As part of its “Crypto Roadmap”, the Financial Conduct Authority (FCA) published a discussion paper (DP25/1) in May 2025 inviting comments on, among other things, how decentralised finance (DeFi) protocols might be treated under its forthcoming cryptoasset regulatory regime. The discussion paper outlined the FCA’s early thinking on excluding from regulation what it calls “truly decentralised” arrangements. The meaning of “truly decentralised” is yet to be defined but its interpretation will have wide implications for the U.K. DeFi market.
DP25/1’s DeFi chapter reflects the longstanding industry distinction between “centralised” and "decentralised" offerings. Centralised finance (CeFi) refers to incorporated businesses providing cryptoasset-related financial services, often with fiat currency on-ramps, such as exchanges, brokers or custodians, and typically with conventional governance structures and identifiable controlling persons. DeFi protocols, by contrast, operate autonomously via open-source smart contracts on blockchains, which are developed by loosely associated contributors with no obvious legal owner or central controller.
The proposed changes to the U.K. cryptoasset regulatory regime in DP25/1 would sharpen this distinction by explicitly carving out DeFi applications from the scope of its regulations, so long as a DeFi protocol is truly decentralised. On one level, the proposals aim to encourage a sustainable CeFi industry increasingly intertwined with traditional finance. On another, the U.K.’s regulatory perimeter would permit an entirely unregulated DeFi ecosystem transacting solely in cryptoassets, as long as it is truly decentralised. We note this approach broadly aligns with the EU's Markets in Crypto-Assets Regulation (MiCA), which in Recital 22 exempts fully decentralised activities from regulation.
For reference, HM Treasury laid before Parliament, on 15 December 2025, the final version of the new statutory instrument (draft SI) which will deliver the U.K.’s financial services regime for cryptoassets. We plan to post about this development (and the corresponding FCA consultation papers) in the coming weeks.
The Effect of a Carve-Out for DeFi
The critical caveat the FCA identifies is that decentralisation exists on a spectrum. The FCA acknowledges in DP25/1 that “the degree of automation or decentralisation amongst current DeFi services varies on a sliding scale, rather than in a binary centralised-decentralised way.” At one end are truly automated protocols requiring no individual or entity whom the FCA could consider a “clear controlling person”. However, in practice most protocols fall somewhere along this spectrum, having evidenced at some point in their life cycle what the FCA might consider an “identifiable intermediary or entity that has control over business operations and product features.”
If a protocol's organisation drifts toward centralised coordination – e.g. through concentrated governance rights, central treasury management or coordinated off-chain commercial decision-making – it risks having identifiable controlling persons. The FCA proposes that such partially decentralised protocols would be subject to the “same set of requirements” applying to CeFi companies. The proposed approach would have the likely effect of bringing contributors within the FCA's supervisory and enforcement remit as persons carrying on cryptoasset regulated activities as set out in Chapter 2B of the U.K.’s Regulated Activities Order (RAO) once amended by the draft SI.
This approach has two principal consequences. First, DeFi protocols and their contributors would need to assess whether their activities fall within the proposed regime’s scope. The FCA notes contributors already face this assessment under existing frameworks, including financial promotions rules. Second, the approach reinforces structural separation between the U.K.’s decentralised and centralised cryptoasset markets, which would likely result in a DeFi segment that remains largely self-regulated. Contributors would be incentivised to preserve decentralised governance and operational structures to remain outside the FCA’s regulatory perimeter.
What Does "Truly Decentralised" Mean?
The FCA has not set out a formal definition of “truly decentralised”, although DP25/1 provides considerations. Specifically, neither the FCA nor HMT has yet defined when a DeFi project would be regarded as “truly decentralised”, what constitutes “controlling person(s)” in that context or how it would enforce its regime against projects falling short of this standard.
Once defined, this concept would likely map onto the draft SI’s list of regulated cryptoasset activities (e.g. operating a qualifying cryptoasset trading platform, safeguarding qualifying cryptoassets, dealing in qualifying cryptoassets, arranging deals and staking). Any “controlling person(s)” carrying on these activities by way of business within the U.K. would face FCA scrutiny.
Significantly, the draft SI includes extra-territorial reach for certain regulated cryptoasset activities, deemed to be carried on “in the United Kingdom” if involving U.K. consumers, even with overseas service providers. For insufficiently decentralised DeFi protocols, the FCA could therefore assert jurisdiction over offshore actors where U.K. consumers are involved, potentially making “controlling person(s)” liable even if they lack a U.K. establishment.
The U.S. “Decentralisation” Precedent
The meaning of “decentralisation” has been shaped by interpretations in other jurisdictions, most prominently by the United States. The U.S. Securities and Exchange Commission (SEC) has exerted global influence through the application of the Securities Act of 1933 and the Securities Exchange Act of 1934 to cryptoassets. This regulatory reach is enabled by the dominance of U.S. cryptoasset markets and the concentration of DeFi developers under U.S. jurisdiction.
Since Congress’s purpose in enacting these Acts was to regulate transactions based on their underlying economic realities rather than their form, determining whether the securities laws apply to a cryptoasset transaction requires assessing whether the transaction constitutes an “investment contract” under the Howey test. Under Howey, an “investment contract” exists where there is: (1) an investment of money; (2) in a common enterprise; (3) with a reasonable expectation of profit; (4) derived from the efforts of others. The concept of decentralisation primarily targets the fourth prong of the Howey test.
According to the SEC’s Strategic Hub for Innovation and Financial Technology’s published Framework for “Investment Contract” Analysis of Digital Assets, where an “active participant” — a promoter, sponsor or other third party — provides essential managerial efforts that affect the success of the enterprise, and investors reasonably expect to derive profit from those efforts, this fourth prong of the Howey test is met, potentially bringing cryptoassets within the scope of U.S. securities regulation.
However, these cryptoassets may not remain within that scope forever. The concept that digital assets can transition out of securities status once their underlying networks become decentralised was articulated in a June 2018 speech by former Director of the Division of Corporation Finance at the SEC, William Hinman (and subsequently reaffirmed by current SEC Chairman Paul Atkins at the Philadelphia Federal Reserve Conference on Nov. 12, 2025) observing that: “If the network on which the token or coin is to function is sufficiently decentralised—where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts—the assets may not represent an investment contract.” DP25/1 draws clear parallels with this U.S. articulation of “decentralisation”.
Assessing Decentralisation
In the absence of a clear legal test from HM Treasury or guidance from the FCA, there are a number of factors which might indicate the existence of active participants, which in turn suggest that a protocol may not be sufficiently decentralised:
- Token governance: decentralised networks make design decisions through token-holder votes via decentralised autonomous organisations (DAOs). Regulators may view governance as centralised if token distribution gives effective control to a small group rather than being sufficiently dispersed.
- Treasury management: control over protocol treasuries (e.g. funds generated by transaction fees) can indicate centralisation if managed directly by core teams rather than through publicly accessible DAOs.
- Off-chain coordination: decentralisation is shaped by how off-chain activities are organised. If business development, marketing or governance functions are driven by a single coordinated entity, this may indicate centralisation and thus a “controlling person”. Steps to decentralise off-chain decision-making may include transferring intellectual property rights to the community, funding independent development through DAO-issued grants and maintaining open-source codebases.
Implications for DeFi Contributors
In an idealistic scenario, the FCA's proposals would not impact genuinely decentralised DeFi contributors. In practice, most protocols will likely fall short of full decentralisation and could therefore be brought within the amended RAO and associated FCA framework. Combined with varying compliance needs across multiple jurisdictions, this may restrict development of an unregulated DeFi market.
In determining where a DeFi protocol lies on the spectrum of decentralisation, the FCA may take inspiration from the norms established by the SEC. Given DeFi protocols operate without regard to jurisdiction – every user interacts with the same smart contract regardless of location – a divergent interpretation of ‘decentralisation’ may have limited impact on the direction of DeFi development. That is particularly acute given the significance of the U.S. market. Indeed, the FCA, and respondents to its discussion paper, are likely to take note of changes to enforcement approaches in the U.S. following the new administration that suggest a broader trend toward more accommodating crypto regulation.
While the FCA's proposals remain at the discussion stage, consultations could either incentivise maintenance of structurally distinct DeFi and CeFi markets, or conversely facilitate greater DeFi integration into the broader financial system through regulated on-ramps.
