Polygon Labs Execs Outline Regulatory Framework to Combat Illicit Activity in Defi

A paper prepared by two Polygon Labs executives and a former Financial Crimes Enforcement Network (FinCEN) director presents a framework to combat illicit activity in decentralized finance (defi) markets. The document proposes three different classes for defi platforms, including platforms controlled by centralized actors, genuine defi systems, and critical communication transmitters, describing the level of oversight each one should face.

Polygon Labs Execs Propose Defi Regulation Framework

Alternative views on how to regulate and control decentralized finance (defi) platforms are surging. A paper titled “Genuine DeFi as Critical Infrastructure: A Conceptual Framework for Combating Illicit Finance Activity in Decentralized Finance” describes a new way in which illicit activity can be monitored and controlled in the defi world.

The paper, authored by Polygon Labs CLO Rebecca Rettig, former acting director of the Financial Crimes Enforcement Network (FinCEN) Michael Mosier, and Polygon Labs Senior Public Policy Lead Katja Gilman, aims to start a discussion on the best way to regulate defi systems, considering that these escape regulations designed for other centralized structures.

The report proposes to classify these platforms into three different categories. The first would include all the platforms that, while classified as defi, depend on centralized actors and are decentralized in name only. These are described to be more likely to be subject to regulation depending on a case-by-case analysis.

The second category would be composed of decentralized systems (“genuine defi”) that would be classified as critical infrastructure under the oversight of the Treasury Department’s Office of Cybersecurity and Critical Infrastructure Protection (“OCCIP”).

Rettig, Mossier, and Gilman stress that “genuine defi should not be designated as ‘financial institutions;’ and ‘critical infrastructure’ is wholly separate and apart from this concept.”

Finally, the third category encompasses businesses that interact with “genuine defi” systems but that are not financial institutions, like RPC node providers, who would be grouped under the classification of “critical communications transmitters.” These would have some obligations but would be excluded from complying with Bank Secrecy Act (BSA) determinations.

“Constructive dialogue is the best way to move the industry forward, and we look forward to developing these concepts further with industry and government collaboration,” Rettig concluded.

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