UK FCA opens DeFi consultations to clarify crypto rules ahead of 2027

The UK’s Financial Conduct Authority has opened two consultations to clarify how decentralized finance businesses will be regulated and which crypto activities could qualify for exemptions when the country’s new framework takes effect in October 2027.

According to the FCA’s consultation documents, the proposals address how existing financial regulations apply to firms using DeFi protocols and which services will require authorization under the incoming cryptoasset regime.

Both consultations opened on October 21 and will accept industry feedback until November 18, with the regulator expecting to publish final guidance in January 2027.

The framework is scheduled to take effect on October 25, 2027, when additional cryptoasset activities will become subject to FCA supervision.

FCA clarifies compliance requirements for DeFi businesses

The first consultation, GC26/7, focuses on financial services firms that use decentralized protocols or provide customers with access to them.

Although DeFi applications rely heavily on smart contracts and automated transactions, the FCA said regulated businesses remain responsible for meeting their existing compliance obligations when using such systems.

The proposed guidance addresses operational resilience requirements under SYSC 15A, compliance and financial crime controls under SYSC 6, and obligations arising from the UK’s Money Laundering Regulations.

According to the regulator, DeFi’s open and interoperable structure can expose firms and customers to operational failures and financial crime risks, particularly where services operate without traditional intermediaries.

The consultation provides examples of measures businesses could consider to manage these risks, but does not introduce a separate rulebook for decentralized finance.

Its focus remains on how firms can meet existing requirements while using technology that differs from conventional financial infrastructure.

A similar debate over the responsibilities of crypto businesses has emerged in France, where authorities recently proposed holding crypto platforms accountable for certain security failures involving DeFi services.

The French proposal would require cryptoasset service providers facilitating access to decentralized protocols to assess associated risks and monitor the services they make available to customers.

Which crypto activities could qualify for FCA exemptions?

The second consultation, CP26/36, examines the boundaries of the UK’s new cryptoasset regime following proposed amendments to existing legislation.

Several exclusions have been introduced through the draft Cryptoassets (Miscellaneous Amendments) Regulations 2026, covering activities that may involve digital assets without necessarily requiring FCA authorization.

Among them are temporary settlement arrangements, temporary holding of qualifying UK stablecoins during payment transactions, and certain arrangements involving assets backing those stablecoins.

The exclusions extend to proprietary trading where a business trades for itself without providing services to another party, as well as qualifying market-making activities on regulated cryptoasset trading platforms.

Technical service providers may qualify when their involvement is limited to enabling access to another company’s services or a decentralized protocol.

The proposed perimeter guidance makes clear that using smart contracts, distributed ledgers or decentralized governance does not automatically determine whether an activity requires regulatory approval.

The assessment depends on the actual service being provided and whether the person or business involved is conducting an activity covered by the regulations.

In September, the FCA published its initial perimeter guidance, explaining how businesses should assess their activities before applying for permission.

The regulator had previously outlined its authorization requirements as part of preparations to bring cryptoasset businesses under the country’s financial services framework.

FCA offers flexibility over crypto licensing applications

The regulator acknowledged that the timing of the latest legislative amendments has created uncertainty for a small number of businesses preparing their applications.

Firms affected by the technical services exclusion may receive additional time to complete certain application requirements, provided they submit an otherwise complete application within the designated window.

The FCA said this flexibility would apply where businesses can demonstrate that uncertainty surrounding the exclusion materially affected their ability to prepare an application.

Existing UK cryptoasset businesses have been able to apply for authorization since September 30, 2026, and the application window closes on February 28, 2027.

As crypto.news previously reported, firms that apply within the window may continue providing eligible crypto services while their applications are assessed, even if the regulator has not reached a decision when the framework takes effect.

However, submitting an application does not guarantee approval, and existing registration under the Money Laundering Regulations will not automatically carry over into the new system.

Businesses that miss the application window face more restrictive transitional arrangements, which generally limit eligible firms to servicing existing contracts while awaiting authorization.

Industry representatives have welcomed the opportunity to comment on the proposals while urging the regulator to maintain proportionate requirements for decentralized services.

The UK Cryptoasset Business Council has urged the FCA to establish clear regulatory boundaries and proportionate compliance requirements for decentralized services. 

The industry group warned that overly restrictive rules could push crypto businesses to move their operations outside the UK.