From a macro perspective, control brings convenience from a business standpoint, but it also comes with costs from a risk perspective.

Written by: Daniel Barabander, Deputy General Counsel at Variant Fund

Translated by: Saoirse, Foresight News

Founders in the crypto space are well aware that "control" poses significant legal risks. While I am pleased to see that everyone is finally recognizing the importance of "control" (there has indeed been considerable progress in recent years), I also notice that there is still some confusion about how to reasonably view "control." Founders seem to generally believe that "control = minefield," but they are not quite clear on how to analyze the logic behind it.

I believe a more appropriate understanding is that control is essentially a spectrum concept. To clarify one's position on this spectrum, one must ask two core questions:

• Who is exercising control?

• What is the scope of control?

Regarding "Who is Exercising Control"

The core variable is the degree of decentralization, with the spectrum as follows (control from strong to weak):

• Single entity control → Internal multi-signature control → Independent multi-party multi-signature control → Decentralized Autonomous Organization (DAO) control → Completely immutable

Regarding "The Scope of Control"

The core variable is the boundary of authority, with the spectrum as follows (control from strong to weak):

• Complete upgrade rights → Complete upgrade rights with time locks → Specific external dependency upgrade rights (e.g., changing oracles) → Pause function rights → Completely immutable

Once the positioning of these two dimensions on the spectrum is clarified, it can be applied to the target legal system. I firmly believe that control analysis is applicable to almost all areas of law. The core logic of legal accountability typically revolves around "who has control over what."

Taking the legal determination of money transmission as an example: I have previously argued that unilateral control over user funds is a necessary condition for determining whether an entity constitutes a money transmitter (although the ruling in the Tornado Cash case holds a different view, I have articulated my objections to that legal interpretation in related papers). When defining "unilateral control," one must consider both: (1) the degree of decentralization; (2) the boundary of authority.

• Scenario A: A single administrator holds the key but can only pause the protocol in emergencies;

• Scenario B: A truly decentralized DAO has complete upgrade control.

Neither of these scenarios constitutes unilateral control by insiders, and therefore, from a legal perspective, it can be argued that the relevant projects do not constitute money transmitters.

This control analysis can also extend to other areas of law. For example, in the Howey test in securities law, the core of the "efforts of others" requirement is essentially to determine whether there is a manager with control, and the technical hierarchy of control in the protocol is an important basis for that determination.

As for how to position oneself on the control spectrum, it requires careful decision-making in conjunction with the specific legal system and legal counsel. However, from a macro perspective: control brings convenience from a business standpoint, but it also comes with costs from a risk perspective. The key is to ensure a balance in the cost-benefit analysis and to clarify the core purpose of retaining control. For instance, if the primary demand for retaining control is to respond to emergencies, then the "control cost" (in terms of legal liability) of merely retaining the pause function will be significantly lower than that of complete upgrade rights. It is essential to accurately identify the truly indispensable control needs in the business and then match them with the corresponding level of control.

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