Regulatory Oversight in DeFi: Polygon Proposes New Status for Protocols
The decentralized finance (DeFi) sector has been under scrutiny for regulatory oversight. To establish a solid foundation in this evolving landscape, protocols like Polygon are navigating the challenges. Polygon’s Chief Legal Officer, Rebecca Rettig, collaborated with Michael Mosier from Arktouros to propose a new classification for “genuinely decentralized” DeFi protocols.
Defining DeFi and Identifying Risks
In their research paper, Rettig and Mosier clarify the definition of DeFi and highlight the unique risks it faces. These risks include cyber risks, system management risks, and usage risks. By differentiating these risks, they lay the groundwork for combating illicit finance in DeFi more comprehensively.
A Three-Component Framework
The proposed framework consists of three key components. First, it defines “independent control” to identify smart-contract-based financial protocols with centralized intermediaries that falsely claim to be “DeFi.” This distinction aims to separate genuine DeFi protocols from others.
Secondly, the authors suggest classifying these DeFi protocols as “critical infrastructure” and subjecting them to oversight and security coordination by the Office of Cybersecurity and Critical Infrastructure Protection (OCCIP), a branch of the US Treasury Department.
Lastly, the paper proposes introducing new laws that require specific businesses known as “critical communications transmitters” (CCTs) to adopt additional illicit finance risk management practices. These businesses facilitate communication related to DeFi transactions and play a role in meeting financial integrity objectives.
Enhancing Security and Resilience
The proposal aims to enhance the security and resilience of DeFi systems by classifying them as critical infrastructure and involving OCCIP in oversight. The coordination provided by OCCIP can strengthen existing cybersecurity frameworks and information-sharing initiatives within the DeFi sector.
Additionally, introducing CCTs as a new category acknowledges the importance of managing illicit finance risks at specific touchpoints in the DeFi transaction flow.
A Comprehensive Framework for Illicit Finance Risks
The proposal by Polygon and Arktouros presents a comprehensive framework for addressing illicit finance risks in the DeFi sector. By classifying DeFi protocols as critical infrastructure and leveraging OCCIP’s coordination, the proposal aims to strike a balance between regulatory oversight and the permissionless nature of DeFi.
Hot Take: Striving for Regulatory Balance in DeFi
Polygon’s proposal to classify genuinely decentralized DeFi protocols as critical infrastructure reflects the sector’s effort to address regulatory concerns. By involving OCCIP and introducing new risk management practices, the proposal seeks to enhance security while maintaining the permissionless nature of DeFi. Achieving this balance is crucial for establishing a solid foundation and navigating the evolving regulatory landscape in decentralized finance.
Currently, the native token of Polygon, MATIC, is trading at $0.7979. Over the past 24 hours, the price has remained relatively stable, showing sideways movement. However, MATIC has experienced a significant surge of over 9% in the past seven days.
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