KEY TAKEAWAYS
- The IOTA, Sui, Cardano, and Avalanche Foundations jointly responded to the UK’s FCA Consultation Paper, advocating for a regulatory framework that supports innovation.
- The response emphasizes distinguishing between custodial and non-custodial models in staking and DeFi, suggesting tailored regulatory obligations for custodial entities.
- Recommendations include defining regulatory expectations based on control over protocol operations, ensuring proportionality and supporting decentralized systems.
On February 12, 2026, the IOTA Foundation, along with the Sui Foundation, Cardano Foundation, and Avalanche Policy Coalition, submitted a joint response to the UK Financial Conduct Authority’s (FCA) Consultation Paper CP25/40. The response, which can be found here, emphasizes the need for a regulatory framework that supports innovation while focusing on custody and control.
The joint response highlights the importance of distinguishing between custodial and non-custodial models in both staking and decentralized finance (DeFi). The organizations argue that regulatory obligations should be tailored to entities exercising custody, discretion, or commercial intermediation, while preserving the neutrality of public blockchain infrastructure.
Focus on Staking and Decentralized Finance
The response addresses the FCA’s proposals on staking and DeFi, areas where the regulatory scope and technical interpretation are crucial. The organizations recommend that custodial staking, where firms safeguard client assets, should be subject to specific regulatory requirements. These include information provision, key contractual terms, and express prior consent for retail clients.
In contrast, non-custodial staking, which occurs on-chain without the staking provider taking custody of user assets, should remain outside the scope of regulated activities. This approach aligns regulatory obligations with actual sources of risk and maintains proportionality.
Recommendations for DeFi Regulation
Regarding DeFi, the response acknowledges the FCA’s intention to regulate activities involving a clear controlling person. However, it suggests that this concept be defined precisely to reflect the unique characteristics of DeFi systems, which rely on self-custody, automated execution, and open participation.
The organizations propose that regulatory expectations should be based on demonstrable control over protocol operations, rather than development activity or infrastructure provision alone. This would ensure that regulatory measures are proportionate and support the continued innovation of decentralized systems.
Overall, the joint response advocates for a regulatory framework that anchors obligations to custody, discretion, and unilateral control, while allowing non-custodial and decentralized systems to thrive. The organizations express their willingness to engage further with the FCA to develop guidance that aligns with both regulatory objectives and technical realities.
Why This Matters: Impact, Industry Trends & Expert Insights
The IOTA Foundation, along with other blockchain organizations, has submitted a joint response to the UK FCA’s Consultation Paper CP25/40, advocating for a balanced regulatory framework for cryptoassets that supports innovation while addressing custody and control.
A recent Sidley report highlights the trend of the UK’s FCA consultations focusing on cryptoasset activities, including staking and DeFi. This aligns with the joint response’s emphasis on distinguishing between custodial and non-custodial models to ensure regulatory obligations are proportionate to actual risk sources.
A Jones Day analysis underscores the importance of the UK’s comprehensive FSMA-based regime for cryptoassets, which expands oversight to activities like staking and DeFi. This supports the joint response’s call for regulatory measures that anchor obligations to custody and control, fostering a conducive environment for decentralized systems.
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