From Cointelegraph · By Katie Harries
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.”