A Conceptual Framework for Regulating Decentralized Finance
A new paper authored by executives from Polygon Labs and a former FinCEN director presents a framework for combatting illicit activity in decentralized finance (defi) markets. The paper proposes three different classes of defi platforms and suggests the level of oversight each should face.
Alternative Views on Defi Regulation
With various opinions on how to regulate defi platforms emerging, the paper titled “Genuine DeFi as Critical Infrastructure” offers a fresh perspective on monitoring and controlling illicit finance activity in the defi space.
Classifying Defi Platforms
The authors suggest classifying defi platforms into three categories. The first category includes platforms that, although labeled as defi, are centralized in nature. These platforms should be subject to regulation on a case-by-case basis.
The second category involves truly decentralized systems that are considered critical infrastructure and fall under the oversight of the Treasury Department’s Office of Cybersecurity and Critical Infrastructure Protection.
The third category encompasses businesses that interact with genuine defi systems but are not financial institutions, such as RPC node providers. These entities would be categorized as “critical communications transmitters” and subject to certain obligations, excluding them from complying with Bank Secrecy Act determinations.
Continuing the Dialogue
The authors emphasize the need for constructive dialogue to propel the industry forward. They look forward to developing these concepts further through collaboration between industry stakeholders and the government.
Hot Take: A New Approach to Regulating Defi
A new paper proposes a regulatory framework for decentralized finance (defi) platforms. By classifying these platforms based on their level of centralization and interaction with financial institutions, the paper suggests different levels of oversight. This innovative approach aims to combat illicit activity while allowing genuine defi platforms to flourish. The authors emphasize the importance of ongoing discussions and collaboration between industry participants and the government to refine these regulatory concepts and achieve a balanced regulatory environment for defi.
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