UK Financial Conduct Authority Launches DeFi Regulatory Consultations

The regulator’s proposal for decentralized finance, designated as GC26/7, clarifies that firms utilizing automated protocols are not exempt from standard compliance obligations. The FCA maintains that businesses remain responsible for meeting financial crime controls and operational resilience standards, regardless of whether they employ traditional intermediaries or decentralized smart contracts. Officials emphasized that the inherent risks in open, interoperable systems necessitate strict adherence to existing rules, such as those governing money laundering.

Simultaneously, the second consultation, CP26/36, outlines specific regulatory exemptions for activities such as proprietary trading, market-making on regulated platforms, and technical service provision. These exclusions are intended to clarify the scope of the new regime, ensuring that entities whose involvement is limited to enabling access to protocols are not unfairly burdened. The FCA also signaled flexibility for firms affected by these legislative shifts, allowing additional time for application requirements if businesses can demonstrate that regulatory uncertainty hindered their preparations. Existing crypto firms must submit authorization applications by February 28, 2027, to ensure they can continue operations during the transition period.