DeFi Risk Management and AML Compliance:
What ADGM's Proposed Guidance Means
ADGM’s proposed guidance shows why regulated firms need risk management and financial crime frameworks that evolve alongside decentralised finance.
Decentralised finance (DeFi) is changing how financial services can be accessed, delivered and managed. Through blockchain networks and smart contracts, DeFi protocols can facilitate financial activities without relying on the traditional intermediaries found in conventional financial systems.
However, these new models also introduce risk considerations that financial institutions and compliance teams need to understand.
On 6 October 2026, the Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Market (ADGM) published Consultation Paper No. 5 of 2026, inviting feedback on proposed DeFi Risk Management Guidance. The proposals set out the FSRA’s expectations for how Authorised Persons and Recognised Bodies should identify, assess, monitor and manage risks arising from their engagement with DeFi protocols and venues.
The guidance focuses on how regulated entities govern and control their DeFi engagements. According to the FSRA, it covers risk management, governance, due diligence, monitoring, financial crime controls, incident escalation, recordkeeping, auditability, competence and client asset safeguards. The consultation is open for comments until 30 November 2026.
Read the official ADGM announcement | View Consultation Paper No. 5 of 2026
What is the guidance designed to do?
The FSRA has previously indicated, as reported by Pinsent Masons, that it does not intend to create a dedicated DeFi regulatory framework or to regulate protocols directly. Instead, the aim is to clarify how existing regulatory requirements apply when authorised firms engage with DeFi-related activities. The proposed approach is principles-based and technology-neutral, and the FSRA has indicated that final guidance is expected in the first half of 2027.
In practice, this places the responsibility on regulated firms to demonstrate that their existing governance, risk management and compliance frameworks remain effective when applied to DeFi.
Why does DeFi require a different approach to risk management?
Traditional financial services typically operate through identifiable institutions, established account structures and defined operational processes. DeFi environments can involve multiple protocols, digital asset transfers across blockchain networks and smart contracts that execute transactions automatically.
This can make it more challenging to understand how different activities are connected, identify the parties involved and assess the risks associated with a transaction or exposure.
Key considerations include:
1. Complex transaction flows
Digital assets can move across multiple wallets, protocols and blockchain networks. Understanding these flows may require more than reviewing an individual transaction in isolation.
2. Counterparty and exposure risks
Identifying the entities, services and other exposures associated with a DeFi activity can be complex, particularly when intermediaries and contractual relationships differ from those in traditional finance.
3. Evolving financial crime typologies
Digital asset ecosystems can be exploited for money laundering, fraud, sanctions evasion and other illicit activities. Compliance teams need to consider relevant indicators and emerging typologies when assessing exposure.
4. Technology and operational risks
Smart contract vulnerabilities, protocol changes and dependencies on external services can introduce risks that need to be considered alongside financial crime controls.
These considerations are interconnected. A technology-related incident, for example, may also create financial, operational or compliance implications.
Where do Anti-Money Laundering (AML) controls fit in?
As regulated entities explore DeFi-related activities, their AML controls need to reflect the nature of those activities and the risks involved.
Customer screening remains an important component of financial crime compliance, helping organisations identify potential matches against sanctions lists, politically exposed persons lists, adverse media and other relevant watchlists.
However, screening alone does not provide a complete picture of risk.
The points below reflect general good practice in financial crime compliance. They are not a summary of the detailed requirements in the consultation paper. Depending on the activity and applicable regulatory requirements, organisations may also need to consider:
- Risk assessment: Evaluate the nature of the activity, relevant counterparties, transaction characteristics and associated risk factors.
- Transaction monitoring: Identify unusual patterns and activity that may warrant further investigation.
- Ongoing monitoring: Reassess risk as customer information, transaction behaviour and relevant risk indicators change, for example through event-triggered reviews.
- Case management and investigation: Document alerts, investigate relevant activity, record decisions and escalate concerns appropriately.
- Governance and recordkeeping: Maintain clear accountability, documented controls and appropriate audit trails.
The objective is not to apply the same controls to every digital asset activity. It is to establish a risk-based approach that reflects the firm’s exposure, operating model and applicable regulatory obligations.
What should compliance teams consider next?
Organisations should understand which DeFi activities they engage in, the risks associated with those activities and whether their existing controls adequately address those risks.
Can the organisation identify and investigate relevant risk indicators?
Compliance teams need appropriate processes, information and tools to assess alerts, investigate potentially suspicious activity and document their decisions.
Can the framework adapt as risks change?
Risk management should not be treated as a one-time exercise. New protocols, changing transaction patterns and emerging threats may require organisations to reassess their approach.
These considerations also highlight the importance of collaboration between compliance, technology and business teams. Managing DeFi-related risks is not solely a compliance function. It requires a coordinated understanding of the activities being undertaken and their potential implications.
The way forward: Innovation and risk management must progress together
DeFi continues to develop, creating new opportunities alongside new risk considerations. For regulated financial institutions, the challenge is to understand these developments without losing sight of established principles of risk management, accountability and financial crime prevention.
ADGM’s proposed guidance reinforces the importance of assessing DeFi engagement through a structured risk management framework. As the consultation progresses, it will be worth watching how regulatory expectations develop and what they mean for firms operating at the intersection of traditional finance and digital assets.
For compliance teams, the key takeaway is clear: financial crime controls must evolve alongside emerging financial technologies and the risks they introduce.
At Finch Innovate, we develop solutions that address key AML compliance challenges. From sanctions checks to transaction monitoring, risk assessment, case management and more. Our modular enterprise platform, FinchCOMPLY, allows organisations to select the capabilities that fit their compliance requirements and operational workflows.
As financial services continue to evolve, we remain focused on developing practical compliance technology that responds to changing risks and regulatory expectations.
Sources: https://www.pinsentmasons.com/out-law/news/adgm-regulator-sets-out-reform-agenda-through-2027
Disclaimer: This article is for informational purposes only and does not constitute legal or regulatory advice. The ADGM DeFi risk management guidance discussed is proposed guidance, subject to consultation and potential changes before finalisation. It should not be interpreted as a finalised regulatory requirement.