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According to Polygon’s legal team, decentralized finance protocols should be considered “critical infrastructure” for the national and economic security of the United States.
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According to a new regulatory approach from Polygon Labs’ legal team, impartial, decentralized finance (DeFi) protocols should be designated as “critical infrastructure” in the United States and regulated by federal cybersecurity agencies.
On January 29, Rebecca Rettig and Katja Gilman of Polygon Labs, along with Michael Mosier, co-founder of emergency technology law firm Arktouros, published a 45-page paper titled “A Conceptual Framework for Combating Illicit Financial Activity in Decentralized Finance.”
The paper proposes designating truly decentralized DeFi protocols as critical infrastructure and suggests that these protocols should be regulated by the Cybersecurity and Infrastructure Security Agency (CISA) of the United States Department of the Treasury.
1/ Today, @m_mosier_ @katjagilman & I are sharing a paper that begins a conversation around, & proposes a conceptual framework for, how to answer the "illicit finance" policy question as it relates to DeFi. A brief thread below, with links to the full paper + a summary document. pic.twitter.com/1OQ1gCHiAX
— Rebecca Rettig (@RebeccaRettig1) January 29, 2024
CISA is not a formal financial regulator, but it coordinates the Treasury Department’s efforts to improve the security and resilience of the critical infrastructure of the financial services sector and reduce operational risk. It shares information about cybersecurity, threats, and vulnerabilities by working closely with financial institutions, industry groups, and government partners.
However, as the paper notes, not all DeFi protocols are truly decentralized and some may have significant centralization points, which would subject them to existing financial regulations.
Polygon Labs Team
In the meantime, the team also proposed creating a new category of “critical communications data providers.” These providers should be identified as part of a unique legal framework that interacts with real DeFi systems and is an integral part of them.
It suggested that these organizations should meet certain specific obligations to help protect the national and economic security of the United States, subject to the Bank Secrecy Act without being “financial institutions.”
The proposed framework also separately defines centralized finance, or TradFi, as subject to independent control based on the guidelines of the Financial Crimes Enforcement Network of the United States Department of the Treasury.
Crypto industry lawyer Jake Chervinsky, in a statement on a social media platform, noted that securities and commodities law headlines are often at the forefront of policy discussions about the digital asset industry.
However, he said that “what policy makers are most concerned about in Washington, D.C. is usually illicit finance” and added that “this could be the start of a real solution.”
The authors concluded that “we should not forget that strengthening good activity is an important and fundamental goal” in the urgency of stopping illicit activity. This grounds the Treasury’s mission to “promote economic well-being and ensure the financial security of the United States.”