In a recent research paper co-authored by Polygon’s Chief Legal Officer (CLO), Rebecca Rettig, and Michael Mosier from Arktouros, the proposal advocates for classifying “truly decentralized” DeFi protocols as critical infrastructure.
Table of Contents
Polygon Labs proposes to Grant DeFi Protocols Critical Infrastructure
The growing focus on regulatory oversight within the decentralized finance (DeFi) space has led platforms like Polygon to address evolving regulatory challenges. Polygon Advocates New Status for DeFi Protocols
The paper commences by defining DeFi and highlighting unique illicit finance risks specific to the sector, such as cyber threats, system management risks, and usage risks. The authors aim to lay the foundation for a comprehensive strategy to combat illicit finance in DeFi by delineating these risks.
Essential Components
The proposed framework comprises three essential components. Firstly, it establishes the criteria of “independent control” to discern smart-contract-based financial protocols with centralized elements falsely presenting themselves as “DeFi.” This differentiation aims to identify genuine DeFi protocols.
Secondly, the authors suggest classifying these DeFi protocols as “critical infrastructure,” subjecting them to oversight and security coordination by the Office of Cybersecurity and Critical Infrastructure Protection (OCCIP), a branch of the US Treasury Department.
Although OCCIP lacks regulatory authority over financial institutions, its purported expertise in managing critical infrastructure can contribute to the secure operation of DeFi systems, as per Rebecca Rettig, Polygon’s representative.
Lastly, the paper proposes introducing new laws mandating specific businesses, termed “critical communications transmitters” (CCTs), to adopt additional risk management practices related to illicit finance.
While these CCTs, facilitating communication in DeFi transactions, wouldn’t be classified as financial institutions under the Bank Secrecy Act (BSA), they play a role in upholding financial integrity objectives.
Addressing Illicit Finance Risks
The proposal aims to bolster the security and resilience of DeFi systems by categorizing them as critical infrastructure and involving OCCIP in oversight. According to Polygon’s CLO, OCCIP’s coordination can enhance existing cybersecurity frameworks and information-sharing initiatives within the DeFi sector.
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
CCTs as a Distinct Category
Additionally, introducing CCTs as a distinct category acknowledges the need to manage illicit finance risks at specific touchpoints in the DeFi transaction flow. Overall, Polygon Labs and Arktouros present a comprehensive framework for tackling illicit finance risks in the DeFi sector.
By designating DeFi protocols as critical infrastructure and utilizing OCCIP’s coordination, the proposal seeks to strike a balance between regulatory oversight and the permissionless nature of DeFi.
MATIC Current Price
Currently, Polygon’s native token, MATIC, is trading at $0.7979, displaying stability over the past 24 hours with a notable 9% surge in the past seven days.
Conclusion
To conclude, Polygon Labs’ proposal, co-authored by Rebecca Rettig and Michael Mosier, advocates for the critical infrastructure status of “truly decentralized” DeFi protocols. This comprehensive framework aims to address regulatory challenges, enhance security, and strike a balance between oversight and the decentralized nature of DeFi, marking a significant step in fostering the sector’s legitimacy.
Note: It’s a research based article not a financial advice
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