“We’re decentralised” has become the crypto industry’s favourite regulatory defence. The assumption is that if no single entity controls a protocol, no single entity can be regulated. It’s a compelling argument in theory. In practice, the FCA is not buying it — and if your business sits anywhere near a DeFi protocol, you need to understand where the regulator is drawing the line.
The FCA’s Position
The FCA has made clear that it regulates activities, not technologies. Whether a service is delivered through a centralised platform or a smart contract is irrelevant to the question of whether it constitutes a regulated activity. If a UK person can access a service that involves dealing, arranging, advising or exchanging cryptoassets, the FCA considers that activity potentially within its perimeter — regardless of how the back end is structured.
The critical question is not “is this decentralised?” but “is there an identifiable person or entity that controls, profits from or promotes this activity in the UK?” If the answer is yes, the FCA will expect that person or entity to be authorised.
Where the Lines Are Being Drawn
Front ends and interfaces. If you operate a website, app or interface that allows UK users to access DeFi protocols — even if you didn’t build the underlying smart contracts — you may be arranging deals in cryptoassets. The FCA views the front end as the point of control and the point of regulatory contact.
Governance token holders and DAOs. If a DAO has identifiable members who vote on protocol changes, set fee structures or control treasury funds, the FCA may treat those individuals or the DAO itself as the responsible entity. “Decentralised governance” does not mean “no governance” in the FCA’s eyes.
Yield and staking products. Offering UK users the ability to stake, lend or earn yield through a DeFi protocol looks a lot like managing investments on behalf of others. If you’re marketing these services, setting the terms or taking a fee, the FCA is likely to consider that a regulated activity.
Financial promotions. Even if the protocol itself is outside the FCA’s perimeter, promoting it to UK consumers almost certainly is not. The crypto financial promotions regime applies to anyone communicating invitations or inducements to engage in crypto activity — and “the protocol is decentralised” is not a defence to a promotions breach.
What This Means for You
If your business touches DeFi in any way — operating interfaces, providing liquidity, marketing yield products, running a DAO with identifiable participants — you need a clear view of where you sit relative to the FCA’s perimeter. The worst outcome is assuming you’re outside scope and discovering otherwise when the FCA comes knocking after October 2027.
The smart move is to get a definitive answer now, while you still have time to apply through the gateway if needed.
Let’s Work It Out Together
LHI Consulting helps firms operating in and around DeFi understand their regulatory position. If there’s ambiguity, we’ll resolve it. If you need to apply, we’ll get you ready.
| Want to talk this through? We offer a free 30-minute consultation to help you understand what the FCA will expect from your firm.
Email: rm@lhiconsult.com | Web: lhiconsult.com |
This article is for general information purposes only and does not constitute legal or regulatory advice. LHI Consulting is a trading style of LHI Holdings Ltd, registered in England and Wales, No. 11496647.
