2024

DeFi

Polygon (Old)

Read

<a href="https://crypto.news/tag/polygon/" rel="noopener noreferrer nofollow">Polygon </a>Labs, in collaboration with Arktouros law firm, has put forward a new regulatory framework that proposes designating certain decentralized finance (<a href="https://crypto.news/tag/defi/" rel="noopener noreferrer nofollow">defi</a>) protocols as critical infrastructure crucial to the national and economic security of the US.
The suggestion was <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4607332" target="_blank" rel="noopener noreferrer nofollow">published </a>on Jan. 29 by Rebecca Rettig and Katja Gilman of Polygon Labs, alongside Arktouros co-founder Michael Mosier. Their 45-page document focuses on combating illicit finance activities in the DeFi space.
<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter">
 <div class="wp-block-embed__wrapper">
 <blockquote class="twitter-tweet">
 1/ Today, <a href="https://twitter.com/m_mosier_?ref_src=twsrc%5Etfw" target="_blank" rel="noopener noreferrer nofollow">@m_mosier_</a> <a href="https://twitter.com/katjagilman?ref_src=twsrc%5Etfw" target="_blank" rel="noopener noreferrer nofollow">@katjagilman</a> &amp; I are sharing a paper that begins a conversation around, &amp; 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. <a href="https://t.co/1OQ1gCHiAX" target="_blank" rel="noopener noreferrer nofollow">pic.twitter.com/1OQ1gCHiAX</a>— Rebecca Rettig (@RebeccaRettig1) <a href="https://twitter.com/RebeccaRettig1/status/1751967709359665569?ref_src=twsrc%5Etfw" target="_blank" rel="noopener noreferrer nofollow">January 29, 2024</a>
 </blockquote>
 </div>
</figure>
The proposal recommends that genuinely decentralized DeFi protocols should be overseen by the US Treasury’s Office of Cybersecurity and Critical Infrastructure Protection (OCCIP).
The OCCIP, while not a traditional financial regulator, plays a pivotal role in enhancing the security and resilience of the financial services sector’s critical infrastructure, in collaboration with finance firms, industry groups, and government partners to share information about cybersecurity threats and vulnerabilities.
You might also like: <a href="https://crypto.news/senator-warren-accuses-crypto-lobbyists-of-obstructing-anti-terrorism-efforts/" rel="noopener noreferrer nofollow"> Senator Warren accuses crypto lobbyists of obstructing anti-terrorism efforts </a>
Polygon’s framework outlines a three-step solution to the legal challenges facing defi. The first step involves creating a legal definition for “System Control Persons” or “SCPs.” These are individuals or entities that can unilaterally exercise operational authority over blockchain-based systems.
According to the proposal, SCPs should adhere to standard anti-money laundering (AML) requirements, regardless of whether the system is labeled as decentralized.
Another significant proposal by the team is the creation of a new category of “critical communications transmitters.” These entities would play a crucial role in genuine DeFi systems.
For systems without SCPs, which are considered “genuine defi”, the framework suggests a separate classification as “critical infrastructure”. This would place them under the supervision of the OCCIP. These entities would be responsible for fulfilling specific obligations to safeguard US national and economic security without being classified as financial institutions under the Bank Secrecy Act (BSA).
This proposal contrasts with the views of crypto-critical senator <a href="https://crypto.news/tag/elizabeth-warren/" rel="noopener noreferrer nofollow">Elizabeth Warren</a>, who last month suggested that crypto firms should meet the same AML requirements as traditional banks. Warren has also raised <a href="https://crypto.news/senator-elizabeth-warren-calls-crypto-a-new-threat/" rel="noopener noreferrer nofollow">concerns about the use of cryptocurrencies</a> 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 lawyer in the crypto industry, commented that while securities and commodities laws often dominate policy discussions about digital assets, in Washington DC, the focus is more on <a href="https://crypto.news/illicit-crypto-addresses-received-over-24b-in-2023-chainalysis-says/" rel="noopener noreferrer nofollow">illicit finance</a>. He views this new framework as a potential real solution to these concerns.
<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter">
 <div class="wp-block-embed__wrapper">
 <blockquote class="twitter-tweet">
 Huge drop today 🔥 In the crypto industry, the policy conversation is often dominated by headlines about the securities and commodities laws. But in DC, policymakers are much more concerned about illicit finance than anything else. This could be the start of a real solution 👇 <a href="https://t.co/6bh2Le2AM8" target="_blank" rel="noopener noreferrer nofollow">https://t.co/6bh2Le2AM8</a>— Jake Chervinsky (@jchervinsky) <a href="https://twitter.com/jchervinsky/status/1751972917401858106?ref_src=twsrc%5Etfw" target="_blank" rel="noopener noreferrer nofollow">January 29, 2024</a>
 </blockquote>
 </div>
</figure>
The authors emphasize the importance of balancing the prevention of illicit activities with the fundamental goal of promoting positive actions. This aligns with the Treasury’s mandate of promoting economic prosperity and ensuring the financial security of the U.S.
Read more: <a href="https://crypto.news/polygon-labs-reveals-updated-web3-identification-service/" rel="noopener noreferrer nofollow"> Polygon Labs reveals updated web3 identification service </a>

Polygon Labs proposes defi protocols as critical infrastructure in new regulatory framework

crypto.news

Other articles published on Jan 30, 2024

Join our free newsletter for daily crypto updates!