Polygon Labs Proposes Regulatory Framework for DeFi

The legal team of Polygon Labs recently claimed that decentralized finance protocols should be classified as critical infrastructures for the national and economic security of the United States. The firm further noted that DeFi protocols may be ranked as critical infrastructures that are regulated by the federal cybersecurity agencies operating in the United States.

This new regulatory framework was recently proposed by a legal team representing Polygon Labs. On 29th January 2024 Rebecca Rettig and Katja Gilman representing Polygon Labs were accompanied by Michael Mosier, the co-founder of technical law consultancy firm named Arktouros.

The dynamic trio authored a paper titled ‘Conceptual Framework for Combating Illicit Finance Activity in DeFi’. This 45-page paper deals with nominating true DeFi protocols as critical infrastructures. As per the document, the qualifying DeFi protocols are to be regulated by the Treasury Office of Cybersecurity and Critical Infrastructure Protection (OCCIP).

Regulatory and Supervisory Requirements for the DeFi Sector

The paper published by Polygon Labs in association with Arktouros relayed that some DeFi protocols fall outside of the definition of critical infrastructures as they are not truly decentralized. The document argued that a DeFi protocol that has some centralized governance features should be subjected to traditional financial regulatory requirements.

At the same time, Polygon Labs has suggested a new category called critical communications transmitters.

AI Trading Robot

This category includes and interacts with genuine DeFi systems as part of the proposed legal framework. To this end, the DeFi protocols that are added to the closely knitted circle are to comply with defined legal obligations as a way to ensure the national and economic security of the United States without morphing into financial institutions that are subject to the Bank Secrecy Act.

Furthermore, this legal framework identifies CeFi and TradFi as two different entities in the light of regulations issued by the Financial Crimes Enforcement Network of the US Treasury.

Illegal Activities in the DeFi Sector

Jake Chervinsky, a crypto legal consultant recently posted on social media that all regulatory discussions surrounding cryptocurrencies are rooted in existing security or commodity laws. He opines that legislators in Washington D.C. are mostly concerned about containing illegal financial activities in DeFi rather than anything else.

He further stated that this approach may lead to real solutions. The authors of the regulatory framework for DeFi protocols also stated that the current focus of digital asset companies is directed toward halting illegal practices. The consultants also noted that it is important to promote and encourage all good activities.

The legal framework proposals resonated with the mandate of the Treasury Department of ensuring economic prosperity and bringing financial security to United States investors. Polygon Labs recently joined hands with Warner Music Group to announce 2 winners of the inaugural Web 3.0 Music Accelerator program.

The venture was introduced on 25th January, 2024 whereas the Music Accelerator program was introduced in June, 2023.

WGM told the media that the platform has received around 120 applications from various projects working in the particular niche. This program strengthens and supports areas such as fandoms, DeFi music productions, digital ticketing and concerts, exclusive collectibles, and integration with music and gaming etc.

As per Cointelegraph article, one recipient is MITH which is a fan service platform that allows artists to publish AI-based insights and analytics in the form of a 360-degree view for every fan.

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