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Joint Response with INATBA and Cardano Foundation
TL;DR:
IOTA Foundation, INATBA, and Cardano Foundation urge the UK’s FCA to rethink one-size-fits-all crypto regulation. They call for clear distinctions between custodial vs. non-custodial services, smart oversight for DeFi, and a proportionate compliance model. Misguided rules risk pushing innovation offshore. Instead, the UK should lead with regulation that protects users without killing permissionless innovation.
We’re living through the greatest financial transformation in human history. Open protocols are replacing closed systems. Permissionless networks are challenging gatekeeping institutions. And the UK stands at a crossroads: will it lead this revolution or regulate it out of existence?
The IOTA Foundation has joined forces with the International Association for Trusted Blockchain Applications (INATBA) and theCardano Foundation to send a unified response to a discussion paper on regulating cryptoasset activities by the UK’s Financial Conduct Authority (FCA), one of the world’s most influential financial regulators.
This collaboration is based on our membership in INATBA and shared policy priorities with the Cardano Foundation. Our message is based on real-world operational knowledge from organizations actively building and deploying blockchain technologies: we need smart regulation, not regulatory sledgehammers.
What does the FCA propose?
The FCA says it wants to develop a “safe, competitive and sustainable” UK crypto sector, so it has published a set of proposals on regulating cryptoasset trading platforms, intermediaries, cryptoasset lending and borrowing, staking and decentralized finance, and the use of credit to purchase cryptoassets. Read its full reporthere.
While we regard the FCA’s proposals as strict yet reasonable, we’re concerned by the intention to apply identical rules to both centralized and decentralized asset platforms.
Why Regulation Has to Reflect Reality
At the core of our message is a simple but critical point: a one-size-fits-all approach can’t work.
For example, in paragraphs 7.5 and 7.10, the FCA’s paper states:
“.”
In contrast, we argue that centralized custodial and decentralized non-custodial services do not share the same risks and should be regulated accordingly.
- Custodial services act more like traditional financial services providers. They hold user funds, creating the same risks that financial regulators are designed to manage. Oversight here makes sense.
- Non-custodial services let users keep control of their assets while interacting with decentralized, transparent, and auditable protocols. These systems embed safeguards directly into their architecture through smart contracts and decentralized governance.
Treating both the same is like regulating email the same way you regulate the postal service. It shows a fundamental misunderstanding of how these technologies operate.
The same logic applies to lending and borrowing in light of the FCA’s proposal to restrict firms from offering crypto-asset lending and borrowing products to retail consumers:
This ignores another fundamental distinction:
- Centralized platforms with single points of failure, opaque leverage, and discretionary control over user funds pose risks.
- But decentralized protocols offering crypto lending and borrowing mechanisms allow users to inspect the health of the system, verify collateralization levels, and track asset flows in real-time.
Another notable example of a one-size-fits-all approach is the FCA’s proposed ban on using credit to buy crypto assets:
While protecting vulnerable consumers is important, a blanket ban would unfairly penalize responsible users and undermine consumer autonomy.
What’s at Risk with a One-Size-Fits-All Approach?
The FCA’s current proposals could:
- Create compliance nightmares for open-source, permissionless protocols.
- Stifle the development of decentralized financial infrastructure and applications.
- Eliminate access to safer, transparent lending protocols while pushing users toward riskier, offshore alternatives.
- Undercut the UK’s position in the global crypto economy.
Here’s the real irony: most consumer harm in crypto hasn’t come from DeFi. It comes from centralized custodians with opaque practices – exactly the kind of services that traditional regulation handles well. These practices aren’t inherent to the design of DeFi protocols with transparent and auditable code.
Our Recommendations for Smarter Oversight
1. Clarify Staking Rules: The FCA’s current language around staking is too vague. We urge a clear distinction between custodial staking, where platforms control user funds, and protocol-native, non-custodial staking, where users retain full control. Only the former should be subject to the proposed regulatory framework..
2. Acknowledge DeFi’s Unique Characteristics: Rather than restricting access, recognize that DeFi protocols offer unprecedented transparency and auditability. With UK crypto awareness at 95% (per Adan), retail users are more than capable of engaging responsibly.
3. Adopt a Tiered Regulatory Approach: We propose a graduated compliance model, scaling obligations based on a project’s size, structure, and risk. This ensures that small teams and non-custodial builders aren’t crushed by frameworks meant for institutional players and centralized entities.
4. Enhance Credit Use Oversight: Instead of prohibiting credit use for crypto purchases, centralized lending and borrowing firms should provide clear risk disclosures, assess customers’ risk appetite, and limit aggressive credit-fueled promotions.
Supporting Self-Regulation in DeFi
We believe that DeFi is best served through industry-led self-regulation. INATBA’s February 2025 proposal for DeFi self-regulation shows how builders can address risks proactively while preserving space for innovation.
This kind of bottom-up approach can help meet safety goals without strangling growth.
The UK’s Opportunity to Lead
DeFi isn’t just TradFi in a crypto bro’s hoodie: it’s a radically different architecture, built for transparency, automation, and global access. Applying old rules to new rails will only set the UK back.
What’s needed now is collaborative, iterative guidance that evolves with the technology.
The UK has a chance to lead the world in forward-thinking crypto regulation, protecting consumers while empowering the next generation of financial innovation.
We stand ready to support the FCA with technical expertise, hands-on insights, and ongoing dialogue to help shape a world-class regulatory framework.
Because the future of finance is being built today. And the UK should help build it, not box it in.