UK's New Crypto Regulations May Catch Firms Off Guard

The UK's Financial Conduct Authority has proposed new crypto regulations that could significantly expand the definition of custody, potentially affecting platforms and software providers that do not consider themselves custodians. The recently published Cryptoasset Perimeter Guidance outlines 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 lead to the loss of their pure tech exemption, necessitating full approval for arranging staking. The regulator has introduced a new perimeter to enhance consumer protections and support fair, transparent, and orderly markets. Notably, the FCA has addressed the 'shadow custody' issue, clarifying that crypto service providers allowing theoretical override of a client's authority are considered custodians, even if they guarantee not to exert that power. Stablecoin issuers are also subject to strict regulations, with issuance only permitted if the issuer is established in the UK and manages the entire lifecycle. The FCA is seeking feedback on these proposals until June 3, 2026, and intends to publish finalized rules and perimeter guidance later this year. 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 must apply for approval within a five-month window to avoid potential fines and suspensions.