UK crypto rules risk creating ‘digital isolation,’ policy report warns

A new UK policy report from the Solana Research Institute has warned that upcoming crypto regulations could push validators, staking providers, and wallet firms out of the country. The authors claim it will create what they describe as a form of "digital isolation" from permissionless blockchain networks. The report, titled The Loneliness of Misunderstanding: The UK's Crypto Sakoku and the FCA's 2026 Regulations, argues that the UK's proposed framework risks treating core blockchain infrastructure providers like traditional financial intermediaries. The paper compares Japan's historical "sakoku" isolationist policy to the approach. It claims the UK could effectively cut itself off from innovation happening across public blockchain ecosystems. Report says FCA misunderstands staking and wallet infrastructure The report focuses heavily on the FCA's proposed treatment of: delegated staking, liquid staking, and non-custodial wallet services. According to the authors, delegated staking on networks like Solana differs fundamentally from traditional financial products. This is because users retain control of their assets while protocols manage staking logic directly onchain. The paper argues the risks associated with staking infrastructure do not map cleanly onto existing financial regulation models built around custody, credit exposure, and discretionary asset management. The report also criticized the FCA's interpretation of non-custodial wallets. It warns that software providers that help users sign and broadcast transactions could fall within the regulatory perimeter. The authors compared the approach to "regulating postmen for the content of the letters they carry." Critics warn firms may relocate or geofence UK users The paper estimates that FCA authorization could consume between 15% and 30% of annual revenue for some mid-sized Solana validator operators, after accounting for ongoing compliance costs. The report argues the burden could: push UK firms offshore, encourage overseas firms to geofence British users, and reduce UK participation in permissionless blockchain infrastructure. The authors also claimed that the UK approach appears more restrictive than those emerging in other countries. Debate grows over how blockchain infrastructure should be regulated The report reflects a broader industry debate over whether blockchain infrastructure providers should be regulated like traditional financial institutions. Critics argue that validators, staking providers, and wallet software often operate more as technical infrastructure than as financial intermediaries. Regulators, meanwhile, continue to examine whether consumer protection and operational risks justify broader oversight of crypto services. The FCA's crypto perimeter guidance remains under consultation ahead of the UK's planned implementation timeline in October 2027. Final Summary A UK policy report warned that proposed crypto rules could push validators, staking providers, and wallet firms offshore. The paper argued that the FCA risks treating blockchain infrastructure providers like traditional financial intermediaries despite major operational differences.