Jannat Ara

Polygon Labs Proposes Regulatory Framework Elevating DeFi Protocols to Critical Infrastructure

Polygon Labs, in collaboration with Arktouros law firm, has introduced a novel regulatory framework suggesting the designation of certain decentralized finance (DeFi) protocols as critical infrastructure vital to the national and economic security of the United States.

The proposal, presented on January 29 by Polygon Labs’ Rebecca Rettig and Katja Gilman, alongside Arktouros co-founder Michael Mosier, focuses on addressing illicit finance activities within the DeFi space.

The key recommendation advocates for genuinely decentralized DeFi protocols to fall under the oversight of the US Treasury’s Office of Cybersecurity and Critical Infrastructure Protection (OCCIP). Despite not being a traditional financial regulator, OCCIP plays a crucial role in enhancing the security and resilience of critical infrastructure within the financial services sector.

Polygon’s framework outlines a three-step solution to legal challenges in DeFi. The first step involves creating a legal definition for “System Control Persons” (SCPs) who have operational authority over blockchain-based systems. The proposal suggests SCPs adhere to standard anti-money laundering (AML) requirements, regardless of whether the system is labeled as decentralized.

Another key proposal introduces a new category of “critical communications transmitters,” playing a pivotal role in genuine DeFi systems.

For systems classified as “genuine DeFi” without SCPs, the framework suggests a separate classification as “critical infrastructure,” placing them under OCCIP supervision. These entities would uphold specific obligations to safeguard US national and economic security without being labeled as financial institutions under the Bank Secrecy Act (BSA).

This proposal contrasts with Senator Elizabeth Warren’s stance, who previously suggested that crypto firms should meet the same AML requirements as traditional banks. The framework also distinguishes between centralized finance (CeFi), traditional finance (TradFi), and DeFi, each with independent control mechanisms based on guidance from FinCEN, the Treasury’s Financial Crimes Enforcement Network.

Legal expert Jake Chervinsky sees this framework as a potential real solution to Washington DC’s concerns about illicit finance, emphasizing a shift in focus from securities and commodities laws to the prevention of illicit financial activities.

The authors stress the importance of striking a balance between preventing illicit activities and promoting positive actions, aligning with the Treasury’s mandate to promote economic prosperity and ensure the financial security of the United States.

Powered by Crypto Expert BD

Follow us on Twitter: https://x.com/CryptoExpert_BD

Join our Telegram channel: https://t.me/CryptoExpert_BD