect of the rules is the 24-hour threshold for custody, where any firm or crypto platform holding client assets for more than a day during trade settlement may be considered a regulated custodian, requiring a full safeguarding license. Additionally, validators and node operators must exercise caution, as providing 'added value' features such as user dashboards or yield tools may necessitate seeking approval for arranging staking. The regulator has also addressed the issue of 'shadow custody,' clarifying that if a crypto service provider can theoretically override a client's authority, it is considered a custodian, regardless of whether it intends to exert that power. The FCA has emphasized that the use of smart contracts, public blockchains, or decentralization elements does not exempt an arrangement from regulation. For stablecoin issuers, the rules require them to be established in the UK and manage the entire lifecycle, from initial offering to redemption and reserve maintenance. The FCA is seeking feedback on these proposals until June 3, 2026, and plans 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 intend to continue operating under the new regulations must apply within a five-month window, from September 30, 2026, to February 28, 2027, to avoid potential fines, suspensions, or permanent closures.