Polygon Labs is making a case for neutral decentralized finance (DeFi) classification as a critical infrastructure in the United States. The network also proposed that federal cybersecurity agencies oversee the new initiative.
Proposed DeFi Classification
Polygon Labs’ Rebecca Rettig Katja Gilman and co-founder Arktouros Michael Mosier co-authored a research work on DeFi. The 45-page research provides a strategy framework for classifying authentic decentralized finance technologies as critical infrastructure components.
According to them, the control and regulation of these procedures would fall under the purview of the US Treasury’s Office of Cybersecurity and Critical Infrastructure Protection (OCCIP) as the assigned supervisor. Despite its lack of legal status as a financial regulator, the OCCIP plays a vital role in coordinating the Treasury Department’s efforts to improve the security of essential infrastructure in the financial services industry.
It is crucial to consider that the OCCIP operates efficiently because of strong cooperation with government entities, industry associations, and financial institutions. This collaborative effort creates an environment that encourages the effective transmission of vital cybersecurity information, such as potential threats and security loopholes.
By adopting this strategy, the OCCIP positions itself as an intermediary in the collaborative efforts to protect decentralized financial systems from illicit financial transactions.
Centralization Within Decentralization
According to the study, there is an underlying issue in the DeFi landscape where some protocols designated as DeFi are inherently decentralized while others display significant points of centralization.
Hence, this assessment highlights the importance of a sophisticated approach to regulatory frameworks that recognizes the complexity of the decentralized financial environment. Therefore, the authors recommend the creation of a new classification called “critical communications transmitters.”
These entities, which are crucial in authenticating DeFi systems, would be integrated into the proposed framework. As key components, they would have to meet certain specifications designed to strengthen US national and economic security.
It is worth noting that the proposal suggests that these firms should not be classified as “financial institutions” under the Bank Secrecy Act to preserve a balance between regulatory control and operational autonomy. Furthermore, the conceptual framework highlights the distinction between decentralized and centralized finance, often known as TradFi.
The latter, which employs a centralized control paradigm, is envisioned as a separate establishment with regulatory oversight from the Treasury’s Financial Crimes Enforcement Network.
Focus On Illicit Financial Activities
Meanwhile, Jake Chervinsky, a legal specialist who specializes in the cryptocurrency market, underlined the need to discuss securities and commodities regulations in the digital asset industry. However, he opined that lawmakers would rather discuss combating illicit financial activities than develop adequate rules for the crypto industry.
The legal specialist added that while addressing the urgency of reducing illegal activity is critical, legislators also need to focus on the broader objective of regulating other activities going on in the crypto ecosystem. This stance is consistent with the Treasury’s primary mandate – the development of economic growth and the protection of the United States’ financial stability.
Crypto regulation continues to be a subject of discussion among professionals and crypto market players as many regions take different steps to perform oversight functions in this fast-growing industry. For instance, the US is developing regulations for various aspects of crypto. The US SEC is regulating spot BTC ETFs under its existing securities laws while lawmakers are deliberating on stablecoin proposals.
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