The world wide web is growing, and the new generation is Web3. But what is Web3? In layman’s terms, it is the third generation of the internet that is based on the blockchain. Unlike today’s internet or more specifically Web2 where companies such as Google and Facebook dominate, Web3 seeks to decentralise control to the users by eliminating intermediaries.
Web3 is the idea of a new internet that is private, secure and decentralized. Individuals can communicate directly through decentralized applications (dApps) and digital currencies such as Bitcoin and Eth. Although this sounds enticing, it also has its drawbacks for governments and regulators.
Web3 as the Future of the Internet: Excitement and Opportunities
Web3 is a concept that could revolutionize the way we leverage the internet as it does away with middlemen such as banks or technology firms. For example, you could transfer funds to another person without the use of a bank, or possess art that is embedded in blockchain and therefore cannot be manipulated by others. This makes users more flexible but at the same time puts new regulatory issues in front of the system.
As compared to conventional systems such as the banking system, there is no single identifiable authority in decentralized networks. This makes it hard for governments to regulate issues to do with money laundering, fraud, and taxes.
Key Challenges in Regulating Web3
1. Money Laundering (AML) and Know Your Customer (KYC)
In traditional finance, the banks check their clients and make sure that they are not involved in any unlawful business. However, in Web3, there is no one who is watching or authenticating the identities of the users. This can help criminals in concealing their unlawful actions.
2. Data Privacy and Protection
Web3 is expected to enhance privacy as there is less collection of personal data. However, blockchain, one of the Web3 technologies, saves data permanently, which is against privacy laws like GDPR in Europe where the user has the right to be forgotten.
3. Taxation Issues
Web3 transactions are frequently anonymous and cross-border, which makes it challenging for tax authorities to monitor them. The Internal Revenue Service in the U. S has initiated what is known as the “Operation Hidden Treasure” to target individuals who have not been disclosing their income from cryptocurrencies and other related activities in the crypto markets.
4. Fraud and Scams
Web3 is also prone to fraud like rug pulls, which is where developers take investors’ money and run, and smart contract scams. These scams were estimated to have cost users billions of dollars from 2022 till now. The risks are being felt, and governments such as the UK’s Financial Conduct Authority are in the process of setting rules to safeguard consumers.
Balancing Innovation and Regulation
On the one hand, Web3 brings potential opportunities, on the other hand, it poses new questions for the business and government to reconsider regulation. There are many attempts to find how to innovate and be compliant at the same time in organizations.
1. Decentralized Identity (DID)
Decentralized identity (DID) solutions provide the ability to prove identity without revealing any information. For instance, BrightID assists individuals to prove that they are real people without sharing personal information, which fulfills KYC needs.
2. Self-Regulation
To this end, some industries are coming up with Self-Regulatory Organizations (SROs) to establish and implement regulations. For instance, the Crypto Ratings Council (CRC) assists firms to determine if cryptocurrencies are legal under the laws of the United States of America; this is a form of self-regulation while encouraging compliance with industry standards.
3. Regulatory Sandboxes
Regulatory sandboxes enable companies to offer new products under the supervision of the regulators. Singapore’s Monetary Authority has established such a sandbox for Web3 projects where they are free to experiment and integrate new solutions while remaining legal.
4. Cross-Border Cooperation
Because Web3 is a global platform, cooperation with other countries is necessary. Such bodies as the Financial Action Task Force (FATF) are establishing global norms to mitigate unlawful conducts such as money laundering in Web3, so that laws are not lagging behind this emerging field.
Conclusion
Web3 is the new trend in the internet revolution that is making the internet more personal, private, and free. But it also poses problems for the authorities that attempt to safeguard consumers from scams, implement laws, and maintain privacy.
Web3 can walk a thin line between innovation and compliance by employing such measures as decentralized identity solutions, self-regulation, and regulatory sandboxes.
About the Author
Abhishek Singh is the Co-founder and CEO, SecureDApp. As the co-founder and CEO of SecureDApp, Abhishek Singh specialises in providing cutting-edge blockchain security solutions for companies operating in the Web 3.0.