TLDR

  • The DeFi Education Fund has pressed the UK FCA to use a narrow definition of “control” in crypto regulations.
  • DEF contends that regulatory duties should center on unilateral authority over users’ funds and transactions.
  • The group emphasizes that software developers shouldn’t be subject to intermediary obligations if they don’t have control over transactions.
  • DEF critiques the FCA’s wider approach to DeFi-specific risks, noting that cybersecurity challenges aren’t exclusive to blockchain.
  • The group warns that using centralized trading platform rules for decentralized protocols would be ineffective.

The DeFi Education Fund (DEF), a U.S.-based advocacy group, has called on the U.K. Financial Conduct Authority (FCA) to prioritize a clear definition of “control” in the regulatory framework for cryptocurrency activities. In a response to the FCA’s consultation paper, DEF argues that the critical factor in determining regulatory obligations should be whether an entity holds unilateral control over users’ funds or transactions. The group believes this approach would prevent holding developers responsible for decentralized protocols that don’t have such control.

DeFi Group Emphasizes ‘Control’ in Regulatory Approach

DEF stressed that regulations should center on control over transactions and users’ funds. It argued that software developers shouldn’t face intermediary-style obligations unless they manage users’ funds or transactions. “Control should be the deciding factor,” DEF stated. The group emphasized that regulators need to focus on operational powers—like initiating or blocking transactions, or changing protocol parameters.

The DeFi group added that software developers don’t hold custody of assets, so they shouldn’t be subject to the same regulatory requirements as entities that control users’ funds. This distinction is vital for preserving the decentralized nature of . Developers merely contribute to protocols and shouldn’t be held accountable for how users engage with the decentralized networks they build.

FCA’s Approach to DeFi Regulation Faces Criticism

DEF also criticized the FCA’s method of defining DeFi-specific risks, suggesting that the risks from decentralized finance systems aren’t unique to blockchain technology. The group noted that cybersecurity vulnerabilities exist in all financial systems—not just those based on blockchain. DEF further argued that public blockchains provide transparency benefits that can help fight illicit financial activities, unlike centralized platforms where information might be more hidden.

In response to the ’s wider application of reporting, platform access, and prudential requirements, DEF warned these measures wouldn’t fit decentralized, non-custodial systems. They emphasized that using centralized trading platform regulations for decentralized protocols would be ineffective and out of step with DeFi’s operational reality.

The U.K. regulatory body is working to create a comprehensive framework for digital asset activities. DEF is advocating for regulations based on concrete operational powers to accurately address the dynamics of decentralized finance. As the consultation proceeds, the group has urged the FCA to stick with a functional, control-based approach when finalizing the rules.