What’s Problem: Elusive Governance, Political Cu…

Taxation, constitutional legitimacy & fiscal justice The previous Part VII of this series traced the contributions of Abu Yusuf, Al-Ghazali, Ibn Taymiyyah, Al-Maqrizi and Ibn Khaldun to public finance and political economy. Their works differed in purpose and historical setting, but a common normative framework emerged: justice in public burdens, accountability of authority, consultation in collective decisions, protection against arbitrary appropriation, honest exchange, responsible administration of public resources, wider circulation of wealth and protection of vulnerable citizens. These principles do not provide a ready-made tax code for a modern federation. They offer something more fundamental: standards by which taxation, expenditure and public authority may be judged. The same standards find expression in the constitutional order of Pakistan. Taxation is not legitimate merely because money is required by the state or because a provision has been inserted into a Finance Act. Parliament possesses wide legislative authority, but it is a creature of the Constitution and not its master. It cannot validly enact what the Constitution prohibits, invade a field constitutionally assigned elsewhere or destroy rights and limitations that bind every organ of the state. The proposition appears elementary. Pakistan’s fiscal practice repeatedly ignores it. Article 77 of the Constitution provides that no federal tax shall be levied except by or under the authority of an Act of Parliament. This embodies the historic principle of no taxation without representation. Revenue cannot be extracted through executive preference, administrative instruction or unstructured discretion. Legislative authority must exist. Article 77 is a necessary condition for lawful taxation, not a complete test of constitutional legitimacy. A tax enacted by Parliament must also conform to the distribution of legislative powers, equality before law, due process, protection of property and other constitutional guarantees. Parliamentary form cannot cure substantive constitutional defect. Otherwise, the requirement of constitutional supremacy would be reduced to the proposition that Parliament may do anything so long as it records the command in statutory language. Pakistan is not governed under parliamentary sovereignty in the British sense. It is governed under a written and supreme Constitution. Legislative authority is not unlimited authority The Constitution divides taxing powers between the Federation and provinces. Parliament cannot convert a provincial subject into a federal one merely by changing its label. A levy upon capital value cannot automatically become income tax because it is placed in the Income Tax Ordinance, 2001. A tax upon services cannot be extended to transactions lacking the character of a service merely because additional revenue is desired. The true nature, subject matter and effect of the levy remain decisive. This is particularly important because fiscal pressures create incentives to stretch legislative entries beyond their constitutional purpose. Governments confronting debt servicing, defence expenditure and programme targets naturally seek accessible revenue. Constitutional limitations exist precisely because necessity, convenience and expediency cannot be allowed to determine the boundaries of public power. A Constitution does not become less binding when the treasury is empty. The Supreme Court’s jurisprudence has recognised that Parliament’s taxing competence, though broad, is not without constitutional limits. In Elahi Cotton Mills, the Court accepted substantial legislative latitude in taxation, including the use of legal fictions, classifications and presumptive methods. It also made clear that the legislature cannot tax as “income” something that cannot rationally possess the character of income. The breadth of a legislative entry does not eliminate its essential subject matter.  The same discipline must govern every fiscal enactment. Equality is not arithmetical uniformity Article 25 guarantees equality before law and equal protection of law. Equality does not require every person, transaction or source of income to be taxed identically. Legislatures may classify taxpayers and activities where a real distinction exists and the classification bears a rational relationship to the purpose of the law. The power to classify cannot become a licence to privilege. Pakistan’s tax system contains numerous distinctions based upon source, status, sector, documentation and bargaining power. Salary, dividends, profit on debt, business income, contracts, imports, property income and capital gains are frequently subjected to different rates and regimes. Some differentiation may be justified by collection realities or constitutional allocation. Much of it has emerged through political accommodation rather than coherent principle. A constitutional analysis must therefore ask whether similarly situated persons are treated alike, whether distinctions correspond to genuine economic differences, and whether the burden imposed is reasonably connected with the stated objective. Higher transactional taxes upon “non-filers”, for example, are presented as instruments of documentation. Their constitutional and economic legitimacy becomes doubtful when they operate indefinitely as revenue measures without determining actual income, establishing liability or bringing the person into a genuine assessment system. A temporary incentive to file cannot become a permanent substitute for income taxation. Due process in fiscal administration Article 4 protects the right of every person to be dealt with in accordance with law. Tax administration must consequently involve more than statutory authority to demand money. Liability must be determined through fair procedures, relevant evidence, a meaningful opportunity to respond and access to independent adjudication. Automated notices, coercive recovery, attachment of accounts, blocked refunds and repeated demands without proper examination undermine this constitutional relationship. Technology does not suspend due process. Digital systems can improve matching, risk identification and transparency. They cannot transform an algorithmic suspicion into established liability. The taxpayer must know the basis of the demand, confront the material relied upon and obtain a reasoned determination from a legally competent authority. A revenue system that collects first and examines legality later converts constitutional administration into fiscal compulsion. The Supreme Court’s judgment in Mustafa Impex also reinforced the constitutional identity of executive authority. Statutory powers assigned to the Federal Government cannot automatically be exercised by an individual minister, division or official unless the constitutional and statutory framework permits it. Fiscal measures made through notifications and delegated authority must remain within the limits imposed by the parent legislation and the constitutional structure of government.  Delegation may supply machinery. It cannot create a new taxable event, enlarge the charge or transfer essential legislative choices to the executive. Property,

In August 2022, satellite images showed the Indus River in Pakistan swelling to more than ten times its normal width, submerging a third of the country. Less than two years later, in early 2024, the same river system was running far below its seasonal average in its upper reaches, triggering emergency irrigation cuts in Punjab. Flood and drought extremes that once defined different eras are now defining the same decade. For the nearly 40 percent of humanity that lives in river basins shared by two or more countries, this volatility is turning a development issue into a security issue.   Water has always been political, but climate change is making it less predictable and less abundant at the moments when it is most needed. Three basins the Indus, the Nile, and the Mekong illustrate how historical treaties, new infrastructure, and a warming climate are converging to test whether water can be managed as a shared resource or will become a source of sustained confrontation.   The Indus: A Treaty Under Strain   The Indus Waters Treaty, signed in 1960 and brokered by the World Bank, is often cited as one of the most durable water-sharing agreements in the world. It survived two wars and multiple crises between India and Pakistan. Under its terms, the three eastern rivers Ravi, Beas, and Sutlej were allocated to India, and the three western rivers Indus, Jhelum, and Chenab to Pakistan, with limited rights for India to develop run-of-the-river hydropower upstream.   The treaty was designed for a different hydrological and political reality. It divides water volumes based on historical flows, with no explicit mechanism for climate adaptation. It also established a complex dispute resolution process involving a Neutral Expert and a Court of Arbitration.   Tensions have centered on India’s hydropower projects in Jammu and Kashmir, such as Kishenganga and Ratle. Pakistan argues that the design of these projects particularly pondage capacity and spillway gates violates treaty restrictions and could give India control over the timing of flows that are critical for Pakistani agriculture, which supports more than 80 percent of the country’s irrigated agriculture and employs a large portion of its workforce. India argues that the projects are within treaty allowances, are necessary for its own energy security and development, and that it has never interfered with Pakistan’s share.   Both governments have sought recourse through the treaty’s mechanisms simultaneously in recent years, leading to parallel proceedings that have raised questions about the treaty’s procedural resilience. Experts note that the underlying driver is not just engineering, but scarcity: glacier retreat in the Hindu Kush-Himalaya, altered monsoon patterns, and rising demand from growing populations on both sides are reducing the margin for error that allowed the treaty to function for six decades.   The Nile: Sovereignty Versus Survival   No river illustrates the clash between national development and downstream vulnerability more starkly than the Nile.   Ethiopia, where about 85 percent of the Nile’s water reaching Egypt originates from the Blue Nile, began construction of the Grand Ethiopian Renaissance Dam, GERD, in 2011. With a capacity of over 5,000 megawatts, the dam is central to Ethiopia’s plan to expand electricity access still below 50 percent in rural areas at the start of construction and to become a regional power exporter. For Addis Ababa, the dam is a matter of sovereignty and economic transformation, financed domestically and built without external funding.   For Egypt, which depends on the Nile for approximately 90 percent of its freshwater, the dam is viewed as an existential risk. A reduction in flow during the multi-year filling period, or during future droughts if filling and operating rules are not agreed, could directly affect agriculture in the Nile Delta and drinking water for over 100 million people. Egypt has therefore insisted on a legally binding agreement on filling and long-term operation, including drought mitigation mechanisms.   Sudan sits between the two, potentially benefiting from regulated flows and cheap electricity, but also concerned about dam safety and its own water needs.   More than a decade of negotiations mediated by the African Union, the United States, and others have failed to produce a binding deal. Ethiopia has proceeded with filling the reservoir, arguing that this is a natural consequence of exercising its right to develop resources within its borders under the principle of equitable and reasonable utilization. Egypt has argued for the principle of no significant harm and historical rights. International water law, primarily the 1997 UN Watercourses Convention, contains both principles, but leaves their balancing to negotiation.   The dispute has remained diplomatic rather than military, despite inflammatory rhetoric at times, and has spurred renewed discussion about benefit-sharing for example, linking power trade to water security rather than zero-sum volume allocation.   The Mekong: Upstream Control   In Southeast Asia, the Mekong River supports the food security of more than 60 million people. Its annual flood pulse drives one of the world’s most productive inland fisheries in the Tonle Sap lake in Cambodia and sustains rice cultivation in Vietnam’s Mekong Delta, which produces roughly half of Vietnam’s rice.   The construction of eleven large hydropower dams on the mainstream of the upper Mekong in China where the river is called Lancang and more than 100 tributary dams downstream, principally in Laos, has fundamentally altered that pulse. Data from the Mekong River Commission, an intergovernmental body of Cambodia, Laos, Thailand, and Vietnam, shows changes in seasonal water levels, sediment transport, and fisheries.   China, which is not a full member of the Commission but a dialogue partner, argues that its dams provide flood control and dry-season flow augmentation, and are essential for its clean energy transition. Data sharing has improved in recent years, with Beijing providing year-round water level and rainfall data.   Downstream countries offer a different perspective. Thailand and Cambodia have raised concerns about unpredictable releases affecting navigation and farming. Vietnam is particularly vulnerable: reduced sediment flow scientists estimate that dams have trapped more than half of the sediment

By Aleena Saif Ullah The writer is an MPhil Scholar in International Relations, specializing in global defence and security, University of the Punjab, Lahore. On February 28, the first day of Operation Epic Fury, a strike hit the Shajareh Tayyebeh girls’ elementary school in Minab, in Iran’s Hormozgan province. Iranian state media reported that 168 children and 14 adults were killed. Anadolu reported two strikes roughly forty minutes apart. President Trump said on March 7 that in his opinion Iran had done it, citing Iranian inaccuracy with munitions. Bellingcat had already established otherwise. Its researchers identified a Tomahawk cruise missile — a munition no other belligerent in the conflict fields — in footage released by Iran’s Mehr agency, and geolocated the strike sequence. The New York Times, the Associated Press and CNN reached compatible conclusions through independent satellite and video analysis. By March 11, NPR reported that a preliminary Pentagon assessment had determined the United States was at fault. Five months later, the accountability failure is not the one I described when I first wrote about this case, and the actual failure is more instructive. A process was initiated. On March 13, Secretary Hegseth announced a formal command investigation, with CENTCOM appointing a senior officer from outside the command to lead it — the correct procedural choice. Lawmakers have said that officer submitted an initial report in April. CENTCOM has held it since. On May 19, Admiral Brad Cooper told lawmakers under oath that the investigation was complex, near completion, and that “I’m fully committed to transparency” once it concluded. No findings have been published. Then in July, CNN reported the detail that reframes the case. Within a week of the strike, the first two stages of the battle damage assessment were complete, establishing that American forces had hit the location. The third stage — the standard review in which Defense Intelligence Agency analysts examine the full body of satellite imagery and intelligence to determine holistically what occurred — had not been ordered as of early July. One source familiar with the matter told CNN there had been no detailed analysis and that CENTCOM had locked down the investigation. NBC reported that preliminary findings pointed to outdated intelligence as the likely cause. This is a different kind of institutional failure from the one international lawyers usually describe, and it is worse. An absent process can be demanded. A process that ran, produced a document, and stopped is much harder to move, because officials can accurately say an investigation took place. The context makes it harder still. On May 13 the Pentagon’s own Inspector General found that the Department had systematically failed to implement its Civilian Harm Mitigation and Response Action Plan, with all eleven objectives reclassified as at risk and the legally mandated Civilian Protection Center of Excellence lacking key staff and leadership. The architecture built specifically to prevent and account for incidents like Minab had been allowed to decay before the war that tested it. Congress has asked the right questions and been ignored. A letter led by Senator Chris Van Hollen and signed by more than forty senators asked Secretary Hegseth directly whether American forces conducted the strikes, what the intended target was, whether AI tools were used in targeting, and whether a no-strike list was established before operations began. Answers were requested by March 18. More than 150 House members signed a parallel letter on the broader civilian toll. The comparison the Pentagon itself invites is unflattering. As NBC noted, the Department has publicly disclosed its role in comparable incidents before: a special forces raid in Yemen, a bombing in Iraq that killed more than a hundred civilians, the strike on an Afghan hospital that killed at least forty-two, a drone attack in Afghanistan that killed ten. Disclosure in those cases was not generous, but it happened. What Minab demonstrates is that the binding constraint on accountability is not evidence. Volunteer open-source investigators, working entirely from public material, established the essential facts within nine days. The state that conducted the strike established them internally within seven. The constraint is that no mechanism exists to compel publication of a report a government has decided not to publish — not the Rome Statute, to which the United States is not a party; not the Security Council, where it holds a veto; and not the Inspector General, who can find institutional failure but cannot release another command’s findings. One lever remains, and it is domestic rather than international. Congress can require declassified release of the findings through the National Defense Authorization Act. Whether it does will indicate more about the state of accountability for civilian harm than any further open-source analysis. The evidence is not missing. The report is not missing. Both exist. Neither can be read.    

The recently published PRIME Plus report, An Assessment of the FY2026–27 Federal Budget Through the Lens of Economic Freedom, deserves appreciation for shifting the debate beyond conventional budget arithmetic. Rather than asking merely whether taxes have increased or decreased, it examines whether the budget enlarges or restricts the freedom of individuals and businesses to produce, invest, trade and innovate. That alone makes it a valuable contribution to Pakistan’s policy discourse. The report of Policy Research Institute of Market Economy (PRIME) correctly observes that Pakistan’s formal economy bears a disproportionate tax burden while much of the informal sector remains outside the effective tax net. It questions tax expenditures exceeding Rs 2.35 trillion, highlights the crowding out of private investment by government borrowing, welcomes tariff rationalisation and criticises regulatory uncertainty. These issues deserve much wider public attention. PRIME’s analysis also points towards a deeper weakness in Pakistan’s reform discourse: we discuss economic freedom without first securing constitutional governance. The distinction is fundamental. International indices commonly measure economic freedom through taxation, trade openness, government spending, financial markets and regulatory efficiency. These indicators matter. Lower barriers to enterprise can promote investment, innovation and competition. They answer only part of the question. Why do countries with similar tax rates produce very different economic outcomes? Why do investors accept higher taxation in some jurisdictions while avoiding countries with lighter tax burdens? Why do some economies flourish with relatively large governments while others stagnate despite repeated concessions? The answer lies primarily in institutions. James Buchanan argued that public finance cannot be analysed independently of the constitutional rules under which governments operate. Douglass North demonstrated that long-term development depends upon institutions that reduce uncertainty, enforce contracts and create predictable incentives. Centuries earlier, Ibn Khaldun linked prosperity with justice, moderation in taxation and restraint upon arbitrary power. Excessive intervention, unpredictable fiscal demands and rent-seeking, he observed, ultimately weaken both economic activity and state revenues. These intellectual traditions converge on one central proposition: economic freedom is not created simply by lowering tax rates. It emerges from constitutional governance. Pakistan’s experience illustrates this clearly. Successive governments have offered tax holidays, created special economic zones, reduced customs duties and announced investment facilitation mechanisms. Investment nevertheless remains subdued. Investors do not merely compare tax rates; they compare legal systems. They ask whether contracts will be enforced within a reasonable time, whether regulations will survive political transitions, whether tax liabilities can be altered retrospectively and whether executive discretion outweighs parliamentary certainty. These are questions of constitutional governance rather than fiscal engineering. The same principle applies to taxation. Pakistan’s problem is frequently described as one of high taxation. That diagnosis is incomplete. The deeper problem is unequal taxation. The salaried class in formal sector is fully documented, its tax is deducted before income reaches employees, and its compliance burden continues to rise. Large segments of commerce, services and agriculture operate under very different fiscal realities. The issue is not merely how much tax is collected, but whether equal citizens are governed by equal fiscal rules. A system built around withholding taxes, presumptive taxes, minimum taxes and sector-specific exemptions creates unequal citizenship before the law. It also encourages informality. Businesses do not remain undocumented only because rates are high. Formal participation imposes greater compliance costs while offering few institutional benefits. Documentation without trust becomes compulsion rather than reform. The PRIME report also notes that government borrowing crowds out private investment because banks prefer sovereign lending over commercial risk. This is not simply a banking failure. When governments repeatedly finance deficits through domestic borrowing, banks act rationally by purchasing government securities. Financial markets are responding to distorted fiscal incentives created by public policy. Interest payments and defence together consume nearly 94 percent of net federal revenue, leaving little fiscal space for education, healthcare, scientific research, digital infrastructure, justice administration and productive public investment. The challenge is not merely that government spends too much; it is that public priorities have become distorted. Expenditure that strengthens courts, education, digital infrastructure, research, public health and efficient regulation expands future economic freedom because it reduces uncertainty and lowers transaction costs. Spending absorbed by debt servicing and institutional inefficiency does not. Constitutional Political Economy therefore distinguishes between the size of government and the quality of government. Fiscal federalism is another neglected dimension. The Constitution (Eighteenth Amendment) Act, 2010 reshaped the distribution of fiscal powers. Provincial sales taxes, fragmented administrations and overlapping jurisdictions now influence business decisions daily. Economic freedom cannot be assessed through the federal budget alone. The constitutional structure governing taxation matters as much as the annual Finance Act itself. Pakistan’s economic challenge is consequently larger than budget reform. Markets flourish where laws are predictable, taxation is neutral, contracts are enforceable, property rights are secure and governments remain subject to constitutional restraints. These conditions cannot be created through a single Finance Act. They require a durable commitment to constitutional governance. The value of the PRIME report lies in encouraging this broader conversation. The next step is to recognise that economic freedom rests upon a stronger constitutional foundation. Where constitutional governance is weak, economic reforms remain temporary. Where it is strong, markets can generate prosperity without constant discretionary intervention. Pakistan’s recurring fiscal crises are symptoms rather than the disease. The underlying ailment is institutional. Budgets can redistribute resources, but only constitutional governance can establish equality before law, predictable taxation, secure property rights and meaningful limits on arbitrary state power. Economic freedom, therefore, is neither the starting point of development nor a concession to be distributed through annual Finance Acts. It is the outcome of a constitutional order in which taxation rests on representation, public borrowing is subject to accountability, contracts and property are protected, and executive power remains bounded by law. In a rent-distributing state, freedom is rationed through exemptions, influence and discretion; in a constitutional state, it is secured for all through equal rules. Unless Pakistan reforms the institutions that determine who is taxed, how public money is spent, who bears the cost of debt and how state power is

When France first levied a 3% tax on the domestic revenues of large technology companies in 2019, the move was presented as a modest, temporary fix. Five years later, the temporary fix has become a global patchwork. More than 20 countries now operate some form of digital services tax, the United States has threatened retaliatory tariffs, and the multilateral replacement intended to tidy it all up remains unsigned.   The question at the heart of the scramble is disarmingly simple and technically complex: where should a company that sells everywhere but is physically located almost nowhere pay its taxes?   For most of the last century, international tax rules rested on physical presence. A company was taxed where it had offices, factories, or personnel. That principle struggled as companies like Google, Amazon, and Meta built business models in which value is derived from users, data, and online advertising in one country, while profits are booked in another, often lower-tax, jurisdiction.   The scale of the mismatch sharpened after the 2008 financial crisis. The Organisation for Economic Co-operation and Development (OECD) launched its Base Erosion and Profit Shifting (BEPS) project in 2013, estimating that profit-shifting cost governments $100 billion to $240 billion annually in lost revenue. By 2018, public pressure to act on highly visible technology firms accelerated political timelines faster than the OECD process could move.   The result was the rise of the unilateral digital services tax, or DST.   Unlike corporate income taxes, DSTs are typically levied on gross revenues, not profits, generated from specific digital activities online marketplaces, search engines, social media platforms, and targeted advertising within a country’s borders. Rates are low, generally 2% to 5%, but they apply broadly. The United Kingdom’s 2% DST raised over £800 million in 2024-25. France, Italy, Spain, Austria, India, Turkey and others adopted similar measures, each with slightly different thresholds, definitions, and scopes.   Proponents argue DSTs restore a basic link between economic activity and taxation. “If a platform earns substantial revenue from French users watching French ads, the French tax base should reflect that,” a senior official at the French Ministry of Finance said in 2023. For many developing economies, where consumption of digital services is large but physical presence of providers is minimal, DSTs are also a matter of fiscal sovereignty.   Critics, including the technology companies themselves and the U.S. government, point to three problems. First, taxing revenue rather than profit can penalize low-margin businesses and be passed on to small businesses and consumers who use the platforms. Second, the proliferation of different rules creates compliance complexity and the risk of double taxation, where the same income is taxed in multiple jurisdictions. Third, Washington has long argued DSTs are discriminatory by design, targeting predominantly American firms.   That third argument carried trade consequences. Under Section 301 of the U.S. Trade Act, the Office of the U.S. Trade Representative (USTR) investigated DSTs adopted by France, India, Italy, and others, concluding that several did discriminate against U.S. companies. Tariffs of up to 25% on selected imports were prepared, then suspended pending a global deal.   That deal was meant to be Pillar One.   In October 2021, 136 countries and jurisdictions representing more than 90% of global GDP agreed to a two-pillar framework brokered by the OECD/G20 Inclusive Framework. Pillar Two, a 15% global minimum corporate tax, has largely moved forward and is now in force in dozens of countries. Pillar One is the more ambitious and more fragile.   Under Pillar One’s Amount A, a portion of the residual profits of the world’s largest and most profitable multinationals  those with global turnover above €20 billion and profitability above 10% would be reallocated to market jurisdictions where their customers and users are located, regardless of physical presence. The scope was deliberately expanded beyond tech; excluding extractive industries and regulated financial services, it would cover roughly 100 multinationals across sectors.   In exchange, countries would be required to withdraw DSTs and similar measures and commit not to introduce new ones. A Multilateral Convention (MLC) would implement the rules, replacing a web of unilateral taxes with a single, coordinated mechanism. The OECD estimated in 2023 that Pillar One would reallocate $200 billion in profits and generate $13 billion to $36 billion in additional global tax revenue annually, a figure comparable in aggregate to existing DST receipts, though distribution would differ markedly by country.   Negotiations have since slowed. The original goal of signing the MLC in 2023 was missed. A target for 2024 was also missed. In 2025 and early 2026, several governments, including the UK, revised their internal planning assumptions to 2027, while confirming that their DSTs “remain in operation” until a convention enters into force.   Several factors explain the delay. The convention requires ratification, including in the United States, where any tax treaty must secure a two-thirds majority in the Senate. Bipartisan skepticism about ceding taxing rights and concerns about revenue impacts have made ratification uncertain. Some emerging economies have argued that the thresholds for Pillar One are too high and the reallocation too small to benefit them meaningfully, preferring instead to retain DSTs or pursue a parallel negotiation at the United Nations on international tax cooperation that could run until 2027. In Washington, meanwhile, successive administrations have maintained that any acceptable deal must include robust DST withdrawal provisions.   The result is a holding pattern with real costs. In October 2021, Austria, France, Italy, Spain, the UK and the United States announced a transitional agreement: as long as Pillar One progressed, the U.S. would not impose retaliatory tariffs, and European DST liabilities would be creditable against future Pillar One obligations. That truce has largely held, but it depends on continued progress.   For businesses, the uncertainty complicates planning. A multinational may face a DST in India, a diverted profits tax in the UK, a Pillar Two top-up in the EU, and the prospect of Pillar One reallocation all with different calculation bases and documentation requirements.

The development of decentralized finance represents a material reconfiguration of financial intermediation rather than a peripheral experiment in virtual assets. DeFi enables trading, lending, borrowing, liquidity provision and asset management through blockchain based smart contracts, with continuous availability, programmable execution, global accessibility and reduced dependence on conventional intermediaries. The FATF records total value locked at USD 86.644 billion in 2026, approximately 85 percent above the 2023 level, while institutional investors, virtual asset service providers and regulated entities are increasingly committing capital to DeFi arrangements. This track suggests that DeFi will not simply compete with traditional finance, but will progressively intersect with it through tokenized assets, settlement, payments, liquidity and market infrastructure. The policy significance of that convergence lies in the need to preserve innovation without permitting functional substitutes for regulated finance to escape equivalent safeguards. Traditional finance provides legal accountability, prudential discipline, customer identification and institutional channels for enforcement, while DeFi contributes automation, composability, transparency of public ledger transactions, broader access and rapid settlement. The future architecture is therefore likely to be hybrid: regulated institutions will use decentralized infrastructure where it produces efficiency, whereas supervisors will require comparable financial integrity outcomes whenever equivalent financial functions are performed. FATF, the Financial Stability Board, IOSCO and the IMF converge on a technology neutral and function oriented conception under which substance, activity, control and risk prevail over labels or technological form. The July 2026 FATF Targeted Report is consequently best understood as an implementation instrument that updates the 2021 Guidance in light of DeFi’s expansion. Its scope is to identify emerging money laundering, terrorist financing and proliferation financing risks, clarify when the FATF Standards apply. It also provide practical tools for identification, regulation, supervision and investigation, develop criteria for identifying controllers or persons exercising sufficient influence, and recommend measures for public and private actors. The report is expressly non-binding, but its analytical significance is substantial because it translates Recommendation 15 into a functional supervisory methodology for a market whose legal form, governance and territorial nexus are frequently indeterminate. The defining characteristics of DeFi create both utility and vulnerability. Similarly, smart contract automation removes many conventional execution functions, open source and composable architecture permit rapid replication and interaction among protocols, algorithmic market mechanisms automate liquidity, pricing and liquidation, pseudonymous liquidity provision permits participation without conventional identification, permissionless access may eliminate customer due diligence, and reliance on oracles imports external data into automated decisions. These characteristics permit rapid and complex movement of value but also allow illicit proceeds to be layered through liquidity pools, decentralized exchanges, bridges, swaps and multiple chains before supervisory or enforcement systems can react. The regulatory fragmentation, weak compliance, cyber vulnerabilities and diminishing dependence upon regulated entry and exit points further aggravate supervisory difficulty. The applicable legal framework begins with technological neutrality. The recommendation 15 applies where a natural or legal person, as a business, conducts or actively facilitates activities falling within the VASP definition. The software itself is not regulated merely because it executes a financial function, but persons exercising control or sufficient influence over a DeFi arrangement may fall within the regulatory perimeter. FATF differentiates centralized arrangements with identifiable controllers, centralized arrangements in which control exists but controllers are difficult to identify, and truly decentralized arrangements in which no person maintains control or sufficient influence. The first two categories fall within the Standards, the third falls outside direct application, although it remains subject to alternative risk mitigation through adjacent regulated actors. The principal implementation deficit is therefore institutional rather than conceptual. FATF’s 2026 survey found that only 26 of 142 responding jurisdictions had assessed DeFi risks, 132 had not identified qualifying DeFi arrangements operating in their territory, only four had implemented licensing or registration requirements, and only two had licensed or registered such arrangements. The resulting supervisory gap facilitates regulatory arbitrage and demonstrates why national authorities must integrate DeFi into national, sectoral or virtual asset risk assessments, calibrated to materiality, domestic exposure, cross border activity, governance structures and actual financial crime threats. The financial crime typologies identified by FATF demonstrate that DeFi risk is not confined to speculative misconduct. The fraudsters have used purported DeFi structures to misrepresent liquidity and divert investor assets, professional money laundering networks fragment funds across wallets and then use decentralized exchanges, bridges, mixers, swaps and chain hopping to obscure provenance, ransomware groups and hackers use DeFi immediately after compromise to convert and disperse proceeds, and proliferation financing actors have exploited governance weaknesses, oracles, bridges and limited compliance environments. The policy concern is intensified by speed: automated movement can complete layering before authorities, intermediaries or analytics providers can identify the event, establish attribution and initiate restraint. The decisive supervisory question is the identification of control or sufficient influence. FATF treats control as the practical ability to determine or materially influence key operations, service delivery or economic benefits. The relevant indicators include authority to modify or pause smart contracts, alter protocol parameters, control oracles, administer treasury assets, determine participation, appoint key actors, receive material fee flows, control governance votes, operate public interfaces, manage corporate entities, determine development priorities, control essential infrastructure, or direct branding and communications. No single indicator is conclusive. Additionally, authorities should combine public blockchain evidence, governance records, audits, service provider information, financial intelligence and investigative material, and should assess economic reality rather than formal claims of decentralization. The assessment of control must remain continuous because governance can migrate from a company or foundation to a decentralized autonomous organization without relinquishing substantive authority. The concentrated governance tokens, delegated voting blocs, special proposal rights, veto powers, administrative keys, clustered wallets and continuing receipt of protocol revenues may disclose retained control. On the contrary, a genuinely decentralized arrangement, after independent assessment, falls outside direct FATF obligations because no accountable person can be identified. That conclusion does not equate to absence of risk. The authorities should instead influence stablecoin issuers, regulated VASPs, financial institutions and controlled application interfaces, whereas encouraging digital identity, embedded customer due diligence and blockchain analytics within genuinely decentralized environments. The licensing and