The DeFi Education Fund (DEF), a Washington, D.C.-based advocacy group, has submitted a formal response to the U.K. Financial Conduct Authority's (FCA) consultation paper CP25/40, urging the regulator to adopt a narrow, functional definition of "control" as it finalizes new rules for crypto asset activities. The DEF argued that regulatory obligations should hinge solely on whether an entity has unilateral authority over user funds or transactions, such as the ability to initiate/block transactions, modify protocol parameters, or exclude users.
"Control should be the determinative factor" of regulatory scope, the DEF stated, warning that software developers could otherwise be incorrectly swept into intermediary-style obligations despite lacking custody or transactional authority. The group emphasized that applying requirements designed for centralized trading platforms to non-custodial, automated protocols would be "ill-suited."
In a coordinated effort, a coalition of blockchain foundations—including the IOTA Foundation, Sui Foundation, Cardano Foundation, and the Avalanche Policy Coalition—filed a joint response echoing similar concerns. Their submission focused on two key areas: staking and decentralized finance (DeFi). The group argued for a clear regulatory distinction between custodial and non-custodial activities.
For staking, the coalition recommended that custodial services (where firms safeguard assets) warrant appropriate retail disclosures and consent requirements, while non-custodial or protocol-level staking should remain outside the scope of regulated activity. On DeFi, they pushed back against triggering regulatory status based merely on software development or infrastructure provision, urging the FCA to anchor obligations to "demonstrable, unilateral control over protocol operation, governance or economic outcomes."
The collective message from both the DEF and the blockchain coalition is that smarter regulatory scoping—focused on custody and control—would enhance consumer protection where risk is real while providing legal certainty that preserves innovation in non-custodial, decentralized technologies. This consultation is part of the FCA's broader effort to bring crypto activities within its regulatory perimeter as the U.K. moves toward a comprehensive digital asset framework.
