Rebecca Rettig, Chief Legal and Policy Officer at Polygon Labs, and Michael Mosier, co-founder of Arktouros PLLC, dive into the intricacies of regulating decentralized finance. They discuss their innovative paper addressing illicit finance challenges in DeFi, the outdated nature of the Bank Secrecy Act, and the importance of KYC and AML compliance. The duo also differentiates between 'onchain CeFi' and 'genuine DeFi', while proposing solutions like targeting high-risk wallets and utilizing critical communications transmitters for effective regulation.
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insights INSIGHT
BSA's Incompatibility with DeFi
The Bank Secrecy Act (BSA) combats illicit finance by targeting intermediaries and mandating customer data records.
This approach doesn't fit DeFi's decentralized, transparent nature, where public ledgers already provide accessibility.
insights INSIGHT
KYC and the BSA
The BSA focuses on designated financial institutions, not all intermediaries, and doesn't inherently mandate KYC.
KYC is a way financial institutions implement BSA, not a direct part of US anti-money laundering efforts.
insights INSIGHT
DeFi vs. TradFi Risks
DeFi's illicit finance risks differ from TradFi. DeFi risks are cyber exploits, system mismanagement, and user-driven illicit activities.
TradFi risks stem from data silos and subjective judgments within institutions.
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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Why Michael views the Bank Secrecy Act as outdated in the context of DeFi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
Unchained 