February 06, 2024

2 Lawyers on How the U.S. Can Finally Regulate DeFi - Ep. 604

1 hour 5 minutes

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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Why Michael views the Bank Secrecy Act as outdated in the context of DeFi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

Thank you to our sponsors!

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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?

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By Laura Shin

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