DeFi Education Fund Urges UK FCA to Narrow Definition of “Control” in Crypto Rules

The DeFi Education Fund (DEF), a Washington, D.C.-based advocacy group, has called on the UK’s Financial Conduct Authority (FCA) to adopt a precise, functional definition of “control” as the regulator finalizes its new framework for crypto asset activities. In a detailed response to the FCA’s consultation paper—shared exclusively with CoinDesk—DEF argues that regulatory obligations should be determined by whether an entity possesses unilateral authority over user funds or transactions, rather than simply whether it developed or contributed to a decentralized protocol.

“Control should be the determinative factor” in defining regulatory scope, DEF emphasized, warning that without such clarity, software developers could be inadvertently subjected to intermediary-style obligations despite lacking custody or transactional authority over user assets.

The Core of the Debate: What Does “Control” Really Mean?

The submission zeroes in on a critical section of the FCA’s consultation that examines how decentralized finance (DeFi) arrangements should be treated under the UK’s emerging crypto regime. While DEF supports the FCA’s control-based approach in principle, it insists that “control” must be tied to tangible operational powers. These include the ability to initiate or block transactions, modify protocol parameters, or exclude users from participation.

This distinction is crucial. In the world of DeFi, protocols are often governed by smart contracts—self-executing code that operates without centralized oversight. Developers may create these protocols, but once deployed, they typically relinquish direct control. DEF argues that applying traditional regulatory frameworks designed for centralized entities to such decentralized systems would be both inappropriate and potentially harmful to innovation.

DeFi Education Fund: A Key Player in Crypto Policy

The DeFi Education Fund has emerged as one of the most prominent voices in the push for balanced crypto regulation. Focused on educating policymakers and regulators about the benefits of DeFi, DEF has been at the forefront of lobbying efforts in Washington as the United States moves toward establishing a comprehensive crypto regulatory framework.

Their intervention in the UK debate underscores the global nature of crypto policy discussions. As nations race to establish regulatory clarity, the definitions and principles adopted today will shape the future of decentralized finance for years to come.

Challenging the FCA’s Risk Assessment

Beyond the definition of control, DEF also took issue with the FCA’s framing of DeFi-specific risks. The group argued that cybersecurity vulnerabilities are not unique to blockchain systems and that public blockchains, in fact, offer transparency advantages in combating illicit finance. By making all transactions publicly visible and immutable, blockchain technology can provide a level of auditability that traditional financial systems often lack.

DEF warned that applying prudential, reporting, and platform access requirements designed for centralized trading platforms to non-custodial, automated protocols would be “ill-suited.” Such an approach could stifle innovation and push development activity to more permissive jurisdictions, ultimately undermining the UK’s ambitions to become a global hub for crypto and blockchain technology.

The UK’s Crypto Regulatory Journey

The FCA’s consultation is part of a broader effort to bring a wide range of crypto activities within its regulatory perimeter. As the UK moves toward a comprehensive digital asset framework, the stakes are high. The government has signaled its intention to position the UK as a global leader in crypto innovation, but achieving this goal requires striking a delicate balance between protecting consumers and fostering technological progress.

The current consultation process is a critical step in this journey. By seeking input from industry stakeholders, the FCA aims to craft rules that are both effective and adaptable to the rapidly evolving crypto landscape. However, as DEF’s response highlights, there is still significant debate over how to apply traditional regulatory concepts—like “control”—to decentralized systems.

Looking Ahead: Implications for the Global Crypto Industry

The outcome of the FCA’s consultation could have far-reaching implications, not just for the UK but for the global crypto industry. As other jurisdictions grapple with similar questions, the UK’s approach may serve as a model—or a cautionary tale.

For developers and entrepreneurs in the DeFi space, clarity on the definition of control is essential. Without it, they face the risk of inadvertently falling afoul of complex regulatory requirements, potentially exposing themselves to legal and financial liabilities. For regulators, the challenge is to craft rules that address legitimate concerns—such as consumer protection and financial stability—without stifling the innovation that makes DeFi so promising.

As the FCA finalizes its rules, all eyes will be on how it navigates these competing priorities. The DeFi Education Fund’s intervention is a reminder that, in the world of crypto regulation, the details matter—and that the voices of those building the future of finance must be heard.

Tags: DeFi Education Fund, FCA, UK crypto regulation, decentralized finance, control definition, crypto policy, blockchain innovation, Financial Conduct Authority, DeFi advocacy, crypto compliance, smart contracts, regulatory framework, UK digital assets, crypto lobbying, DeFi risks, public blockchains, crypto transparency, financial innovation, DeFi developers, crypto consultation

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