Regulatory

Web3 & Crypto Legal Consulting

Regulatory

Web3 is the most important element in the new age of cryptocurrency. In fact, Web3 relies on many of the same principles and technologies that underpin cryptocurrency. However, in order to make the most of the abilities of Web3 in relation to cryptocurrency, we also need to understand that there are certain risks that come with reliable cryptocurrency exchange in the Web3 environment.

What Is Web3?

When it comes to the development and use of websites and apps in the modern world, Web3 is the upcoming third generation of the internet. It allows websites and apps to process information in a smart human-like way through technologies like machine learning, Big Data, decentralized ledger technology (DLT), and even more.

Originally, Web3 was referred to as the Semantic Web and its purpose was to be more autonomous, and intelligent, and provide an open internet. However, in order to be more intelligent, programs need to understand information both conceptually and contextually. This is where AI comes in. We are now able to use a collection of JavaScript libraries to interact with an Ethereum node remotely or locally. It provides us with an API to use so that we can easily work with blockchain.

Challenges of Web3

Any platform and app that is built on Web3 will be operated by users in a decentralized fashion where the final goal is to empower users with ownership of their data and its monetization. Web3 will also allow people to decide how they want to collect and store their data and users will earn their ownership stake by helping to develop and maintain Web3 services.

However, because Web3 will be maintained by the users that help to create it, if these users are not implementing proper cyber hygiene and protecting their own data and privacy, there will likely be few other enforcement mechanisms in place. This creates an intrinsic risk to the security of Web3 infrastructure itself. When the protection of a user’s data and privacy is transferred to the individual, there may be new, potentially massive security and privacy vulnerabilities that are likely to arise. This will also remove any kind of hierarchical authority over users in the ecosystem, which leaves the security of Web3 at risk without a clear system to fix it.

The Legal Tender of Cryptocurrency

Because of the virtual nature of Web3 and the push towards decentralization, cryptocurrency in some form is likely to be considered legal tender in Web3. This means that many transactions in this new space will occur using virtual currencies and will be maintained on the blockchain.

The widespread use of, and looming dependence on cryptocurrency, while appealing to some, will also increase the ease with which bad actors can skirt existing financial regulations in the Web3 space. One example of this activity already unfolding is sanctions evasion, an area where malign actors exploit the pseudonymity and lack of regulation of cryptocurrency.

Entities looking to skirt sanctions can use digital currencies to bypass the control points that governments rely on–mainly transfers of money by banks–to block monetary transactions to and from sanctioned entities. Many banks have to abide by “know your customer” (KYC) rules, which include verifying their clients’ identities, but KYC in the cryptocurrency space poses a more complicated compliance challenge.

Companies dealing in cryptocurrency must work harder in order to validate the identities of the customers using their digital services and understand the details of transactions that they are facilitating to uphold legal restrictions and prevent engagement with sanctioned actors.

The rise of Web3 is also likely to exacerbate existing problems in the cryptocurrency ecosystem by increasing the volume of information stored on the blockchain and making it exponentially more difficult to sift through the available data. Tracking ransomware payments and criminal activities on the blockchain takes a lot of time and energy already because of the pseudonymity of many cryptocurrencies and the ability to “chain hop” or move between different blockchains. Web3 is likely to spur the widespread adoption of numerous new avenues to move across the ecosystem, including non-fungible tokens (NFTs) and decentralized autonomous organizations (DAOs).

Web3 Regulatory Jurisdiction

Compounding the aforementioned concerns about the security of Web3, it is becoming increasingly evident that Web3, like the current Internet, will fall outside of the exclusive jurisdiction of any regulatory body. The U.S. government has been slow to regulate tech companies, who are now designing the next iteration of the Internet, and cryptocurrency and blockchain technologies, which will form the backbone of this new structure.

Since the goal of Web3 is to achieve decentralization—in large part to skirt government regulation and oversight—absent a significant policy shift, there will not be a monopoly on regulatory power in the development of the next iteration of the Internet.

While this may sound like an opportunity for a fairer system, tech companies stand to gain that power. They are buying into proposals for the next generation of the Internet at a massive scale, enabling them to buy majority control over Web3 if the government does not step in to regulate the underlying technology.

What People Are Saying





“We are glad to have them as our development partners. They know their stuff inside out when it comes to developing and integrating the blockchain technology."





“We are glad to have them as our development partners. They know their stuff inside out when it comes to developing and integrating the blockchain technology."

Michael Marcos

Founder of NGSCrypto





“We are glad to have them as our development partners. They know their stuff inside out when it comes to developing and integrating the blockchain technology."

Regine Velasquez

Founder of Nexo