The Loneliness of Misunderstanding: The UK's Crypto Sakoku and the FCA's 2026 Regulations

Between 1603 and 1868, the Tokugawa shogunate imposed a strict isolationist policy on Japan known as sakoku, or "closed country" The UK's financial regulators appear set to repeat the same mistake with crypto, cutting the country off from the most innovative and dynamic ecosystems in modern finance: permissionless blockchains.

The UK is implementing rules that will make participation in the basic operations of blockchain protocols uneconomic for firms connected to the country. The outcome will be that many UK-based firms quit either the country or the business, and non-UK firms exclude UK clients. If British citizens cannot participate in basic crypto operations, they will find it impossible to play a part in developing the higher-level applications that have the potential to transform finance.

The problem stems from a misunderstanding of risk. Regulators worldwide, confronted with the novelty of crypto, adopted the mantra: same asset, same risk, same regulation. The intent was reasonable: to prevent people from issuing financial instruments onchain, calling them "coins," and sidestepping regulatory requirements. A security is a security, whatever the infrastructure on which it is issued. But if "same risk, same regulation" applies to high-risk assets, it should apply equally to low-risk ones. If the risks are genuinely different, should not the regulatory treatment also be? In the UK, apparently not.

The FCA is currently consulting on "Perimeter Guidance” regarding the implementation of The Financial Services and Markets Act 2000 (Cryptoassets) Regulations 2026 (SI 2026/102), approved by Parliament in February 2026 and due to come into force in October 2027. The Regulations extend the FCA's regulatory perimeter to cover certain crypto-related activities. Not all details of how this is to be done are yet available but the broad outlines are visible, and it is clear that a number of technology services fundamental to blockchain operation risk being regulated as financial services on the basis of little more than superficial resemblance to them. We focus on two: delegated staking, liquid staking, and non-custodial wallet provision.

How delegated and liquid staking actually work

Staking is the mechanism by which nodes in a proof-of-stake blockchain commit collateral, in the form of the protocol's native cryptocurrency, to earn the right to participate in block formation and validation. The collateral requirement deters malicious participants while honest behaviour is incentivised by the fees earned. Ethereum and some other protocols (not Solana currently) go further through "slashing": confiscating stake from nodes that demonstrably undermine protocol integrity, such as by proposing two different blocks for the same slot.

Many nodes collect stake from third parties in return for a share of rewards, a process known as delegated staking. In protocols like Solana, this delegation is governed entirely by the protocol itself: the delegator's assets never leave their own wallet and are locked by the protocol for the duration of each staking period (an "epoch" of approximately two to three days on Solana, with a reduction to around 1 day planned for later this year). 

Liquid staking addresses the illiquidity of the stake commitment. Liquid staking protocols issue a transferable token (an LST) representing the delegator's claim on their stake. LSTs have a fixed relationship with the underlying, enforced by open-source smart contract code. They are redeemable at the end of each staking period and tradeable in the meantime, allowing delegators to manage short-term liquidity needs.

The Regulations bring the activity of “Arranging cryptoasset staking” into the regulatory perimeter.  While this term is not precisely defined, the FCA’s guidance includes the example of “managing the end-to-end staking lifecycle – where a person oversees or enables a process through which qualifying cryptoassets are staked, rewards are generated, and rewards are distributed or reinvested” as an activity likely to be in scope.  This example strongly implies that delegated staking is in the FCA’s sights.  

There is an exemption for purely “technical services”, but the guidance makes it clear that this is limited to those operating validator nodes on behalf of others.  Offering any “value added services” such as “ a dashboard or other interface that provides easy access to staked assets and rewards, the compounding of rewards, identifying and recommending validators based on past performance or fees, and the offer of other additional benefits and services” would disapply the exemption.  

The Guidance also raises the possibility that staking service providers may need to seek additional approval for the activity of “safeguarding crypto assets”, although it does not expand on when this would apply or how it will relate to non-custodial staking models.  Finally, LST issuance is “likely to constitute dealing in qualifying cryptoassets”.

Why staking risk doesn't map to traditional finance 

Delegated and liquid staking bear a superficial resemblance to term deposits or money market funds. A consumer commits funds for a period of time and earns a yield. But the underlying risks are fundamentally different, and the difference matters for how they should be regulated.

As noted above, delegated stake on Solana remains in the delegator's own wallet, locked by the protocol. There is no opportunity for the operator, or a malicious third party attacking the operator, to gain control of the asset or to use it for anything other than staking. Bugs in the stake program itself remain a theoretical risk, but this is a risk inherent to the underlying protocol and is borne equally by every holder of the asset, staked or not—it is not a risk that financial services authorisation of an operator could address. Staking yield is calculated by the protocol as a function of total network transaction flow, the node's share of total stake, and its block-signing performance. The node's only discretion is the commission rate it charges on the yield.  All of these parameters are publicly visible, in real time. Switching costs between nodes at epoch boundaries are minimal.  This is unlike any financial product where the provider gains operational control of client funds and has management discretion over how they are deployed and the returns allocated.

It might be argued that the position is different for Layer 1’s that, like Ethereum, implement slashing, since, delegators face the risk of capital loss.  However, even here, market discipline provides a powerful mitigant. A delegated staking node that was slashed would suffer a devastating blow to its reputation. This assertion is borne out by the statistics.  Although slashing has been live on Ethereum since 2020, fewer than 500 validator instances out of more than 1.2 million have ever been slashed, and almost all of these cases were the result of operator configuration errors during key migrations, rather than malicious conduct. Given that a single node operator typically runs many validator instances, the number of distinct operators who have experienced slashing is smaller still.

It is equally inaccurate to characterise LST issuance as a dealing activity.  The activity of dealing as principal in the Regulation captures a person who buys, sells, subscribes for or underwrites a qualifying cryptoasset as counterparty to a client transaction. LST issuance does not fit within this scope: there is no price, no market risk, the issuer gains neither the right nor the means to dispose of the stake acquired and the smart contracts controlling the LSTs and their stake cannot become insolvent.

Of course, LSTs may expose the holder to risks coded into the smart contracts that control them.  But this is coding risk, not institutional credit or conduct of business risk. The contract code is open-source and auditable by anyone. On Solana, most providers use the same program, developed and maintained by ANZA, the lead development organisation of the Solana protocol, which is therefore well tested in live operation. 

There is also a theoretical risk of decoupling between LST and stake as happened in 2022 when stETH traded at a discount to ETH.  However, this event occurred when extreme market stress coincided with Ethereum’s transition from proof of work to proof of stake, during which, exceptionally, redemption of stake was intentionally blocked, preventing arbitrage from closing the gap.  There was no failure of the smart contract to maintain its obligations and normal destaking periods are simply too short to allow significant variations in prices to occur. 

In fact, it is debatable whether an LST even counts as a “Qualifying Cryptoasset” at all.  The Regulations specifically exclude any asset that is “solely a record of value or contractual rights, including rights in another cryptoasset.” An LST fits that definition well.  It is, in substance, a receipt acknowledging that assets have been committed to a staking protocol and evidencing the holder’s right to recover those assets plus accrued rewards. Its entire economic content is that relationship with the underlying staked asset. It has no independent yield, no independent cash flows, and no economic function divorced from the underlying stake it represents. That it also trades on secondary markets and is used as DeFi collateral does not alter its fundamental character: a warehouse receipt also trades, but remains a record of rights in the goods it represents.

The conclusion is that staking has no real parallel in traditional finance. There are no credit risks, no custody risks in the conventional sense, very limited opportunities to mislead consumers, and almost no management discretion. The FCA's legitimate concerns — adequate disclosure of unbonding periods, commission transparency, yield expectations — are real but are better addressed through targeted disclosure obligations that support market discipline. Blockchains' intrinsic transparency already provides the informational foundation for such disclosures. There is no need for financial services authorisation.

Non-custodial wallets under the FCA perimeter

The third activity entering the regulatory perimeter is non-custodial wallet provision, where wallets include transaction management tools. Non-custodial wallets are software applications running on a user's own device, often in the form of browser extensions (i.e., locally stored web pages). They manage cryptographic keys and provide tools to sign blockchain transactions, without which users would have no means to interact with the assets they hold.

The FCA states that where a firm "provides users with the means to make, place or otherwise send orders and receive confirmation that a transaction has been completed, this may amount to arranging deals in qualifying cryptoassets."  On the face of it, providing a software tool to sign and send blockchain transactions would seem to fall within that definition.  

The impact of this on wallet providers depends on the interpretation of the word “orders”, which is nowhere defined in the Regulations or the guidance.  In traditional finance, “orders” are definitionally linked to a bilateral exchange transaction at a price, and it might be argued that only tools that support these types of transactions are covered.  However, the fact that HM Treasury felt it necessary to introduce a specific exemption for one-way transfers of UK-issued Qualifying Stablecoins confirms that such transfers would otherwise be caught: you do not need an exemption for something that was never in scope.

The stablecoin exemption provides limited relief but it applies only to UK Qualifying Stablecoins.  USDC, USDT, and virtually every other stablecoin in widespread use are specifically excluded, since their issuers have not sought UK authorisation.  We therefore face the possibility that a wallet can offer tools to send a payment transaction made using a hypothetical UK-authorised stablecoin without authorisation, but must register with the FCA before those same tools can be used to make an identical payment, on identical infrastructure, using a US-regulated stablecoin like USDC.  Even if you take the view that prudential regulation of stablecoins in the UK will be so much better for consumers than its US equivalent, this has nothing to do with the wallet!

Finally, suppose you limited the regulatory scope to wallets providing tools for managing orders as understood in traditional finance: the policy would still make no sense.  A wallet's function is to construct, sign, and broadcast a message at the user's direction. The order book, the matching engine, the price-time authority, and the fill all sit inside an autonomous smart contract on an open network, of which the wallet has no means of being aware, let alone influencing. 

This is not to claim that wallet software is risk-free.  Just as for smart contracts, it may contain bugs or security vulnerabilities that could harm a user's interests.  Users may also execute bad strategies using their wallets.  However, if wallets are to be regulated for this reason, then so too should be the RPC providers that route transactions, data dissemination services, block explorers, hardware wallet manufacturers, and internet browsers, each of which also plays a role in providing “the means to make, place or otherwise send orders and receive confirmation…”. In effect, the UK is proposing to regulate postmen for the content of the letters they carry.  

What FCA authorisation will cost UK validators

Firms that find themselves within the regulatory perimeter will face significant obligations. These could include requirements to establish a UK legal presence, implement Senior Managers and Certification Regime (SMCR) governance, hold regulatory capital, adopt an operational resilience framework, and comply with Consumer Duty rules.

To illustrate the impact of these obligations, consider a Solana node with approximately 1.35 million SOL delegated to it, placing it at the lower end of the top decile of validators ranked by stake: a meaningful second-tier operator. Given current network economics, it earns revenue primarily through leader slot priority fees and a 10% commission on Jito MEV tips, generating approximately $250,000–$400,000 per year.

Obtaining FCA authorisation for such an operator, assuming it is already UK-based, would give rise to estimated one-off costs of approximately $70,000–$170,000, including application fees, legal and advisory costs, compliance infrastructure, insurance, and management certification. Regulatory capital of $100,000–$200,000 may need to be raised separately. Ongoing compliance costs would likely run between $65,000–$155,000 per year. In aggregate, a minimum of 20% of revenue in year zero and 15–30% annually thereafter, before any additional headcount to meet SMCR requirements.

The consequences are straightforward. UK-based operators will reconsider their location or whether to remain in business. Overseas operators will geofence the UK rather than incur the compliance burden for a sub-scale market. British citizens seeking wallet services from non-UK providers will find those providers have blocked them.

The consequences of UK divergence from the EU, US, and Switzerland

The UK government has stated its ambition to establish the country as a global hub for digital assets. That ambition will not be realised through the private institutional chains that traditional regulation is designed for. The real innovation is happening on public permissionless networks, where advances in latency, finality, market microstructure, confidentiality, and development cost are announced almost weekly.  Participation as node operators, liquidity providers, and infrastructure developers is how firms build the expertise to compete in the higher-order applications that will define the next generation of finance.

Yet the UK approach is significantly different, more restrictive, and more burdensome than that of other major jurisdictions. The EU, Switzerland, and the US all exempt non-custodial staking from regulation, and even jurisdictions like Singapore, which take a more restrictive approach, seek to regulate access rather than service providers. The picture is even more stark for wallet providers, where the UK’s approach is without international precedent.

Regulation that makes basic participation uneconomic does not protect UK consumers. It merely ensures that the firms building the future of finance build it somewhere else. The era of digital sakoku is upon us.