UK Crypto Regulations: Hidden Pitfalls for Unwary Firms

The UK's Financial Conduct Authority has introduced proposed crypto regulations that could significantly broaden the definition of custody, potentially capturing 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 result in the loss of their pure tech exemption, necessitating full approval for arranging staking. The FCA aims to strengthen consumer protections and support fair markets with these new regulations. Notably, the guidelines address 'shadow custody' for the first time, clarifying that crypto service providers allowing theoretical overrides of client authority are considered custodians, even if they guarantee not to exert that power. The rules also mandate that stablecoin issuers must 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 intends 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 have a five-month application window, from September 30, 2026, to February 28, 2027, to apply for the new regime, with those applying during this period able to benefit from 'savings provisions' allowing them to continue operating while the regulator reviews their applications.