Web3 sector calls for stronger regulation of centralised crypto players, more decentralisation in 2023

Giving insight into crypto exchange FTX crashing in 2022, JP Morgan last month identified centralized players as the main cause.

The banking giant added that recent crypto crashes are not due to decentralized protocols, but to centralized crypto players.

With this, the Web3 industry worldwide expects accelerated crypto regulations in all jurisdictions in 2023.

At the same time, it is also fighting for further innovation and adoption of decentralized infrastructure, to offer more transparent and secure ways to trade and manage digital assets.

Regulation of centralized players

Government regulations seem impossible for truly decentralized protocols, and they are. This is why Indian and global Web3 stakeholders are not calling for decentralized networks to be regulated.

Instead, they are seeking stricter regulations for centralized crypto players, who are prone to misuse of funds by the few who control them.

At the same time, they expect greater acceptance of decentralized applications and networks, which regulate themselves through self-executing code without trust.

In a recent blog post, Coinbase CEO and co-founder Brian Armstrong wrote:

“The role of financial regulators should be limited to centralized cryptocurrency players, where additional transparency and disclosure is needed. In an on-chain world, this transparency is built in by default and we have an opportunity to build even stronger protections.”

Crypto regulations for centralized players can only come from government authorities and are designed to protect consumers and ensure that these technologies are used fairly and transparently.

They also provide clarity and guidance for companies using or developing Web3 technologies.

“In 2023, it will be the responsibility of the players in the crypto ecosystem and Web3 to foster a sense of security among their consumers. Putting the right protocols and practices in place to avoid the impact of black swan events will be crucial to success,” said Raj Karkara, COO of ZebPay, a centralized exchange.

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US vs. United States Perspective India on cryptocurrencies

The US Securities and Exchange Commission (SEC) has declared that some cryptocurrencies are “securities” and therefore can be regulated by it.

In other words, if a cryptocurrency or Web3 company in the US is creating a product to give a cryptocurrency token a value, the SEC may consider it a security.

However, not all cryptographic tokens are securities. They can be utility tokens, government tokens, and more, and can be issued by decentralized companies registered outside of the US, thus falling outside the purview of the SEC.

In India, all crypto tokens are regulated as virtual digital assets (VDAs) and crypto income is taxed at 30%. Coupled with a 1% tax at source (TDS) mandate, the crypto tax mandate in India has led to sharp drops in trading activity on domestic exchanges.

Major Indian exchanges such as CoinDCX and CoinSwitch have diversified into new products (such as a DeFi app and a multi-exchange trading platform, respectively). They claim that these efforts were already in the works long before India’s crypto tax mandate.

The other leading Indian exchange, WazirX, remains focused on improving the cryptocurrency trading experience for its users and has not diversified or added new potential revenue streams by 2023.

However, the consensus in the Web3 industry is that 2023 will see more mainstream adoption of decentralized applications (and the cryptographic tokens that power them).

“In 2023, there must be practical decentralization, and not just a spirit of decentralization. Wherever it makes sense, there should be easy ways for more people to participate as validators and nodes in blockchain networks,” said Anantha RK, founder and CEO of Sarva Labs.

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Adoption of decentralized Web3 technology

According to Aniket Jindal, co-founder of Biconomy, the drive for usable user experience and mass adoption of Web3 will continue despite the market downturn.

“We will see a strong push toward self-custody, guardrails for authentication, and more sophisticated governance for Web3 financial operations to protect user and project assets. 2023 will show which infrastructure withstands volatility,” he said.

In addition, the transition of Ethereum, the most popular blockchain for building decentralized applications, from the energy-intensive Proof-of-Work (PoW) consensus mechanism to the 99% more efficient Proof-of-Stake (PoS) system energy will be another key driver for web3 adoption,

Leon Foong, Head of APAC, Binance, said: “The Ethereum upgrade was one of the major developments in the crypto industry, making the blockchain more scalable, secure and sustainable, paving the way for the creation of more efficient decentralized applications.

Also, while the furore created by Facebook’s rebranding to Meta in late 2021 and the hoped-for adoption of metaverse technology fizzled out in 2022, there may be room for Web3 technology to make its mark in the metaverse.

Kaavya Prasad, founder of Lumos Labs, said: “A long-awaited trend for the next year would be the expansion of Web3 into the metaverse. We are seeing major Web2 companies invest heavily in the metaverse and have been embracing NFTs and DeFi through tokenized products, digital avatars, virtual retail stores, virtual concerts, music NFTs, etc.

Going forward, enforcing any crypto policy framework remains the biggest hurdle for governments, regardless of whether crypto is used in a commercial exchange, a decentralized protocol, or a metaverse application.

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International cooperation for crypto regulation

Ultimately, all cryptocurrency users are national citizens of their particular country, and cryptocurrency regulators and law enforcement agencies have only focused on their national markets. So far, none of them have an international mandate.

In early July 2022, India’s Finance Minister Nirmala Sitharaman admitted:

“Cryptocurrencies, by definition, have no borders and require international collaboration to avoid regulatory arbitrage. Therefore, any legislation for regulation or prohibition can be effective only after significant international collaboration in assessing the risks and benefits and the evolution of common taxonomy and standards.

Unless the regulatory frameworks for cryptocurrencies are applied uniformly nationally and internationally, there will be no way forward, Brian Armstrong argued on his blog.

“For the most part, they [regulators] it does not have an international mandate or capacity to regulate/investigate companies that are abroad. Where do you send the legal notice if the entity is not registered? What door are they going to knock on? he wrote.

It seems the only way for Web3 and cryptocurrency to achieve mainstream adoption is for regulators around the world to come together to regulate not only local cryptocurrency companies, but also entities that serve their citizens from abroad.