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

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Polygon Labs, in collaboration with Arktouros regulation agency, has put ahead a brand new regulatory framework that proposes designating sure decentralized finance (defi) protocols as vital infrastructure essential to the nationwide and financial safety of the US.

The suggestion was published on Jan. 29 by Rebecca Rettig and Katja Gilman of Polygon Labs, alongside Arktouros co-founder Michael Mosier. Their 45-page doc focuses on combating illicit finance actions within the DeFi house.

The proposal recommends that genuinely decentralized DeFi protocols must be overseen by the US Treasury’s Workplace of Cybersecurity and Essential Infrastructure Safety (OCCIP).

The OCCIP, whereas not a standard monetary regulator, performs a pivotal function in enhancing the safety and resilience of the monetary providers sector’s vital infrastructure, in collaboration with finance corporations, business teams, and authorities companions to share details about cybersecurity threats and vulnerabilities.

Polygon’s framework outlines a three-step resolution to the authorized challenges dealing with defi. Step one includes making a authorized definition for “System Management Individuals” or “SCPs.” These are people or entities that may unilaterally train operational authority over blockchain-based methods.

In accordance with the proposal, SCPs ought to adhere to plain anti-money laundering (AML) necessities, no matter whether or not the system is labeled as decentralized.

One other vital proposal by the group is the creation of a brand new class of “vital communications transmitters.” These entities would play a vital function in real DeFi methods.

For methods with out SCPs, that are thought of “real defi”, the framework suggests a separate classification as “vital infrastructure”. This could place them below the supervision of the OCCIP. These entities can be answerable for fulfilling particular obligations to safeguard US nationwide and financial safety with out being categorized as monetary establishments below the Financial institution Secrecy Act (BSA).

This proposal contrasts with the views of crypto-critical senator Elizabeth Warren, who final month instructed that crypto corporations ought to meet the identical AML necessities as conventional banks. Warren has additionally raised concerns about the use of cryptocurrencies in funding illicit actions, together with North Korea’s nuclear arms program.

The proposed framework additionally distinguishes between centralized finance (CeFi) or conventional finance (TradFi) and defi, with every having unbiased management mechanisms primarily based on steering from FinCEN, the Treasury’s Monetary Crimes Enforcement Community.

Jake Chervinsky, a lawyer within the crypto business, commented that whereas securities and commodities legal guidelines usually dominate coverage discussions about digital property, in Washington DC, the main focus is extra on illicit finance. He views this new framework as a possible actual resolution to those issues.

The authors emphasize the significance of balancing the prevention of illicit actions with the basic aim of selling constructive actions. This aligns with the Treasury’s mandate of selling financial prosperity and guaranteeing the monetary safety of the U.S.

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