It’s no surprise that the Web3 industry presents many unique challenges for lawmakers and regulators globally.
Decentralised, permissionless technology is, in many ways, at odds with much of current law and regulation that assumes centralised, intermediated and gatekept systems. Adding to this inherent complexity, Web3 technology is borderless by nature, spanning countless jurisdictions and legal/regulatory frameworks.
We believe that fair, proportionate and clear regulation can benefit our industry and is necessary if we want to see genuine global growth and adoption of Web3 technology. We also believe that the policy outcomes advanced by most regulators globally (protecting investors, maintaining market integrity and promoting financial stability) are reasonable and capable of being achieved in the Web3 context with the right approach (i.e. regulatory equivalence is possible).
Indeed, many of Web3’s core features (including decentralisation, disintermediation, transparency and immutability) make it uniquely suited to effectively achieving these policy outcomes. But, to achieve these outcomes, regulation must be fair and proportionate. If regulation isn’t fair and proportionate — if it doesn’t consider the unique features and associated challenges inherent to Web3 technology — then it can stifle innovation and undermine the very policy goals lawmakers and regulators are trying to advance1.
CURRENT STATE OF PLAY
Currently, there is no common or consistent approach to Web3 regulation. Laws and regulations that do exist vary widely between jurisdictions. In some jurisdictions, including Switzerland, the European Union (EU), the United Kingdom (UK), Japan, Singapore and Hong Kong, we are seeing progress and, critically, a recognition that, at least in some respects, our industry does require a different approach. In the EU, for example, the Markets in Crypto-Assets Regulation (MiCA) (the text of which was agreed upon late last year and is anticipated to come into force in late 2024) aims to create a harmonised, comprehensive legal framework across all EU member states for the regulation of crypto assets and related activities2 (although other policy developments are troubling3). Switzerland was one of the first jurisdictions to implement an effective regulatory framework for digital assets back in 20184 and has since been home to a vibrant Web3 ecosystem. The UK has also signaled its intent to embrace our industry, recently launching a significant consultation to seek views on how the UK could best regulate the Web3 industry5, which followed an excellent Law Commission of England and Wales (Law Commission) paper on personal property law and digital assets (as well as a consultation on decentralised autonomous organisations (DAOs) which recently closed6).
However, in other jurisdictions, most notably the US, there has been an increasing, and in many cases, overt hostility towards our industry. Amongst other things, a recent White House report on crypto is scathing7, a Treasury Department analysis of decentralised finance (DeFi) (somewhat more balanced than the White House report) contains some fundamental technical and policy misunderstandings8, banking access for Web3 projects has been compromised in a seemingly coordinated and deliberate manner9, prominent lawmakers talk of creating an ‘anti-crypto army,’10 and aggressive legislation proposals are receiving increased support. Regulators continue to rely on outdated laws and regulations that aren’t fit for purpose without providing any clarity or guidance that the industry desperately needs, let alone a viable route to registration11. Amidst this complex and unclear regulatory background, regulators and the industry alike struggle with definitive asset classification and the industry faces a wave of enforcement actions12.
This approach is unquestionably damaging the Web3 industry in the US (and beyond), driving many projects out of the jurisdiction. It is not a fair or proportionate regulatory approach, it is regulation by enforcement.
WHERE DOES THIS LEAVE THE INDUSTRY?
There is much work to do, particularly in the US. As an industry, we need to recognise that these regulatory challenges and the apparent growing hostility can potentially harm us all. However, what is unfolding now across our industry in the US could become a seminal and net positive moment if we can unite and mobilise effectively.
The NEAR Foundation’s primary focus is to support the ongoing growth and development of the NEAR protocol and its associated ecosystem, but it also has a more general mandate to accelerate the adoption of open technologies at a global scale. The Foundation, therefore, has a responsibility to advocate for reasonable, proportionate and effective approaches to regulating our industry.
Part I of this series sets out the NEAR Foundation’s core policy priorities for the next 12 months and beyond to increase awareness of the key issues, and to show what guides the NEAR Foundation as we advocate on behalf of the NEAR ecosystem and the wider industry. These policy priorities are: (1) protect developers and open source software; (2) protect privacy; (3) promote autonomy; (4) protect validators; (5) promote clarity, collaboration and good faith engagement.
In Part II of this series, to follow shortly, we set out policy initiatives to help drive these priorities forwards.
NEAR FOUNDATION POLICY PRIORITIES
PROTECT DEVELOPERS AND OPEN SOURCE SOFTWARE
Developers are the lifeblood of our industry, responsible for creating, maintaining, and innovating the infrastructure on which Web3 operates. To foster innovation and growth, it is essential to safeguard developers from onerous regulation and ensure that publishing open source code remains free and open. Developers should be able to explore, experiment, and create without unnecessary constraints, burdensome obligations or fear of liability (including, for example, designation as fiduciaries13 or ‘Financial Institutions’14).
Open source code is a powerful tool that enables transparency, collaboration, and rapid innovation, allowing developers to share, modify, and build upon existing work while enhancing the security of the code. By defending the right to publish open source code, we also support the principles of freedom of expression and the free flow of information. This not only benefits the Web3 community but also fosters a culture of open collaboration across the entire technology industry and encourages its continued development.
PROTECT PRIVACY
Privacy is a fundamental human right and a cornerstone of the Web3 vision to create a more secure, user-centric and user-empowered web. However, as a neutral and highly transparent technology, blockchain (and other Web3 technology) is equally capable of being misused for warrantless mass surveillance and censorship if appropriate privacy safeguards aren’t in place. We are already seeing various attempts to erode privacy in Web3 that could have far-reaching consequences well beyond our industry15.
Web3 technology has demonstrated that maintaining privacy can be compatible with other important policy outcomes including, for example, the prevention of crime. Zero-knowledge proof (and other) innovations are already capable of implementing (for example) KYC/AML and sanctions checks without exposing sensitive personal data16.
Privacy should be staunchly defended to protect individuals from unwarranted surveillance, invasive data collection, censorship and malicious actors. Policymakers should support these outcomes when it comes to Web3 technology, as they have done in Web2 with data protection legislation such as GDPR and DPA. By championing privacy, we want to ensure that Web3 technology continues to respect users and empower them to own and control their data.
PROMOTE AUTONOMY
Ensuring individuals can use self-hosted products and services free of heavy restrictions or obligations is critical to user empowerment. Through self-hosting, users can fully control their assets and data, enhance their privacy, and reduce censorship risks and reliance on centralised intermediaries and service providers (and it is often within such centralised intermediaries that risk is most highly concentrated17). Self-hosting is also a foundational component of secure, resilient, diverse and competitive ecosystems since it minimises centralised points of failure and dangerous concentrations of power18 and supports decentralised infrastructure and governance systems19. But, we are already seeing proposals that would harm autonomy by significantly constraining the development and use of self-hosted products and services20.
Users should be able to seamlessly embrace self-hosting as a viable and attractive alternative to centralised service offerings and also safely participate in decentralised autonomous governance systems (including DAOs) without fear of liability or being subjected to burdensome obligations. Many in the industry, including those working on NEAR protocol’s transition to the Blockchain Operating System21, are pioneering technological innovations to make this possible. Policymakers should also enable these outcomes.
PROTECT VALIDATORS
Validators are the backbone of decentralised networks, ensuring those networks can function effectively by validating transactions, maintaining transaction accuracy and ensuring adherence to consensus rules. In performing this essential function, validators should not be subject to burdensome obligations or significant liability risks22. Accordingly, a balance should be struck between the need for regulatory clarity, network security and ease of validator participation.
A good starting point could be the creation of a light-touch, standardised public disclosure regime whereby validators would be required to disclose relevant information about their operations. This relevant information could include (amongst other things) relevant digital asset holdings, ownership of/the extent of their node operations, fee structure, affiliations with other significant ecosystem participants, hardware and software infrastructure, security measures, and past performance records. De minimis thresholds could be implemented so that the disclosure requirements would apply only to those validators operating at scale and in connection with significant networks. This approach could also provide much-needed clarity by confirming the nature and extent of participating validator obligations and liability in the context of network failures, security breaches or other adverse events, providing an incentive for participation in the regime.
This type of disclosure-based approach would reduce information asymmetry, and therefore promote investor protection and help to maintain market integrity. It also has other advantages, including: (1) focusing on the types of activities that are being undertaken rather than the nature or classification of the underlying asset (the latter approach can create enormous complexity, as evidenced by the current situation in the US); and (b) being relatively flexible and so capable of application to other critical network participants including, for example, core development teams who are building/maintaining certain types of Web3 projects/infrastructure23.
By establishing clear guidelines and legal safeguards for validators (and other network participants), policymakers can provide a conducive environment for validators to operate without fear of significant legal consequences. This will promote the resilience, security and growth of decentralized networks and help to preserve critical benefits of Web3 – decentralisation and disintermediation.
PROMOTE CLARITY, COLLABORATION AND GOOD FAITH ENGAGEMENT
The industry desperately needs clarity from lawmakers and regulators. Effective policy debate requires willingness from both policymakers, and the industry to discuss issues in good faith24, as well as a recognition that Web3 presents a unique and unprecedented policy challenge and therefore an openness to exploring new approaches.
We should also recognise that as developers, users, and other proponents of Web3 technology, we are each representatives of and advocates for our industry. Our conduct matters, and we should all strive to act with integrity and set a good example to show policymakers what our industry is capable of, and the unique value it can generate25. To do this effectively, collaboration across the industry is essential.
CLOSING THOUGHTS
Productive dialogue between the industry and regulators will hopefully lead towards further legal and regulatory clarity in Web3, which will have a positive effect on: (1) developers, by offering them a framework in which to operate, aware of their obligations and protected from the unreasonable application of unsuitable laws and regulations; and (2) users, by providing a safe environment in which to try new products and services and explore a new technological frontier where autonomy, transparency and privacy are paramount.
We believe that the light-touch disclosure based approaches (like the high-level proposal referenced above), as well as safe harbour implementations26 (which provide projects with viable, conditioned routes to registration/compliance – and which could be integrated into a wider disclosure based regime), sandboxes (to explore specific activities like digital asset issuance, updated AML/KYC processes etc.) and model law proposals27 (amongst other approaches), show significant promise and warrant further work and discussion28.
We will explore some of these potential routes forwards in more detail in Part II of this series.
In the meantime, we believe that regulatory clarity and consensus are essential for the meaningful global adoption of Web3 technology. Policymakers’ approach to Web3 will continue to evolve, and on-going education efforts and good faith discussions will be key to moving the conversation in a positive direction. We welcome the opportunity to engage with other industry participants, as well as lawmakers and regulators globally, to develop a fair and proportionate approach in support of these policy priorities.
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