Legal Experts Propose Regulatory Framework for DeFi Protocols

In a groundbreaking development, legal experts from Polygon Labs have put forth a comprehensive proposal for the regulation of DeFi (Decentralized Finance) protocols. Rebecca Rettig and Katja Gilman, along with Michael Mosier from Arktouros Legal, have jointly authored the "Concept for Combating Illegal Financial Activities in Decentralized Finance," advocating for the classification of DeFi protocols as critical infrastructure.

The proposal suggests that the U.S. Cybersecurity and Critical Infrastructure Protection Office (OCCIP), a division of the U.S. Department of the Treasury, should oversee and regulate DeFi protocols. While OCCIP is not an official financial regulator, it plays a crucial role in coordinating efforts to enhance the security and resilience of the financial services sector.

The document also highlights the fact that not all DeFi protocols are truly decentralized, necessitating compliance with existing financial regulations. Polygon Labs' team further recommends the creation of a new category, "Critical Information Transmitters," which interact with DeFi systems and are integral to their functioning. These organizations would undertake specific responsibilities to help protect the national and economic security of the United States, without falling under the purview of the Bank Secrecy Act (BSA).

Additionally, the proposal calls for centralized finance (CeFi) to be treated as a separate sector with independent oversight, in accordance with the requirements of the U.S. Financial Crimes Enforcement Network (FinCEN). The authors emphasize that addressing illegal financial activities should not overshadow the potential benefits of DeFi, which can contribute to the economic prosperity of the United States.

This development follows the recent call by the U.S. Commodity Futures Trading Commission (CFTC) for federal authorities to find ways to identify individuals using DeFi services. Government officials are actively pushing for DeFi projects to adhere to anti-money laundering and counter-terrorism financing regulations, emphasizing the need for greater oversight and security in the rapidly evolving DeFi space.