Polygon Labs’ Framework: DeFi as Critical Infrastructure

A new regulatory framework proposed by Polygon Labs and Arktouros co-founder Michael Mosier suggests that decentralized finance (DeFi) protocols should be classified as “critical infrastructure” and be overseen by federal cybersecurity agencies in the United States. The framework, titled “A Conceptual Framework for Combating Illicit Finance Activity in Decentralized Finance,” recommends that the U.S. Treasury’s Office of Cybersecurity and Critical Infrastructure Protection (OCCIP) oversee truly decentralized DeFi protocols. While the OCCIP is not an official financial regulator, it coordinates efforts to enhance security and resilience in the financial services sector. The paper emphasizes that not all DeFi protocols are truly decentralized and that those with centralization points should be subject to existing financial regulations.

In addition to classifying DeFi protocols as critical infrastructure, the proposed framework suggests creating a new category of “critical communications transmitters” that interact with and are inherent to genuine DeFi systems. These entities would have specific obligations to protect U.S. national and economic security without being classified as “financial institutions” governed by the Bank Secrecy Act (BSA). The framework also recognizes centralized finance (CeFi) or TradFi as separate entities with independent control, based on guidance from the Treasury’s Financial Crimes Enforcement Network (FinCEN).

Notably, policymaker concerns in Washington DC are primarily focused on illicit finance, rather than securities and commodities laws. This proposed framework could offer a potential solution to address these concerns. The authors emphasize the need to not only combat illicit activity but also empower beneficial activities, aligning with the Treasury’s goal of promoting economic prosperity and ensuring the financial security of the United States.