Polygon Labs has proposed a framework for classifying DeFi as ‘critical infrastructure’
Independent, decentralized finance (DeFi) protocols should be designated as “critical infrastructure” and regulated by federal cybersecurity agencies in the United States, according to a newly proposed regulatory framework from the legal team behind Polygon Labs.
In the year On January 29, Rebecca Rettig and Katja Gilman from Polygon Labs and Michael Mosier, co-founder of the emerging tech law firm Arcturos, published “A Conceptual Framework for Decentralized Finance to Combat Illicit Financial Activity.”
The 45-page paper actually suggests classifying decentralized DeFi protocols as critical infrastructure, which would be regulated by the US Treasury's Office of Cyber Security and Critical Infrastructure Protection (OCCIP).
1/ Today @m_mosier_ @katjagilman and I are sharing a paper that will start a conversation around, and propose a conceptual framework for how to answer the “illegal finance” policy question related to DeFi. Short thread below, links to full paper + summary document. pic.twitter.com/1OQ1gCHiAX
— Rebecca Rettig (@RebeccaRettig1) January 29, 2024
OCCIP is not an official financial regulator, but coordinates the Treasury Department's efforts to improve the safety and resilience of the financial services sector's critical infrastructure and reduce operational risks.
It works closely with financial organizations, industry groups and government partners to share information about cyber security, threats and vulnerabilities.
However, the paper notes that not all DeFi protocols are truly decentralized and some have critical points of centralization that must be governed by current financial regulations.
Meanwhile, as part of the new legal framework, the group proposes to create a new category of “critical communicators” that interact with and become critical to true DeFi systems.
These entities are not “financial institutions” subject to the Bank Secrecy Act (BSA), but must fulfill certain tailored obligations to protect America's national and economic security, he said.
Related: DeFi platforms can comply with regulations without compromising privacy.
The proposed framework also identifies centralized finance (CeFi) or TradFi with independent oversight based on FinCEN (Treasury's Financial Crimes Enforcement Network) guidelines.
Crypto industry attorney Jake Chervinsky commented on X that policy conversations about the digital asset industry are often dominated by securities and commodity law topics.
However, in Washington, D.C., he said, “This could be the beginning of a real solution,” before adding that “policymakers are more concerned about illicit finance than anything else.”
“We must not lose sight of the important and fundamental goal of promoting good governance,” the authors concluded, in support of the Treasury's mission of “promoting economic prosperity and ensuring the financial security of the United States” in an effort to urgently end illegal activities.
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