UK's New Crypto Regulations Pose Risks to Unprepared Firms

The UK's Financial Conduct Authority has introduced proposed crypto regulations that may inadvertently expand the definition of custody, potentially affecting platforms and software providers that do not consider themselves custodians. The FCA's Cryptoasset Perimeter Guidance, published recently, highlights several technical traps that firms handling client crypto assets must watch out for. A key aspect of the rules is the 24-hour threshold for custody, where any firm or platform 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 lead to the loss of their pure tech exemption, necessitating full approval for arranging staking. The regulator has emphasized that its new perimeter provides the tools 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,' clarifying that if a crypto service provider can theoretically override a client's authority, it is considered a custodian, even if it guarantees not to exert that power. For stablecoin issuers, the guidelines 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 has invited views 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 regulatory roadmap requires 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 face a five-month application window from September 30, 2026, to February 28, 2027, and those that miss this deadline risk facing fines, suspensions, and permanent closures. Only firms that apply during the application period will benefit from the 'savings provisions' that allow them to continue operating while the regulator deliberates.