UK Crypto Regulations: Hidden Pitfalls for Unwary Firms

The UK's Financial Conduct Authority has introduced proposed crypto regulations that may 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 complexities for firms handling client crypto assets. 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 necessitate seeking approval for arranging staking. The FCA has emphasized its commitment to strengthening consumer protections and promoting fair, transparent markets as the sector evolves. 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. For stablecoin issuers, the rules mandate that 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 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 system to a stricter approval regime under the UK's Financial Services and Markets Act. Firms must apply for approval within a five-month window, from September 30, 2026, to February 28, 2027, to avoid potential fines, suspensions, or permanent closures.