Opinion by Katie Harries, head of policy, Europe, Coinbase
The United Kingdom is approaching a choice that could define its financial future: should decentralized finance (DeFi) be allowed to develop through regulated gateways or will it be constrained to a silo?
This is not just relevant to crypto enthusiasts; it goes to the future of capital markets, the competitiveness of the City and the UK’s ability to shape the next generation of financial infrastructure.
DeFi is software that lets people borrow, lend and trade directly with one another without relying on an intermediary like a bank or broker. It works less like a financial institution and more like the internet, promising cheaper, faster financial services that are accessible to everyone, anytime.
While DeFi will always be accessible through open-source or decentralized routes, regulated providers can also offer a route to DeFi, allowing customers to engage with the technology while receiving key information about the services they are accessing and the risks they should be aware of.
However, the Financial Conduct Authority’s (FCA) proposed crypto rules could make this impossible. The FCA will expect regulated platforms to ensure customer orders are only executed on an FCA-authorized venue. While this is designed to prevent overseas firms from illegally accessing the UK market, it also risks blocking off access to DeFi because the decentralized protocols and exchanges where users execute orders do not have a person behind them who could become authorized.
Overview of FCA’s cryptoassets regime policy statements. Source: FCA
No rule explicitly says that firms cannot offer DeFi integrations to their customers; however, the FCA has made clear that it is not seeking to provide rules specific to these products, opting instead to apply the same rules as to fully centralized trading. The effect could be a de facto ban.
From October 2027, regulated platforms may no longer be able to provide customers access to DeFi services unless the FCA changes its approach.
The government has pledged it wants the UK to “lead the world on digital assets.” It will struggle to realize this ambition if British firms are cut off from the decentralized infrastructure digital asset markets are built on.
Related: UK FCA sets crypto authorization guidance ahead of September application window
DeFi is becoming part of the next financial infrastructure
Regulators in other jurisdictions recognize the opportunities and are exploring ways to enable DeFi innovation. In the European Union, the European Securities and Markets Authority has proposed allowing regulated firms to provide access to DeFi, saying it could “allow innovation in decentralized finance in a regulated and transparent environment.”
In September, the United States Securities and Exchange Commission granted an “Innovation Exemption” for the trading of tokenized stocks peer-to-peer, using automated trading systems and liquidity pools.
In short, the US and EU are exploring how traditional finance and DeFi infrastructure can work together. The UK should be exploring the same potential before it closes off this option completely.
Onchain tokenized finance cannot reach its full potential if it is confined to closed and fragmented systems that struggle to interact with the decentralized technology that underpins them.
A de facto ban may push DeFi beyond the regulator’s reach
The UK has set out its first full rulebook for crypto regulation. From Oct. 25, 2027, firms offering crypto services to UK customers will need authorization from the FCA. The FCA is now consulting on guidance on how its rules will apply to firms that provide financial services that use or interact with DeFi.
Potential concerns around DeFi integrations are threefold. First, a customer using a familiar regulated platform may not realize when they have moved into an environment where the usual protections do not apply. Second, certain firms could use DeFi integrations to avoid regulatory obligations. Third, DeFi could bring risks related to financial crime and market resilience.
The UK wants to lead the world on digital assets. Source: Gov.uk
But these risks point to the need for clear information for consumers and responsibilities for firms — not a prohibition.
A de facto ban would produce the opposite of its intended effect. It would not eliminate DeFi. Instead, it would push more activity beyond the FCA’s practical visibility and reduce regulated firms’ ability to shape how customers interact with it.
Regulated platforms can provide a useful point for supervision. They can make clear to customers when they are leaving a regulated environment and require their consent before allowing this. Regulated firms can also curate access to selected protocols, assess operational and governance risks, and report incidents and usage to regulators.
Regulate the gateway, not the technology
The UK already recognizes, in other areas of finance, that…
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