Table of contents
This is a guide designed to help you as an aspiring Web3 developer or business operator understand the range of legal issues blockchain technologies face in the world today. It’s important to know that this is an ever-evolving space, but on this page, you’ll be able to get a better understanding of the key areas of blockchain regulation, Web3 compliance, blockchain data privacy concerns, and more that you need to know.
Why Legal Clarity is Essential for Web3 and Blockchain
By its very nature, blockchain and much of the Web3 development world clashes with traditional legal frameworks by way of the decentralized nature of the projects. Being such a novel premise, it’s often difficult to land on exactly which laws and regulations are relevant to the project at hand. Further, terminologies in many jurisdictions are yet to adapt to the sector, with the likes of “coin,” “currency,” and digital or virtual “asset” meaning different things in different places. As we delve into in the guide to blockchain startups, the key to getting as much legal clarity as possible is to bring in an experienced legal professional to navigate this winding road of crypto regulation.
The Global State of Blockchain Regulation
While blockchain law is becoming more prevalent, we’re far from seeing a consensus or even a tremendous amount of consistency across global blockchain regulation. One of the world leaders in the regulation of blockchain and associated sectors is the United States. Here, departments like FinCEN have issued clear guidance for dealing with many Web3 legal issues. The European Union has also put out a comprehensive framework that particularly addresses blockchain data privacy under its Markets in Crypto-Assets (MiCA) regulation. In Asia, while Singapore is on the rise, Hong Kong is seen as a top authority because of how it governs securities and applies those rules to applicable tokens.
Top Legal Issues in Blockchain Technology
Blockchain technology has faced a lot of friction when coming up against more traditional laws and regulations. While specific crypto regulation is on the rise, there are still several commonplace legal issues blockchain enterprises continue to face.
Data Privacy and Decentralized Storage
Operating with a distributed ledger and data blocks that can’t be tampered with or removed, Web3 compliance with GDPR regulations, for example, has been a particular sticking point in legal circles. The right to be forgotten of the GDPR’s Article 17 has created blockchain data privacy issues, so the crypto regulation MiCA mandates that operations adhere to the principles of privacy-by-design from the start. Further, as the ledgers and networks are decentralized and without a set, central location, they naturally bump with commonplace data residency laws that push companies to store and process local data within the borders of that country.
Smart Contracts and Legal Enforceability
As strange as it may sound, the very premise of a traditional contract isn’t globally agreed upon, with some jurisdictions having different requirements to others. Generally, there needs to be an offer and an agreement followed by consideration and then intent to fulfil. The automated nature of smart contracts has led to regulators not governed by specific blockchain law to remain uncertain as to their validity and, in some circumstances, refuse to recognize a smart contract under existing contract law at all. Further, due to the decentralized nature of the network, there’s often a lack of self-enforced blockchain regulation that creates a viable intermediary for dispute resolution.
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AML/KYC and Regulatory Compliance
There are many benefits to setting up a decentralized autonomous organization with a dedicated DeFi platform, but one element that needs to be addressed regardless of a nation’s specific Web3 law or Web3 legal framework is anti-money laundering (AML) and know your customer (KYC) compliance. DeFi platforms, wallets, and exchanges must adhere to AML and KYC regulations despite the facilitating of anonymity and pseudonymous transactions often being a key selling point.
Security and Fraud Risk Management
Many of the legal issues blockchain technologies face in regard to security and fraud risk management have come because of the unique risks faced by the platforms. Phishing scams, the exploitation of smart contract protocols, and the dreaded 51 percent attack can all place liability on the platform owners – especially if there is firm crypto regulation in place to state that these risks and scams need to be combated. Again, the tech being decentralized with its lack of central oversight makes security and fraud risk management a difficult task.
Web3 Compliance: Who Is Responsible?
There is a distinct lack of clarity as to who within a DAO is responsible for ensuring compliance with relevant blockchain regulation standards and other related laws. In a decentralized ecosystem, the burden could lay on the governance token holders, the protocol developers who may be seen as being at fault for a lapse, or perhaps the node operators who haven’t maintained the network to the required standing. Establishing responsibility within an organization is critical to knowing where you stand should any legal issues blockchain companies can face arise.
Legal Risks for Web3 Startups and Investors
The legal risks for Web3 startups and investors can be present from the off. The very definition of “coins” and “digital assets” can make the legality of an initial coin offering (ICO) or launch of NFTs particularly opaque in many countries. Luckily, there are established and more favourable jurisdictions with firm blockchain law procedures in place to mitigate these risks. In a similar vein, some forms of token classification and the presence of securities laws around the world will incur crypto tax obligations, which is another element of the Web3 legal risks that need to be weighed into consideration. Further, while many Web3 startups and investors will be keen to tap into the vast cross-border market permitted by a decentralized network, this will incur more legal risks owing to the differing states of blockchain regulation around the world.
Conclusion: Future-Proofing Legal Frameworks for Innovation
Crypto regulation and the state of play for blockchain and Web3 companies continue to evolve at a varied pace around the world. The key to navigating the still somewhat stormy waters of blockchain law is to be proactive, bring in a legal expert early, and follow their interpretation of the law. This is essential for catering to the early adoption and future scalability of your project while giving you peace of mind.
