Understanding Control in the Crypto Sector: A Legal Perspective

According to Foresight News, founders in the crypto sector often view 'control' as a risky area, yet there is confusion about how to logically assess these risks. Daniel Barabander, Deputy General Counsel at Variant Fund, suggests that control should be understood as a spectrum, ranging from strong to weak control. To determine one's position on this spectrum, two key questions must be addressed: who exercises control and what is the scope of this control? The degree of decentralization is crucial in determining who exercises control. The spectrum ranges from single entity control to decentralized autonomous organization (DAO) control, ultimately leading to complete immutability. The scope of control involves the boundaries of authority, ranging from full upgrade rights to complete immutability. Once these dimensions are clarified, they can be applied to the relevant legal framework. Control analysis is applicable across various legal fields, with the core logic of legal accountability revolving around 'who has control over what.' For instance, in the context of money transmission laws, unilateral control over user funds is a necessary condition for determining if an entity is a money transmitter. However, this view is contested, as seen in the Tornado Cash case. Two scenarios illustrate this: in Scenario A, a single administrator holds keys but can only pause the protocol in emergencies; in Scenario B, a truly decentralized DAO has full upgrade control. Neither scenario constitutes unilateral control, suggesting that these projects may not be considered money transmitters legally. This control analysis extends to other legal areas, such as securities law, where the Howey Test's 'efforts of others' criterion essentially assesses the presence of a controlling manager. The technical control hierarchy of a protocol is a critical factor in this assessment. Determining one's position on the control spectrum requires careful consideration of the specific legal system and consultation with legal advisors. From a broader perspective, control offers commercial convenience but comes with associated risks. The key is to balance cost-benefit analysis and clarify the core purpose of retaining control. For example, if the primary goal of retaining control is to address emergencies, the legal liability of maintaining only a pause function is significantly lower than full upgrade rights. It is essential to accurately identify indispensable control needs in the business and match them with the appropriate level of control.