UK Crypto Regulations: Hidden Pitfalls in New FCA Rules

The UK's Financial Conduct Authority has introduced proposed crypto regulations that may significantly 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, highlights several technical complexities that firms handling client crypto assets must be aware of. 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. 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 FCA aims to enhance consumer protections and support fair, transparent, and orderly markets as the sector evolves. Notably, the regulator has addressed the 'shadow custody' issue, clarifying that if a crypto service provider can theoretically override a client's authority, it is considered a custodian, regardless of whether it guarantees not to exert that power. The document also emphasizes that the use of smart contracts, public blockchains, or decentralization elements does not exempt an arrangement from regulation. For stablecoin issuers, the rules are clear: issuance is only permissible if the issuer is established in the UK and manages 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 policy statements 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 systems to a more stringent approval regime under the UK's Financial Services and Markets Act. Firms that intend to continue operating under the new regulations have a five-month application window, from September 30, 2026, to February 28, 2027, and failure to meet this deadline may result in penalties, suspensions, or permanent closures. Only those who apply during this period will be eligible for 'savings provisions' that allow them to continue operating while the regulator reviews their application.