FATF's New DeFi Test Unveils Real Control Under Regulatory Scrutiny

The Financial Action Task Force (FATF) has introduced a new test to determine whether decentralized finance (DeFi) projects have identifiable controllers or those exercising sufficient influence.

This approach looks beyond whether a protocol describes itself as decentralized and instead assesses who has control over how a project operates. Regulators can examine governance structures, smart-contract upgrades, treasury assets, fees, and administrative permissions to identify potential controllers.

The FATF's 'control or sufficient influence' test could bring some DeFi platforms under requirements that apply to virtual asset service providers (VASPs). This framework also gives regulators a way to look beyond a protocol's legal structure and assess how decisions are actually made, which could be beneficial for projects with complex governance structures.

Stablecoins face added scrutiny as authorities look for ways to curb illicit activity. Regulators can examine transactions and governance records to trace who is making decisions or exercising influence over a DeFi protocol, even when there is no company or identifiable management team running it.