A novel capacitor voltage control strategy for three-phase distribution static synchronous compensators (DSTATCOM) based on modular multilevel converters (MMC) is proposed in this paper. Firstly, modeling of circular interaction among the electrical quantities for MMC-STATCOM is established. And the improved capacitor voltage control structure consists of three loops, a) total active power control loop for the entire apparatus, b) the arm capacitor voltage balancing control loop for each phase and c) individual capacitor voltage balancing control loop in each arm. The output of total active power control is added to the current tracking control as active current reference. The arm capacitor voltage balancing control is critical for the stable operation of the MMC-DSTATCOM, especially in capacitive var compensation mode. A set of cosine functions instead of the output currents is proposed for the individual capacitor voltage balancing control in this paper. Since output current measurement is avoided in the individual capacitor voltage balancing control, the number of current sensors and data communication resources are reduced, especially for practical applications based on MMC with a large number of modules. The effectiveness of the above capacitor voltage three-loop control architecture is verified completely by detailed analysis and experimental results from a MMC-DSTATCOM laboratory prototype with multi-DSP controller system.