The UK Financial Conduct Authority (FCA) has released Discussion Paper DP25/1 outlining its future approach to regulating cryptoasset activities. The scope is broad, covering centralized platforms, retail access, staking, lending, and – critically – decentralised finance (DeFi).
Below, we break down the five most important takeaways for crypto industry participants and why this paper could reshape the future of permissionless innovation in the UK.
1. “Same Risk, Same Regulation” – DeFi Enters the Regulatory Perimeter
The FCA confirms in provisions 7.4 to 7.10 that DeFi will not be exempt from its upcoming regulatory framework. This means that protocols governed by DAOs or smart contracts will be treated similarly to centralized entities under a technology-neutral interpretation of financial regulation.
Key takeaway:
The paper proposes that even without a clear “controlling person,” a protocol may still fall under regulatory oversight if it produces the same financial outcomes as centralized firms.
Implication:
This could impose TradFi-style compliance on decentralised networks that are not operationally capable of meeting such standards – risking exclusion from the UK market.
2. UK Entity Required for Retail Access
The FCA proposes that foreign crypto trading platforms (CATPs) must establish UK-based legal entities to serve retail customers, regardless of where their core operations are located.
Key takeaway:
Retail access should be conducted under the oversight of UK regulators, with onboarding, KYC/AML, and support functions located locally.
Implication:
While intended to ensure retail protection, this requirement may create barriers for international platforms, particularly DeFi protocols with no centralized legal presence.
3. Retail Ban on Crypto Lending and Borrowing?
One of the most controversial proposals is a potential ban on retail access to crypto lending and borrowing products, irrespective of whether these are offered by centralized custodians or via DeFi protocols.
Key takeaway:
The FCA signals that retail involvement in crypto credit products could pose unacceptable risks, following the failures of platforms like Celsius and BlockFi.
Implication:
This approach fails to distinguish between opaque centralized lending and transparent, overcollateralized DeFi systems like Aave or Compound, where many risk factors are mitigated on-chain.
4. Applying TradFi Rules to Non-Custodial Systems
The FCA proposes imposing creditworthiness checks, best execution rules, and client protection standards that mirror MiFID and CONC requirements – even on protocols with no custody, discretion, or central operator.
Key takeaway:
Compliance structures from traditional finance are being mapped onto algorithmically governed, open-source protocols.
Implication:
For DeFi builders, this could mean facing unrealistic regulatory burdens – or being forced to recentralize just to maintain compliance, undermining the architectural advantage of DeFi.
5. Market Consolidation Risks
A recurring theme in DP25/1 is the high cost of compliance, particularly for small or decentralised actors. Without a proportionate, risk-based approach, the regulatory framework may entrench large custodial incumbents and squeeze out innovators.
Key takeaway:
Uniform rules for all firms – regardless of scale or business model – may produce anti-competitive effects.
Implication:
The UK could lose its competitive edge in crypto by forcing early-stage or decentralised projects offshore, diminishing both consumer protection and innovation leadership.
Final Thoughts: A Call for Proportionate and Differentiated Regulation
While the FCA’s Discussion Paper DP25/1 demonstrates a serious attempt to bring clarity to the crypto sector, its approach to DeFi and non-custodial innovation remains problematic.
Validvent supports a technology-informed, proportionate regime – one that fosters responsible retail participation without sacrificing decentralisation.
At Validvent, we believe the path forward requires collaborative engagement between regulators, builders, and the public to craft a framework that protects users while enabling innovation.
