Polygon Labs, in collaboration with Arktouros law firm, has introduced a fresh regulatory framework suggesting the classification of specific decentralized finance (defi) protocols as critical infrastructure essential to the national and economic security of the United States.
Published on January 29 by Rebecca Rettig and Katja Gilman of Polygon Labs, along with Arktouros co-founder Michael Mosier, the proposal aims to address illicit financial activities within the DeFi space. It advocates for the oversight of genuinely decentralized DeFi protocols by the US Treasury’s Office of Cybersecurity and Critical Infrastructure Protection (OCCIP).
The OCCIP, although not a traditional financial regulator, plays a crucial role in bolstering the security and resilience of the critical infrastructure in the financial services sector. It collaborates with financial institutions, industry associations, and government entities to exchange information on cybersecurity threats and vulnerabilities.
Polygon’s framework presents a three-step approach to tackle the legal challenges facing DeFi. The initial step involves establishing a legal definition for “System Control Persons” (SCPs), who have the authority to govern blockchain-based systems.
According to the proposal, SCPs should comply with standard anti-money laundering (AML) regulations, irrespective of the system’s decentralized nature. Additionally, the framework introduces a new category of “critical communications transmitters” to play a vital role in genuine DeFi systems.
For DeFi systems without SCPs, classified as “genuine defi,” the proposal suggests a special designation as “critical infrastructure” under the supervision of the OCCIP. These entities would be tasked with specific responsibilities to safeguard US national and economic security without falling under the category of financial institutions regulated by the Bank Secrecy Act (BSA).
This approach contrasts with the perspective of Senator Elizabeth Warren, who recently proposed that crypto firms should adhere to the same AML standards as traditional banks. Warren has raised concerns about the use of cryptocurrencies in funding illicit activities, including North Korea’s nuclear program.
The proposed framework distinguishes between centralized finance (CeFi) or traditional finance (TradFi) and DeFi, each with distinct control mechanisms based on guidance from FinCEN, the Treasury’s Financial Crimes Enforcement Network.
Legal expert Jake Chervinsky notes that while discussions about digital assets often revolve around securities and commodities laws, the focus in Washington DC is more on illicit finance. He sees this new framework as a potential solution to address these concerns.
The authors stress the importance of striking a balance between preventing illicit activities and promoting positive actions, aligning with the Treasury’s goal of fostering economic prosperity and ensuring financial security in the US.
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