Polygon Labs Advocates Designating DeFi as Essential Infrastructure

Legal Experts Propose DeFi Classification

Legal experts from Polygon Labs and Arktouros have recommended that neutral, truly decentralized DeFi protocols be classified as “critical infrastructure.”

New Regulatory Framework Proposal

The recommendation was made in a newly proposed regulatory framework from the legal team at Polygon Labs.

Classifying DeFi Protocols As Critical Infrastructure

Such a classification would allow DeFi and DeFi protocols to be placed under the oversight of federal cybersecurity agencies in the United States. The proposal, put forward by legal experts from Polygon Labs and Arktouros, aims to fight illicit financial activities in the DeFi space and enhance the security and resilience of the financial services sector. The proposal was presented in a 45-page document called “A Conceptual Framework for Combating Illicit Finance Activity in Decentralized Finance,” in which Rebecca Rettig and Katja Gilman, from Polygon Labs, and Michael Mosier, the co-founder of emergent technology law firm Arktouros, put forward their vision for the regulation of DeFi.

Oversight by OCCIP

The document suggests designating truly decentralized DeFi protocols as critical infrastructure, allowing them to be overseen by the US Treasury’s Office of Cybersecurity and Critical Infrastructure Protection (OCCIP). While the OCCIP is not an official financial regulator, it plays a crucial role in enhancing the resilience and security of critical infrastructure in the financial services sector. The OCCIP works with financial firms, industry groups, and government partners, sharing information about threats, vulnerabilities, and cybersecurity with concerned stakeholders.

In the document, Polygon Labs and Arktouros advocate extending OCCIP’s mandate to include the oversight of DeFi protocols.

Identifying Truly Decentralized Protocols

The paper acknowledges that not all DeFi protocols are truly decentralized, with some having significant points of centralization. According to the paper, this should subject these protocols to existing financial regulations. The proposal suggested the creation of a new category called “critical communications transmitters.” Any protocol under this category would be classified as a truly decentralized DeFi system and would have to undertake certain obligations to protect the national and economic security of the US.

The proposal also highlights the importance of independent regulation for centralized finance (CeFi) and traditional finance (TradFi).

Significance Of The Proposal

Crypto industry lawyer Jake Chervinksy took to social media platform X to highlight the proposal’s significance and highlighted that headlines about securities and commodities laws often dominate policy conversations regarding the digital asset industry. However, he added that policymakers are far more concerned about illicit finance, stating that such a proposal could be the start of a real solution.

“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.”

The proposal also emphasized the importance of empowering legitimate and beneficial activities within the DeFi sector, highlighting that its approach is in line with the Treasury’s mandate of “promoting economic prosperity and ensuring the financial security of the United States.”