UK Crypto Regulations: Hidden Pitfalls for Firms

The UK's Financial Conduct Authority has introduced proposed crypto regulations that may broaden the definition of custody, potentially impacting platforms and software providers who do not consider themselves custodians. The FCA's Cryptoasset Perimeter Guidance, published recently, outlines 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 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 reward-compounding tools may necessitate full approval for arranging staking. The FCA has also 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. Stablecoin issuers are also subject to stringent requirements, with issuance only considered legal 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 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 more rigorous approval regime under the UK's Financial Services and Markets Act. Firms that fail to apply for approval during the designated five-month window, from September 30, 2026, to February 28, 2027, may face fines, suspensions, or permanent closure.