Recent studies paint a sobering picture. According to a survey by Acuiti, a staggering 57% of firms are still unprepared for the EU’s new crypto regulation, MiCA, even though its first phase took effect on June 30, 2024. This poses a significant risk to individual companies and the entire ethos of the blockchain space. But there is still a solution to that.
Web3 Regulatory Status Quo: the Good and the Bad
Regulatory frameworks, such as the EU’s Markets in Crypto-Assets regulation (MiCA), are being put in place across the globe.
MiCA aims to create a standardized approach to crypto-related activities across the EU market and covers the following aspects:
- Classification of crypto assets
- Requirements for issuance and listing of crypto assets
- Regulation of crypto asset service providers (CASPs)
- Consumer protection measures
- Prevention of market abuse
Non-compliant companies may face fines of up to €5 million or 3% of their annual turnover. Businesses might be barred from operating in regulated EU markets, limiting growth potential.
But MiCA is just one of the many regulatory frameworks being developed globally.
On the one hand, such regulations could legitimize and stabilize the crypto industry, allowing us to link Web3 with TradFi and other real-world use cases and assets (RWA). But on the other hand, we need to be careful in how we adapt to these new regulations so we can stay true to our values of decentralization and privacy. To do it successfully, here’s what we need to keep in mind:
The 2 Key Challenges of Becoming Compliant in Web3
Most Web3 products are inherently global and borderless, while most regulations are fragmented and vary a lot by jurisdiction. That’s why to comply with them, crypto companies will have to overcome 2 key challenges:
- Understanding and staying abreast of these ever-evolving laws – given that even legal experts are still navigating uncharted territory.
- Adapting their products to each new jurisdiction they’re entering.
Sounds difficult and costly? It very much is, especially for startups with limited resources.
But what’s more, some companies simply ignore the need to comply with the law and think they’ll be able to carry on as they used to. But that’s a very big and costly mistake, as there will simply be nowhere to grow as the path to true adoption will lie through the regulated territory.
This puts their long-term existence at risk and poses a question to all of us: what would happen if the most innovative early-stage businesses in Web3 don’t become compliant and die? How will it change the market landscape? Will Web3 as we know it cease to exist?
The Dangers of Inaction
As smaller companies struggle with compliance or simply choose to ignore it, large corporations with extensive resources could take over.
But would they pay as much attention to the values we, true blockchain believers, cherish? Decentralization, transparency, privacy, user empowerment – would all that persist? Perhaps not.
But it’s not all black and white. Here’s why:
A Path Forward
The crypto industry has always been about finding innovative solutions to complex problems. Regulatory compliance should be no different.
And luckily, there already are some blockchain-based solutions that help achieve compliance with certain regulations – such as:
- Decentralized Identities (DID) for privacy-preserving KYC and AML checks: Integrating DIDs into your product can make you KYC and AML compliant while preserving users’ privacy to the highest degree possible. DIDs let you check whether a user is eligible to use your product without even seeing or storing his/her data.
- Token wrapping for making the token compliant with the local jurisdictions: This is the simplest way to adapt existing tokens to regulatory standards in a given location without its complete overhaul. It will “program” the token to function in a way that is allowed in this market.
One company that offers both of these tools at a low cost is Swisstronik. They provide chain-agnostic solutions for KYC, AML, and other types of verifications required in various jurisdictions, without compromising on decentralization or user privacy principles.
Moreover, Swisstronik is working on solutions for token compliance, including mechanisms for stablecoin issuers to prove their reserves transparently. This addresses one of the key concerns in MiCA regarding asset-backed tokens.
These types of solutions demonstrate that the industry can adapt to regulatory requirements while preserving the innovative spirit of blockchain technology. With the right approach, compliance and innovation in the crypto space can go hand in hand and it’s up to us to make it happen the right way.