Polygon Labs’ legal team pushes for OCCIP control

DeFi regulation has been a major bone of contention among regulators around the world. A recent paper by Rebecca Rettig, Katja Gilman from Polygon Labs, and Michael Mosier from Arcturos, proposed a strategy for classifying truly decentralized DeFi protocols as critical infrastructure.

This classification places them under the control of the US Treasury's Office of Cybersecurity and Critical Infrastructure Protection (OCCIP). Although OCCIP is not a typical financial regulator, it plays an important role in strengthening the safety and soundness of critical infrastructure in the financial services sector.

It works in partnership with financial institutions, industry associations and government agencies to share information about cyber security threats and vulnerabilities.

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Classifying DeFi as ‘critical infrastructure'

According to the 45-page study, it is possible to develop security measures to prevent the risks of illegal financial activities in DeFi systems. Rather than force middlemen into a true Diff system, it's akin to not having phone companies have switchboard operators again to verify who's using each phone.

Instead, real DeFi should be viewed as “critical infrastructure” and regulated by the OCCP, similar to how authorities treat illicit financial risks in other technology systems in finance.

The report clarifies that the classification of true DeFi systems as “critical infrastructure” under OCCIP does not classify them as “financial institutions” governed by the Bank Secrecy Act (BSA). OCCIP is not bound by BSA regulations and is not limited to working with financial institutions.

in addition. The classification of true DIFF systems as “critical infrastructure” is consistent with efforts by both industry and regulators to establish regulatory measures for independent software. According to the paper, these measures include implementing cybersecurity standards, establishing information sharing and analysis centers (ISACs), automating risk indicators and using other tools to mitigate risks.

While some of these initiatives are already underway in the DeFi sector, such as cybersecurity frameworks and ISAC, cooperation between industry and OCCIP-facilitated regulators will enhance the effectiveness of these efforts.

Unclear regulations create barriers to DeFi expansion

DeFi was a gray area for regulators and majors. While North America is a large user of DeFi, its share of activity has recently declined, mainly due to regulatory uncertainty in the US.

Earlier this year, the Commodity Futures Trading Commission (CFTC) highlighted the problem with DeFi systems: the lack of clear accountability, which some industry structures deliberately ignore. The agency pointed out various risks for investors and users such as fraud, market manipulation, conflict of interest, data breach and privacy violation, mainly because people do not understand DeFi well.

The CFTC suggested that policymakers should better understand DeFi by identifying what is already known and what still needs to be explored. He recommended that policymakers use mapping to see if financial products and services offered by DeFi projects fall within existing US regulations.