FCA draws narrow line around crypto technical-service carve-out

The UK Financial Conduct Authority has proposed a narrow reading of a new technical-services exclusion for crypto businesses, drawing a line between software that merely connects a user to another provider or decentralized protocol and services that substantively shape a transaction. The consultation opened October 21 and matters now because the authorization window for the UK’s broader crypto regime is already running.

Under draft guidance in consultation paper CP26/36, an eligible provider would not need permission for the regulated activity of arranging deals in qualifying cryptoassets when its role is confined to non-discretionary technical access. The exclusion is not a blanket exemption for wallets, interfaces, aggregators, automated systems or products marketed as decentralized finance.

Software alone does not settle the classification

The FCA’s proposed test focuses on what a service does in practice, not whether it uses code, smart contracts or an algorithm. Indicators of discretion include choosing among counterparties, protocols, liquidity sources or transaction routes; changing material terms; ranking options through a qualitative assessment; or promising an optimized result.

Predetermined processing may point the other way when a user selects the provider and transaction terms, instructions pass through without alteration and identical inputs ordinarily produce identical outputs. Even then, the agency says no single factor decides the outcome. Software can implement judgments made earlier by its operator, while a non-discretionary function may still amount to substantive intermediation.

The carve-out is also structurally limited. It applies to arranging activity, not dealing, financial promotions or anti-money-laundering obligations. The technical provider must be neither an authorized person nor a payment-service provider. Where access is to a third party rather than a decentralized protocol, that third party must be authorized or exempt for the relevant regulated activity—not merely authorized for something else.

Settlement and stablecoin exclusions have separate boundaries

CP26/36 also proposes guidance for temporary settlement, UK qualifying stablecoin payments and backing assets, proprietary trading, market making and certain central-securities-depository arrangements.

For temporary safeguarding used only to settle an already-agreed transaction, the FCA says “temporarily” is undefined but is unlikely to require more than 24 hours from the point the provider obtains the necessary control. That 24-hour period is the regulator’s proposed interpretation, not a statutory maximum, and it does not automatically apply to the separate exclusion for temporarily holding a UK qualifying stablecoin for a payment.

The stablecoin provisions are narrower than a general exemption for dollar- or pound-linked tokens. They apply to a “UK qualifying stablecoin” issued within the relevant regulated activity by a firm with the required UK permission. The draft also keeps lending and borrowing, safeguarding rules, and other activities in scope where their separate conditions are met.

A consultation, not a live safe harbor

The FCA is accepting comments through November 18. Existing UK crypto businesses seeking transitional protection must submit applications during the window that opened September 30, 2026 and closes February 28, 2027. The wider regime is scheduled to start October 25, 2027.

The regulator says it may give limited extra time to complete arranging-permission material when uncertainty over the late technical-services exclusion materially affected an otherwise complete application. That is targeted forbearance, not an extension of the application window or permission to operate without authorization.

Important pieces remain unsettled as of Coinburn’s October 23 publication. The underlying Miscellaneous Amendments Regulations remain a draft instrument, and the consultation cannot change the statutory perimeter; it only states the FCA’s proposed interpretation. The FCA webpage says final guidance is targeted for January 2027, while the consultation paper says spring 2027. Until the instrument is made and final guidance appears, firms cannot treat the proposed examples as a definitive safe harbor.