DEF warns that applying trading platform and prudential requirements and full money-laundering laws to automated protocols would be structurally incompatible.
The DeFi Education Fund (DEF) has urged the U.K.’s Financial Conduct Authority to adopt a narrow, functional definition of “control” as it finalizes new rules for crypto asset activities.
The Washington, D.C.-based advocacy group argued that regulatory obligations should hinge on whether an entity has unilateral authority over user funds or transactions, not merely whether it developed or contributed to a decentralized protocol, in a response to an FCA consultation paper shared exclusively with CoinDesk.
“Control should be the determinative factor” of regulatory scope, DEF said, warning that software developers could otherwise be swept into intermediary-style obligations despite lacking custody or transactional authority.
The submission focuses on an area of the consultation which considers how decentralized finance (DeFi) arrangements should be treated under the U.K.’s emerging crypto regime. DEF supports the FCA’s control-based approach in principle but says it must be tied to concrete operational powers, such as the ability to initiate or block transactions, modify protocol parameters or exclude users.
DEF is an organization focused on informing policymakers and regulators about the benefits of DeFi and has been one of the prominent lobby groups on the road to crypto regulatory frameworks being established in Washington in recent years.
The group also challenged the FCA’s framing of DeFi-specific risks, arguing that cybersecurity vulnerabilities are not unique to blockchain systems and that public blockchains offer transparency advantages in combating illicit finance.
Applying prudential, reporting and platform access requirements designed for centralized trading platforms to non-custodial, automated protocols would be “ill-suited,” DEF said.
The FCA is seeking to bring a broad range of crypto activities within its regulatory perimeter as the U.K. moves toward a comprehensive digital asset framework.
