Polygon Labs advocates for the recognition of defi protocols as essential infrastructure in a novel regulatory framework.
Polygon Labs, in partnership with Arktouros law firm, has unveiled a groundbreaking regulatory framework that proposes recognizing specific decentralized finance (defi) protocols as critical infrastructure vital to the national and economic security of the United States.
The proposal, authored by Rebecca Rettig and Katja Gilman of Polygon Labs, alongside Arktouros co-founder Michael Mosier, was published on January 29. The 45-page document focuses on addressing illicit financial activities in the DeFi sector.
According to the proposal, genuinely decentralized DeFi protocols should be overseen by the Office of Cybersecurity and Critical Infrastructure Protection (OCCIP) within the US Treasury. Although not a conventional financial regulator, the OCCIP plays a crucial role in strengthening the security and resilience of the financial services sector’s critical infrastructure. It collaborates with financial firms, industry groups, and government partners to exchange information about cybersecurity threats and vulnerabilities.
Polygon’s framework presents a three-step solution to the legal challenges facing DeFi. The first step involves establishing a legal definition for “System Control Persons” (SCPs). SCPs are individuals or entities that possess unilateral operational authority over blockchain-based systems.
The proposal suggests that SCPs should comply with standard anti-money laundering (AML) requirements, regardless of whether the system is classified as decentralized.
Another noteworthy recommendation is the creation of a new category of “critical communications transmitters.” These entities would play a vital role in genuine DeFi systems.
For systems without SCPs, which are regarded as “genuine defi,” the framework proposes a separate classification as “critical infrastructure.” This would place them under the supervision of the OCCIP. These entities would have specific obligations to safeguard US national and economic security without being classified as financial institutions under the Bank Secrecy Act (BSA).
This proposal stands in contrast to the stance of crypto-skeptical senator Elizabeth Warren, who recently suggested that crypto firms should be subject to the same AML requirements as traditional banks. Warren has also expressed concerns about the use of cryptocurrencies in funding illicit activities, including North Korea’s nuclear arms program.
The proposed framework also distinguishes between centralized finance (CeFi) or traditional finance (TradFi) and DeFi, with each having independent control mechanisms based on guidance from FinCEN, the Treasury’s Financial Crimes Enforcement Network.
Jake Chervinsky, a crypto industry lawyer, commented that while policy discussions about digital assets often revolve around securities and commodities laws, in Washington DC, the focus is primarily on illicit finance. He sees this new framework as a potential genuine solution to these concerns.
The authors emphasize the importance of striking a balance between preventing illicit activities and promoting positive actions. This aligns with the Treasury’s mandate to promote economic prosperity and ensure the financial security of the United States.
