Regulation in a Web 3.0 World
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The annihilation of Luna, and broader crash across the crypto markets has once again raised the question of regulatory oversight enhancement across the industry. We have seen scams and crashes since the dawn of crypto, but the Bitcoin and Ethereum crash is concerning for the future of the industry, forcing regulators to consider the extent of control. This article will cover past developments in regulatory infrastructure and the reasons for the continued difficulty of effective regulation. From here, the SM22 team will discuss the development and issues with modern crypto projects, and the future tensions between the Web 3.0 community and regulators.
From the emergence of the Bitcoin whitepaper in 2008, government bodies have struggled to understand and regulate the industry, often in direct tension with the philosophy of founders and projects. At the early stage of Bitcoin development, regulators struggled to classify and understand the technology, given the revolutionary nature of the system. Along with the complexity of the technology, the development of the industry and markets has shifted across different coins, ledgers, and minting processes. As the variety of coins and exchanges has grown, investors have been quick to adopt new trading strategies that add a further layer of difficulty for lawmakers.
On a global level, the development of crypto assets has developed hand in hand with an increasingly globalised financial and technological system. This is clearly demonstrated by the cryptocurrency exchange FTX. After its foundation in the US, FTX moved to Hong Kong, and then the Bahamas, demonstrating the power of flexibility crypto firms have to operate in the most regulation-friendly environments across the world. In contrast, governments face the dilemma of attracting talent, but not allowing a cryptographic wild west. On a philosophical level, the founding values of the Web 3.0 community assert decentralisation and autonomy, often in direct contrast to the incentives of regulators.
As the proliferation of coins and markets continues, regulators have begun to make concerted efforts to control and monitor the industry. In 2013, the US Treasury classified Bitcoin as a ‘convertible decentralised currency’. Later in 2015, the Commodity Futures Trading Commission classified Bitcoin as a commodity. Per the Internal Revenue Service, Bitcoin is now taxed as a property. More recently in 2022, California become the first state to begin an official process to regulate and adapt to cryptocurrency technology, mirroring the federal agencies. Governor Newsom said his order is a step toward making it the nation's first state ‘to establish a comprehensive, thoughtful, and harmonised regulatory and business environment for crypto assets.’ This demonstrates the importance of separating ‘crypto projects,’ which may sometimes be risky and poorly structured and ‘blockchain,’ the underlying technology with near universally appreciated value.
In 2015, the EU classified Bitcoin as a currency rather than a commodity to make trading tax-exempt. From here, the regulatory regimes across member states have been favourable towards the use of cryptocurrencies, with no member state applying even permissive regulations on its usage. However, there have been recent calls for mining process adaption, with Erik Thedeen, vice-chair of the ESMA calling for a ban on proof of work mining in favour of proof of stake to combat climate change. With Europe and the west taking a relaxed approach to regulation, countries such as China, India and Turkey continue to take a tough stance on Bitcoin and other assets, all applying a blanket ban on their mining and trade.
Looking to the future, the growth and adoption of the metaverse will be an important topic of legal discourse in the years to come, with regulators recognising the impact this will come to have on consumer interactions. Technologies used in the metaverse will be able to track user data in a deeper way than seen before. Platforms already have the technology to track expressions, vital signs, and inflexions, using this data to predict future emotional states. Along with this deep consumer proliferation, the metaverse will allow enhanced freedom and expertise across both our professional and social lives, proving deeper opportunities to transact, socialise and work. In balancing these considerations, it will be vital for regulators to pay attention to both consumer rights and new monetisation strategies.
From the early development of blockchain technology, to the proliferation of new coins and markets, regulators have struggled to keep pace with the speed of crypto innovation. The founding philosophy of crypto projects has encouraged regulators in the western world to take a backseat, whilst other more authoritarian regimes have taken strict measures. With the growth of the metaverse, Web 3.0 technologies will move past finance and into the mainstream of our livelihood. With the risks, but boundless benefits, the technology and experiential layers of Web 3.0 must become a mainstream concern for regulators.