DeFi

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The UK Financial Conduct Authority is sharpening its approach to decentralised finance as the country prepares for a much broader regulatory regime covering cryptoasset businesses.
The regulator has opened a <a href="https://www.fca.org.uk/publications/guidance-consultations/gc26-7-decentralised-finance-guidance" rel="noopener noreferrer nofollow">consultation on guidance for firms providing financial services using decentralised finance</a>. Rather than creating a separate regulatory system specifically for decentralised protocols, the FCA is focusing on how existing obligations around operational resilience, financial crime and anti-money laundering should apply when regulated companies interact with DeFi.
The move offers an important preview of how the UK intends to treat decentralised financial infrastructure once its new crypto regime becomes fully operational.
<h2 id="fca-turns-its-attention-to-defi">FCA Turns Its Attention to DeFi</h2>
The FCA published its DeFi guidance consultation, known as GC26/7, on October 21.
The proposed guidance is primarily aimed at FCA-regulated firms that use DeFi while carrying out financial services and are already subject to operational resilience, compliance or anti-money laundering requirements.
It could also affect companies planning to enter the regulated UK crypto market.
The FCA describes DeFi broadly as financial services enabled by distributed ledger technology, often involving automation, interoperable systems and, in some cases, the absence of a traditional financial intermediary.
Those characteristics can create efficiencies, but they also introduce risks that are harder to manage using conventional financial controls.
Smart contract failures, dependencies on external protocols, blockchain infrastructure outages and limited visibility over counterparties can all complicate a firm's ability to meet regulatory obligations.
The regulator therefore wants companies interacting with DeFi to understand where responsibility remains with the regulated business even when part of a service is executed through decentralised infrastructure.
<h2 id="decentralisation-does-not-automatically-remove-regulation">Decentralisation Does Not Automatically Remove Regulation</h2>
One of the most significant elements of the FCA's developing approach is that decentralisation itself does not determine whether an activity falls outside regulation.
The FCA is also consulting separately on its <a href="https://www.fca.org.uk/publications/consultation-papers/cp26-36-cryptoasset-perimeter-guidance" rel="noopener noreferrer nofollow">updated cryptoasset regulatory perimeter guidance</a>, following recent legislative changes.
Under the proposed approach, regulators will look at the actual activity taking place, whether a person or business is providing a regulated service and whether a specific exemption applies.
That means simply using smart contracts or decentralised protocols does not necessarily remove a financial service from the regulatory perimeter.
However, the UK's framework also recognises that purely technical services should not automatically be treated in the same way as financial intermediaries.
The latest perimeter consultation specifically addresses exclusions covering technical services that merely enable access to services provided by a third party or to a decentralised protocol.
This distinction could become particularly important for wallet interfaces, infrastructure providers, protocol front ends and other businesses operating between users and decentralised applications.
<h2 id="operational-resilience-becomes-a-major-defi-issue">Operational Resilience Becomes a Major DeFi Issue</h2>
Operational resilience is a central part of the FCA's proposed guidance.
Traditional financial institutions generally control much of the infrastructure required to deliver their services. DeFi can distribute those dependencies across blockchains, smart contracts, bridges, validators, oracles and third-party technology providers.
A regulated firm may therefore rely on systems it does not directly operate.
The FCA wants firms to assess these dependencies when considering their ability to continue delivering important business services during disruption.
Scenario testing could include smart contract exploits, blockchain congestion, protocol failures or the loss of critical third-party infrastructure.
The central regulatory principle remains familiar: outsourcing or decentralising technology does not necessarily outsource regulatory responsibility.
For companies integrating DeFi products into regulated financial services, this could require more extensive technical due diligence before adopting protocols.
<h2 id="financial-crime-controls-remain-central">Financial Crime Controls Remain Central</h2>
Financial crime represents another major focus of the <a href="https://www.fca.org.uk/publications/guidance-consultations/gc26-7-decentralised-finance-guidance" rel="noopener noreferrer nofollow">FCA's proposed DeFi guidance</a>.
Regulated firms must still consider customer due diligence, transaction monitoring, suspicious activity reporting and other obligations where applicable.
This can be challenging in permissionless systems where transactions occur directly between blockchain addresses and participants may interact with protocols without traditional account structures.
The regulator is not proposing a single compliance model for every DeFi interaction.
Instead, firms are expected to assess their individual exposure and build controls proportionate to the risks involved.
This could increase demand for blockchain analytics, wallet screening and on-chain monitoring systems among companies seeking UK authorisation.
The FCA has also recently proposed broader <a href="https://www.fca.org.uk/publications/consultation-papers/cp26-38-financial-crime-guide-updates" rel="noopener noreferrer nofollow">updates to its Financial Crime Guide</a>, including changes designed to reflect risks associated with cryptoassets ahead of the new regime.
<h2 id="uk-crypto-regulation-is-moving-toward-full-fca-oversight">UK Crypto Regulation Is Moving Toward Full FCA Oversight</h2>
The DeFi consultation forms part of a much larger change in British crypto regulation.
Crypto firms can already begin applying for FCA authorisation under the forthcoming regime.
According to the FCA's <a href="https://www.fca.org.uk/firms/new-regime-cryptoasset-regulation/what-you-need-to-do" rel="noopener noreferrer nofollow">guidance for firms preparing for the new framework</a>, the application period opened on September 30, 2026 and runs until February 28, 2027.
The new regulatory framework itself is scheduled to take effect on October 25, 2027.
It will bring several crypto activities into the FCA's regulatory perimeter, including operating crypto trading platforms, safeguarding cryptoassets, arranging deals and certain staking-related activities.
The FCA's <a href="https://www.fca.org.uk/publications/policy-statements/ps26-18-cryptoasset-perimeter-guidance" rel="noopener noreferrer nofollow">final cryptoasset perimeter guidance</a> also makes clear that existing registrations and permissions will not automatically convert into authorisation under the new framework.
Companies operating within the new perimeter will therefore need to demonstrate that they meet the FCA's requirements before carrying out regulated crypto activities in the UK.
<h2 id="the-uk-is-drawing-a-more-detailed-line-around-defi">The UK Is Drawing a More Detailed Line Around DeFi</h2>
The latest consultations show that the UK's crypto framework is becoming considerably more granular.
Rather than attempting to regulate every decentralised protocol directly, policymakers appear to be concentrating on regulated businesses that provide access to, rely on or build services around decentralised infrastructure.
At the same time, technical-service exclusions indicate an effort to avoid capturing software providers simply because their technology connects users to decentralised systems.
The balance will matter.
Rules that are too broad could make it difficult for regulated firms to experiment with DeFi infrastructure, while rules that are too narrow could allow financial activity to move outside established consumer protection and financial crime controls.
The FCA is accepting responses to both its DeFi guidance consultation and its updated cryptoasset perimeter consultation until November 18.
It plans to publish the final DeFi guidance in January 2027, ahead of the full UK crypto regulatory regime taking effect later that year.
For crypto businesses targeting the UK market, the direction is becoming increasingly clear: decentralised technology may change how financial services are delivered, but it does not automatically eliminate the regulatory responsibilities attached to them.
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

UK FCA Targets DeFi Risks as New Crypto Regulatory Framework Takes Shape

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