DeFi Group to FCA: Anchor Crypto Rules in ‘Control’ Over User Funds

TLDR

• The DeFi Education Fund has urged the UK FCA to adopt a narrow definition of “control” for crypto regulations.
• DEF argues that regulatory obligations should focus on unilateral authority over user funds and transactions.
• The group stresses that software developers should not be held to intermediary obligations if they lack control over transactions.
• DEF criticizes the FCA’s broader approach to DeFi-specific risks, highlighting that cybersecurity issues are not unique to blockchain.
• The group warns that applying centralized trading platform regulations to 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 focus on a clear definition of “control” in the regulatory framework for crypto activities. In a response to the FCA’s consultation paper, DEF argues that the key factor in defining regulatory obligations should be whether an entity has unilateral control over user funds or transactions. The group believes that this approach would avoid holding developers accountable for decentralized protocols that lack such control.

DeFi Group Emphasizes ‘Control’ in Regulatory Approach

DEF stressed that regulations should focus on control over transactions and user funds. It argued that software developers should not face intermediary-style obligations unless they manage user funds or transactions. “Control should be the determinative factor,” DEF said. The group emphasized that regulators must focus on operational powers, such as initiating or blocking transactions or modifying protocol parameters.

The DeFi group added that software developers lack custody over assets, which means they should not fall under the same regulatory requirements as entities controlling user funds. This distinction is critical for maintaining the decentralized nature of DeFi platforms. Developers simply contribute to protocols and should not be held responsible for how users interact with the decentralized networks they create.

FCA’s Approach to DeFi Regulation Faces Criticism

DEF also criticized the FCA’s approach to defining DeFi-specific risks, suggesting that the risks posed by decentralized finance systems are not unique to blockchain technology. The group pointed out that cybersecurity vulnerabilities exist across all financial systems, not just blockchain-based ones. DEF further argued that public blockchains offer transparency advantages, which can help combat illicit finance activities, unlike centralized platforms, where information may be more opaque.

In response to the FCA‘s broader application of reporting, platform access, and prudential requirements, DEF warned that these measures would not suit decentralized, non-custodial systems. They emphasized that applying centralized trading platform regulations to decentralized protocols would be ineffective and misaligned with the operational reality of DeFi.

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

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