Neutral, decentralized finance (DeFi) protocols should be designated as “critical infrastructure” and overseen by federal cybersecurity agencies in the United States, according to a newly proposed regulatory framework from the legal team behind Polygon Labs. 

On Jan. 29, Rebecca Rettig and Katja Gilman from Polygon Labs and emergent technology law firm Arktouros co-founder Michael Mosier, published “A Conceptual Framework for Combating Illicit Finance Activity in Decentralized Finance.”

The 45-page paper suggests designating truly decentralized DeFi protocols as critical infrastructure which would be overseen by the U.S. Treasury’s Office of Cybersecurity and Critical Infrastructure Protection (OCCIP).

1/ Today, @m_mosier_ @katjagilman I are sharing a paper that begins a conversation around, proposes a conceptual framework for, how to answer the "illicit finance" policy question as it relates to DeFi. A brief thread below, with links to the full paper + a summary document. pic.twitter.com/1OQ1gCHiAX

— Rebecca Rettig (@RebeccaRettig1) January 29, 2024

The OCCIP is not an official financial regulator but coordinates the Treasury Department’s efforts to enhance the security and resilience of the financial services sector’s critical infrastructure and reduce operational risk.

It works closely with finance firms, industry groups, and government partners to share information about cybersecurity, threats, and vulnerabilities.

However, the paper noted that not all DeFi protocols are truly decentralized, and some have significant points of centralization, which should make them subject to existing financial regulations.

Meanwhile, the team has also proposed creating a new category of “critical communications transmitters” that interact with and are integral to genuine DeFi systems as part of the new legal framework.

These entities would have to undertake certain tailored obligations to help protect U.S. national and economic security without becoming “financial institutions” subject to the Bank Secrecy Act (BSA), it suggested.

Related: DeFi platforms can comply with regulations without compromising privacy

The proposed framework also identified centralized finance (CeFi) or TradFi as separate with independent control based on FinCEN (the Treasury’s Financial Crimes Enforcement Network) guidance.

Crypto industry lawyer Jake Chervinsky commented on X that policy conversations regarding the digital asset industry are often dominated by headlines about securities and commodities laws.

However, in Washington DC, “policymakers are much more concerned about illicit finance than anything else,” he said before adding, “This could be the start of a real solution.”

The authors concluded that in the urgency to stop illicit activity, “we must not forget the important and fundamental goal to empower good activity,” which anchors the Treasury’s mandate of “promoting economic prosperity and ensuring the financial security of the United States.”

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