Legal Compliance Is Crucial For Web3 Mass Adoption

Jamilia Grier is the Founder & CEO of ByteBao, an ecosystem of legal resources for Web3 lawyers and businesses.

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Introduction

Web3 technology is based on decentralization, transparency and trustless networks.

Decentralization means the information is not owned, managed or controlled by one source. Instead, the information is dispersed throughout the blockchain and created by anyone who engages in a transaction on that blockchain.

In terms of transparency, blockchain transactions are recorded in a ledger fashion and are open and visible for anyone to view since they are not owned by any one party. Transaction data is created and recorded on the blockchain.

The issue of trust plays a major part in blockchain technology. Transactions are confirmed mostly by a proof-of-work or proof-of-stake protocol that incentivizes the confirmation of only accurate information. There is no incentive to incorrectly confirm transactions; as such, this creates a trustless system where a blockchain acts as the sole source of truth for transactional data.

Many proponents of Web3 technology hope the technology will significantly disrupt traditional systems in industries such as banking, real estate and education. Most industries have pockets of centralization, with major multinational corporations holding large amounts of information and control over the market. Many blockchain-based technologies hope to reinstate control with users and creators in order to level the playing field.

However, disruption across industries still requires the rule of law. In order for startups to be sustainable and for new companies to create solutions using this technology, these new companies need to abide by existing laws and regulations. Blockchain technology, in its essence and uniqueness, does not erode the requirement for legal and compliance frameworks.

Proper Education For Regulators

In order to properly build within this new technological space, new companies need to know what the rules are. Each country has the responsibility to clearly define the rules and ways of working with blockchain technology. This can foster innovation and promote new exploration in Web3.

1. Task forces and working groups with industry and academia need to pitch in to educate regulators.

2. Early regulations can start us on the journey of understanding the balance between not enough regulations and over-regulation.

3. The creation of cross-border working groups can help companies understand international implications.

Web3 Businesses Need To Take Legal And Compliance Seriously

While regulators have a responsibility to clearly define laws and regulations on digital assets, entrepreneurs and startups have an obligation to society and consumers to follow those laws and regulations. For better or for worse, a lack of trust and credibility fostered early on can risk long delays in the mass adoption of the technology by users and society as a whole.

1. Hiring lawyers and compliance professionals early. As many Web3 businesses involve the monetization of intellectual property or the use the data, these businesses should seek to hire legal and compliance professionals with a background in IP and data privacy or even with previous experience at technology companies in order to ensure a smooth transition into the business. Privacy by design or experience in structuring compliant cross-border data flows are skills that are still very much in demand in Web3.

Additionally, for more mature Web3 businesses that seek to create a full in-house legal team, paying attention to the right balance in skill sets and seniority is a must. Due to the fact that many major markets are still creating robust digital assets regulatory frameworks, seasoned lawyers can help develop strategies that are in line with existing regulations. Meanwhile, the creativity of tech-savvy lawyers can allow them to think outside of the box to create new solutions. While it is tempting to outsource all legal work, companies should consider a long-term strategy of building an in-house team that can ensure continuity and a deeper understanding of business needs.

2. Privacy and compliance by design. In most startups, there is the tendency to only bring lawyers in to review a new product after it has been developed. However, having someone with a legal or compliance background at the table when product ideas are just being generated can reduce costs and risks of noncompliance over the long term because these considerations are integrated into the overall design of the product. For example, consider an application that collects, stores and analyzes user-specific digital wallet data. Due to potential data privacy concerns, it would make sense to have those concerns raised before millions of dollars are spent on the design and development of an application that is at risk of noncompliance with various privacy regulations.

3. Follow existing best practices in corporate compliance and ethics. While it is tempting to assume that a whole new set of laws apply due to the newness and uniqueness of Web3, that is certainly not the case. The United States Department of Justice has published an “Evaluation of Corporate Compliance Programs” that provides excellent standards that all technology companies should use in self-evaluating the maturity of their compliance programs. The goal is not to overly burden emerging technology businesses but to bring Web3 business ethics to an industry standard that has long been in existence.

There’s a long trajectory for Web3 when it comes to mass adoption, but blockchain is here to stay.


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