Polygon Labs proposes a framework to classify DeFi as ‘critical infrastructure’

Polygon Labs Proposes DeFi Protocols as Critical Infrastructure for US Security.

Polygon Labs’ legal team suggests that decentralized finance (DeFi) protocols should be recognized as vital to national and economic security in the United States. They propose that these neutral, decentralized systems be classified as “critical infrastructure” and fall under the supervision of U.S. federal cybersecurity agencies.

On January 29, Rebecca Rettig and Katja Gilman from Polygon Labs and Michael Mosier from Arktouros law firm published a paper titled “A Conceptual Framework for Combating Illicit Finance Activity in Decentralized Finance.” This 45-page document recommends that fully decentralized DeFi protocols be overseen by the U.S. Treasury’s Office of Cybersecurity and Critical Infrastructure Protection (OCCIP).

The OCCIP, while not a financial regulator, coordinates the Treasury Department’s efforts to secure and bolster the resilience of the financial services sector’s essential infrastructure. The office collaborates with financial firms, industry groups, and government partners to share information about cybersecurity threats and vulnerabilities.

The paper highlights that not all DeFi protocols are genuinely decentralized, with some having significant centralization aspects. These should, therefore, adhere to existing financial regulations. The team also suggests introducing a new “critical communications transmitters” category for entities integral to genuine DeFi systems. These entities would take on specific responsibilities to safeguard U.S. national and economic security without being classified as “financial institutions” under the Bank Secrecy Act.

Centralized finance (TradFi) systems are treated as separate in this framework, with oversight based on guidance from the Financial Crimes Enforcement Network.

Crypto industry lawyer Jake Chervinsky pointed out on social media that while securities and commodities laws often dominate digital asset policy discussions, Washington, D.C. policymakers are more concerned about illicit finance. He suggests that this proposal could be a step towards a real solution. The paper’s authors emphasize the need to balance preventing illicit activities with promoting positive economic activities, aligning with the Treasury’s goals of economic prosperity and financial security for the U.S.