DeFi Advocacy Group Urges U.K. Regulator to Narrow ‘control’ Definition in Crypto Rules

London, United Kingdom – February 13, 2026 – The DeFi Education Fund (DEF) is calling on the United Kingdom’s financial Conduct Authority (FCA) to adopt a precise definition of “control” as it finalizes new regulations governing Crypto Asset activities. The organization argues that overly broad interpretations could stifle innovation and unfairly burden software developers.

The Core of the Debate: Defining ‘control’

The Washington, D.C.-based advocacy group submitted a response to the FCA’s recent consultation paper, shared exclusively with industry news outlets.DEF contends that regulatory obligations should be directly linked to entities possessing unilateral authority over user funds or transactions. Simply developing or contributing to a decentralized protocol should not automatically trigger intermediary-style obligations, notably when custody or transactional power is absent.

“Control should be the determinative factor” in determining

What specific aspects of the FCA’s proposed definition of “control” does the DeFi Education Fund (DEF) believe could stifle innovation in the UK DeFi sector?

DeFi Education Fund Challenges UK FCA on Crypto Control Definition

The DeFi Education Fund (DEF), a non-profit organization dedicated to promoting understanding of decentralized finance, is actively pushing the UK Financial Conduct Authority (FCA) to refine its definition of “control” within the upcoming cryptoasset regulations. This push centers around concerns that a broad interpretation of ‘control’ could inadvertently stifle innovation and hinder the growth of legitimate DeFi projects in the UK.

The Core of the Debate: What Does ‘Control’ Mean in DeFi?

Currently, the FCA’s proposed rules aim to regulate cryptoassets, bringing them more in line with traditional financial instruments. A key element of this regulation revolves around identifying who is responsible for the assets – essentially, who has ‘control’. However, the DeFi space operates fundamentally differently from centralized finance.

Traditional finance relies on intermediaries – banks, brokers, exchanges – who exert clear control over assets. DeFi, by design, aims to remove these intermediaries, distributing control across a network of participants through smart contracts. This presents a challenge for regulators accustomed to identifying a central point of authority.

The DEF argues that applying a traditional definition of ‘control’ to DeFi could have unintended consequences:

* Over-Regulation of Protocols: Protocols themselves, being code-based and frequently enough governed by decentralized autonomous organizations (DAOs), don’t fit neatly into the traditional ‘controller’ framework.

* Impact on Developers: Developers contributing to open-source DeFi projects could be inadvertently classified as controllers,subjecting them to regulatory burdens they aren’t equipped to handle.

* Hindered Innovation: A broad definition could discourage developers from building and deploying innovative DeFi applications in the UK, pushing activity to more permissive jurisdictions.

DEF’s Proposed Solution: A Risk-Based approach

the DEF advocates for a more nuanced, risk-based approach to defining ‘control’.Instead of focusing on who can influence a protocol, they suggest the FCA should concentrate on who actually exercises control and benefits from it, particularly in ways that could harm consumers.

This means focusing on:

1. Direct Control: Individuals or entities with the ability to unilaterally alter core protocol parameters or access user funds.
2. Economic Control: Those who hold significant economic influence over a protocol, such as large token holders who can manipulate governance decisions for personal gain.
3. Operational control: Entities responsible for the day-to-day operation and maintenance of critical infrastructure supporting the protocol.

This targeted approach, the DEF believes, woudl allow the FCA to regulate genuinely harmful activities while fostering a thriving DeFi ecosystem.

Real-World Implications & Case Studies

Consider a decentralized exchange (DEX) like Uniswap. While anyone can propose changes to the protocol, those changes require a vote by UNI token holders. The DEF argues that simply being a UNI token holder doesn’t equate to ‘control’ – it’s the ability to successfully influence governance decisions that matters.

Similarly, flash loan protocols, while powerful, are generally considered low-risk because they are overcollateralized and automatically liquidated if conditions aren’t met. Regulating the developers of such protocols as ‘controllers’ would be disproportionate to the actual risk.

The Role of DAOs and Decentralized Governance

Decentralized Autonomous Organizations (DAOs) are central to many DeFi projects. These organizations operate based on rules encoded in smart contracts, with decisions made by token holders. The FCA’s approach to DAOs is crucial.

The DEF emphasizes that:

* Not all DAOs are equal: Some DAOs are genuinely decentralized, while others are more centralized in practice.

* Governance participation doesn’t equal control: Simply holding governance tokens doesn’t automatically confer control.

* Focus on effective decision-making power: Regulation should target those who have the ability to effectively direct the DAO’s actions.

Benefits of a Narrowly Defined ‘Control’

A more precise definition of ‘control’ offers several benefits for the UK’s crypto landscape:

* Attracting Investment: Clear and reasonable regulations will attract investment into the UK DeFi sector.

* Promoting Innovation: A supportive regulatory habitat will encourage developers to build and deploy new DeFi applications.

* Protecting consumers: Targeted regulation will focus on protecting consumers from genuine risks, such as fraud and market manipulation.

* Maintaining Global Competitiveness: The UK can position itself as a leading hub for responsible DeFi innovation.

Practical Tips for DeFi Projects Navigating UK Regulation

For DeFi projects operating or planning to operate in the UK, here are some practical steps:

* Understand the FCA’s proposals: Stay informed about the latest developments in the FCA’s regulatory framework.

* Assess yoru level of decentralization: Objectively evaluate how decentralized your project truly is.

* Document your governance processes: Clearly document how decisions are made and who has the ability to influence