Understanding Decentralized Finance: Polygon's Proposal for Authentic DeFi Protocols

Polygon Labs Proposes Critical Infrastructure Status for DeFi Protocols

01/02/2024: Lee
The evolving regulatory landscape has thrust decentralized finance (DeFi) into the spotlight, prompting protocols and entities like Polygon to actively seek regulatory clarity. Navigating this complex terrain is crucial for establishing a robust foundation in the rapidly changing DeFi sector.
Polygon, through a collaborative effort between Chief Legal Officer (CLO) Rebecca Rettig and Michael Mosier from Arktouros, introduces a groundbreaking proposal in their recent research paper. The paper delves into the classification of "genuinely decentralized" DeFi protocols as critical infrastructure, addressing the unique risks associated with illicit finance in the decentralized financial sector.
To combat these risks, the proposed framework establishes three pivotal components. Firstly, it defines "independent control" to distinguish authentic DeFi protocols from those with centralized intermediaries falsely claiming the "DeFi" label. This differentiation is crucial to maintaining the integrity of the sector.
The second component involves classifying these identified DeFi protocols as "critical infrastructure," subjecting them to oversight and security coordination by the Office of Cybersecurity and Critical Infrastructure Protection (OCCIP), a branch of the US Treasury Department. Despite lacking regulatory authority over financial institutions, OCCIP's purported expertise in managing critical infrastructure is deemed valuable for ensuring the secure operation of DeFi systems, as emphasized by Rebecca Rettig, Polygon's representative.

Polygon Proposes New Status For DeFi Protocols

The paper concludes by recommending the implementation of new laws mandating "critical communications transmitters" (CCTs) to adopt enhanced illicit finance risk management practices. These businesses, responsible for transmitting communications related to DeFi transactions, would not fall under the classification of financial institutions according to the Bank Secrecy Act (BSA) but would contribute to meeting financial integrity objectives.
In its commitment to address illicit finance risks, the proposal emphasizes the significance of classifying DeFi systems as critical infrastructure and involving OCCIP in oversight. Polygon's Chief Legal Officer highlights the role of OCCIP in reinforcing cybersecurity frameworks and information-sharing initiatives within the DeFi sector.
The introduction of CCTs as a distinct category recognizes the need to manage illicit finance risks at specific touchpoints in the DeFi transaction flow. Polygon Labs and Arktouros present a comprehensive framework for tackling illicit finance risks in the DeFi sector, aiming to strike a balance between regulatory oversight and the permissionless nature of DeFi.
Related: Polygon's User Base in 2023 Nearly Rivals Ethereum's
As a side note, the native token of Polygon, MATIC, is currently trading at $0.7797, demonstrating relatively stable sideways movement over the past 24 hours. Despite this, MATIC has witnessed a noteworthy surge of over 9% in the last seven days.