FCA opens two consultations on DeFi and authorization exemptions as UK crypto firms race to apply before the February 28 deadline

The UK’s Financial Conduct Authority opened two consultations on October 21 that spell out how DeFi businesses must meet existing compliance rules and which crypto activities could be exempt from authorization, as firms face a February 28, 2027 deadline to apply under the new regime.

FCA targets DeFi compliance and financial crime risks

The first consultation, GC26/7, examines how existing financial services requirements apply to businesses using decentralized protocols. Rather than establishing an entirely separate regulatory framework for DeFi, the FCA is proposing guidance to help firms interpret their existing obligations when delivering services through blockchain-based systems.

The document focuses on operational resilience, financial crime controls and compliance with the UK’s Money Laundering Regulations. It also discusses requirements under SYSC 15A, which addresses operational resilience, and SYSC 6, which covers compliance and financial crime systems and controls.

The central issue is whether businesses can adequately manage risks when their services depend on smart contracts, automated transactions and infrastructure that may operate without conventional intermediaries.

Decentralized applications can introduce vulnerabilities involving software failures, service disruptions and illicit financial activity. These risks can become more complicated when multiple protocols interact or when businesses provide customers with access to third-party decentralized services.

The FCA’s proposed guidance offers illustrative measures that firms may consider when managing these exposures. However, the consultation does not create a standalone DeFi rulebook or suggest that every decentralized protocol automatically falls within the regulator’s direct supervision.

Instead, the proposals explain how existing requirements should be applied to firms conducting financial services through decentralized infrastructure.

The regulator’s broader approach is consistent with its stated objective of protecting consumers while supporting competition and responsible innovation. In September 2026, the FCA published perimeter guidance outlining which cryptoasset activities would require permission under the incoming regime. The latest consultations build on that work by addressing additional legislative changes and practical questions affecting decentralized services.

UK crypto rules could exempt specific activities from authorization

The second consultation, CP26/36, addresses the regulatory boundaries of the forthcoming cryptoasset framework. It seeks to clarify exclusions introduced through the draft Cryptoassets (Miscellaneous Amendments) Regulations 2026, helping businesses establish whether their activities fall within the scope of regulated services.

Among the activities covered are certain temporary settlement arrangements, temporary holdings of qualifying UK stablecoins connected with payment transactions, and arrangements involving assets held to back those stablecoins.

The proposed exclusions also address proprietary trading, where a business trades for its own account rather than providing a service to another party, as well as qualifying market-making activities on specified cryptoasset trading platforms.

Some technical service providers could also fall outside the authorization perimeter when their role is limited to enabling access to services supplied by another business or to a decentralized protocol.

These distinctions matter because providing the technology that connects users to a service is not necessarily equivalent to operating the regulated service itself.

The FCA’s proposed guidance emphasizes that using smart contracts, distributed ledger technology or decentralized governance does not, by itself, determine whether authorization is required. The assessment depends on the actual activity being performed and whether it meets the relevant legal definition.

For businesses, this means examining their commercial models, contractual responsibilities and customer-facing services rather than relying solely on claims that their technology is decentralized.

The UK Crypto Rules consultations could therefore influence how crypto companies structure their operations, particularly those combining software development, transaction processing and financial services. However, an exclusion must be assessed against the applicable legislation; businesses should not assume that all technical providers, market makers or stablecoin-related arrangements qualify automatically.

Authorization deadline approaches as FCA offers limited flexibility

The consultations arrive as existing cryptoasset businesses prepare for a new authorization process. According to the FCA, the application window opened on September 30, 2026, and closes on February 28, 2027. Eligible firms seeking to benefit from the transitional arrangements must submit their applications within this period.

The regulator has acknowledged that the timing of recent legislative amendments may have created uncertainty for a small number of businesses, particularly those assessing whether they qualify for the technical services exclusion.

In response, the FCA has indicated that it may allow affected firms additional time to complete certain elements of their applications relating to arranging permission. This flexibility is conditional: a firm must demonstrate that uncertainty surrounding the exclusion materially affected its ability to submit a complete application within the designated period, and it must submit an otherwise complete application on time.

The concession is not a blanket extension of the application deadline. Businesses uncertain about their status are encouraged to engage with the FCA’s pre-application support service.

Firms must also recognize that existing registration under the Money Laundering Regulations does not automatically translate into authorization under the new Financial Services and Markets Act regime. Applications remain subject to regulatory assessment, and submitting one does not guarantee approval.

Those that miss the relevant application window may face more restrictive transitional arrangements, potentially limiting their ability to enter new business relationships while continuing eligible existing contracts.

The UK Crypto Rules transition therefore presents a practical challenge: businesses must establish which activities they conduct, identify the permissions they need and prepare applications before the deadline.

Industry participants have also stressed the importance of proportionate requirements for decentralized services. The UK Cryptoasset Business Council has called for clearer regulatory boundaries, warning that excessively restrictive obligations could encourage some companies to relocate their operations abroad. That concern reflects a wider policy challenge facing regulators: strengthening consumer safeguards without unnecessarily restricting legitimate innovation.

With feedback closing on November 18 and final guidance expected in January 2027, firms have a limited period to influence how the proposals are implemented. The outcome will help shape the compliance landscape ahead of October 25, 2027, when the UK’s expanded cryptoasset regulatory regime is scheduled to take effect.