As part of its Crypto Roadmap, the Financial Conduct Authority (FCA) published DP25-1 in May 2025 inviting comments on how decentralised finance (DeFi) protocols might be treated under its forthcoming cryptoasset regime. The paper outlines early thinking to exclude from regulation what it calls “truly decentralised” arrangements. The meaning of “truly decentralised” is not yet defined, but its interpretation could have wide implications for the U.K. DeFi market. The proposals would carve out DeFi applications from regulation so long as a DeFi protocol is truly decentralised, while centralised DeFi would remain regulated.
MiCA’s approach is cited, noting it exempts fully decentralised activities from regulation. The FCA emphasises that decentralisation exists on a spectrum rather than in a binary centralised‑decentralised way. It acknowledges that the degree of automation or decentralisation among current DeFi services varies along a sliding scale, with many protocols evidencing at some point what regulators might view as an “identifiable intermediary” with control over operations and product features.
If a protocol’s organisation drifts toward centralised coordination—through concentrated governance rights, central treasury management or coordinated off‑chain 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 bring DeFi contributors within the FCA’s supervisory and enforcement remit as persons carrying on cryptoasset regulated activities under the RAO once amended by the draft SI. It would also reinforce a structural separation between the U.K.’s decentralised and centralised cryptoasset markets, likely resulting in a largely self‑regulated DeFi segment.
The FCA notes that it has not set a formal definition of “truly decentralised,” though DP25-1 provides considerations. Neither the FCA nor HM Treasury has yet defined when a DeFi project would be regarded as truly decentralised or who constitutes a controlling person. Once defined, the concept would likely map onto the draft SI’s list of regulated activities such as operating a trading platform, safeguarding assets, dealing, and staking. Any controlling person carrying on these activities in the U.K. would face FCA scrutiny.
Additionally, the draft SI includes extra-territorial reach for certain regulated activities when carried on in the United Kingdom for U.K. consumers, even with offshore providers. This could allow the FCA to assert jurisdiction over offshore actors where U.K. consumers are involved, potentially making controlling persons liable without a U.K. establishment.
The meaning of decentralisation has been shaped by interpretations in other jurisdictions, most prominently 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. Under the Howey test, an investment contract exists where there is an investment of money, in a common enterprise, with a reasonable expectation of profit, derived from the efforts of others.
The concept of decentralisation primarily targets the fourth prong of the Howey test. The SEC’s framework notes that an active participant providing essential managerial efforts could bring cryptoassets within U.S. securities regulation. Hinman’s 2018 articulation suggested that once a network is sufficiently decentralised, the assets may no longer represent an investment contract.
Assessing decentralisation is discussed with several indicators. Token governance through DAOs may be seen as centralised if control concentrates in a small group. Treasury management and off‑chain coordination by a single coordinated entity can signal centralisation, whereas steps like transferring IP to the community, funding open‑source development, and maintaining transparent codebases support decentralisation.
Implications for DeFi Contributors. In an ideal scenario, the FCA’s proposals would not affect genuinely decentralised DeFi contributors. In practice, most protocols are unlikely to be fully decentralised and could be brought within the amended RAO framework. Combined with varying compliance needs across jurisdictions, this may constrain the development of an unregulated DeFi market. Regulators may take cues from SEC norms, and DeFi’s global nature could limit the regulatory impact, though enforcement could shift in coming years.
While the proposals remain at the discussion stage, consultations could incentivise maintaining structurally distinct DeFi and CeFi markets or, conversely, facilitate greater DeFi integration into the broader financial system through regulated on-ramps. The direction will depend on how regulators balance innovation with consumer protection and market integrity.
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