2 Lawyers on How the U.S. Can Finally Regulate DeFi

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Trying to regulate DeFi is a huge challenge because in a truly decentralized system, there should be no centralized actors to make and enforce rules for. This could make combating illicit finance challenging since traditionally, regulation has been targeted at centralized intermediaries. Yet Rebecca Rettig, Chief Legal and Policy Officer at Polygon Labs; Michael Mosier, the co-founder of boutique law firm Arktouros; and Katja Gilman, senior lead for public policy at Polygon Labs, published a paper last week that proposes to do just that.

Rebecca and Michael join Unchained to discuss what prompted them to write the paper, what the difference is between “onchain CeFi” and “genuine DeFi,” how targeting high-risk wallets can be one part of the solution, how critical communications transmitters (CCTs) are another piece of the puzzle, and what next steps they are pursuing.

Show highlights:

• The motivations behind their paper and Michael and Rebecca’s legal backgrounds
• Why Michael views the Bank Secrecy Act as outdated in the context of DeFi
• How critical KYC and AML compliance is for the integrity of DeFi
• What Rebecca identifies as the principal risks in the DeFi sector
• Why their proposal targets the protocol layer for effective DeFi regulation
• How “onchain CeFi” differs fundamentally from “genuine DeFi”
• Whether a decentralized protocol can be effectively regulated when controlled by a DAO
• How if DeFi were to be classified as critical infrastructure by the Cyber and Information Security Agency (CISA), it would impact the sector
• Whether the critical components of blockchain networks, such as RPCs, can be regulated effectively
• How categorizing wallets based on risk can be one part of the solution to fighting illicit finance
• Why Rebecca considers Tornado Cash a prime example of “genuine DeFi”
• What steps Rebecca and Michael plan to take next following the publication of their paper

Episode Transcript

Thank you to our sponsors!

• Popcorn Network
• Polkadot

Guest:

• Rebecca Rettig, Chief Legal and Policy Officer at Polygon Labs
  • Previous appearances on Unchained:
    • Just a Coincidence? Coinbase and Polygon Lawyers See Bad Omens in SEC Crackdown
    • Kik’s Surprising Move in Its Lawsuit With the SEC
• Michael Mosier, cofounder of Arktouros PLLC

Links

• Previous coverage of Unchained on the topic: Could the Bank Secrecy Act Harm Crypto? Coin Center Thinks So 
• Full paper: Genuine DeFi as Critical Infrastructure: A Conceptual Framework for Combating Illicit Finance Activity in Decentralized Finance
• Rebecca’s thread

• Coin Center: Broad, Ambiguous, or Delegated: Constitutional Infirmities of the Bank Secrecy Act

Tornado Cash

• Unchained: Given the Sanctions on Tornado Cash, Is Ethereum Censorship Resistant?

Illicit funds in crypto:

• Unchained: How Much Money Are Terrorists Actually Raising in Crypto?