A Washington based crypto advocacy organization is calling on the UK Financial Conduct Authority to anchor its upcoming digital asset framework to a narrow definition of control, arguing that non custodial decentralized finance developers should not be regulated as intermediaries under the country’s proposed regime.
The DeFi Education Fund submitted formal feedback to the FCA’s consultation on crypto asset activities, urging regulators to make unilateral control over user funds or transactions the determining factor for regulatory obligations. According to the group, simply developing or contributing to open source decentralized protocols should not trigger the same requirements imposed on centralized trading platforms or custodians.
The FCA is currently working toward a comprehensive framework designed to bring a broad range of crypto activities within its supervisory perimeter. As part of that effort, regulators are examining how decentralized finance arrangements should be categorized and whether developers or contributors could fall within the definition of regulated entities.
The DeFi Education Fund supports a control based approach in principle but argues that it must be tied to concrete operational authority. In its view, regulatory obligations should apply only where an entity has the technical capacity to initiate or block transactions, alter protocol parameters, or exclude users from participating. Absent such powers, developers of non custodial systems do not exercise the type of authority that traditional financial intermediaries hold.
The group cautioned that applying prudential standards, reporting requirements, and full anti money laundering frameworks designed for centralized platforms to automated smart contract systems would be structurally incompatible. Decentralized protocols typically operate through self executing code deployed on public blockchains, where no single party retains control over user assets once transactions are initiated.
The submission also challenges the characterization of certain DeFi risks. While acknowledging cybersecurity concerns, the advocacy group argues that such vulnerabilities are not unique to blockchain systems. It further contends that public blockchain transparency can offer advantages in monitoring transactions and identifying illicit finance compared to opaque legacy systems.
The debate highlights a broader policy tension facing regulators globally as they attempt to integrate decentralized models into traditional supervisory frameworks. If the UK adopts a broad interpretation of control, software developers and governance contributors could face intermediary style obligations even without custody of client assets. Conversely, a narrow definition could limit oversight to entities that directly manage funds or exert transaction level authority.
As the UK moves closer to finalizing its crypto rules, industry participants are closely watching how the FCA balances innovation with consumer protection. The outcome of the consultation may influence not only the domestic DeFi landscape but also international discussions around how decentralized protocols should be treated under financial regulation.
