Whether the SEC is issuing a Wells Notice or the FCA is licensing a crypto exchange, the reality is that crypto regulation has finally come to stay. It's evolving rapidly, catching up with emerging markets, and defining the modus operandi of the brave new world.

This article explores the recently approved Markets In Crypto Assets (MiCA) regulation–a global benchmark for comprehensive crypto regulation–and the challenges facing startups in the EU’s crypto market and such innovative compliance solutions as decentralized identities (DID) and token wrapping.

The approval of MiCA gave the EU an early lead in crypto regulations. More so, the recent emergence of the USDC as the first MiCA-compliant stablecoin added to its prestige as a key leader in web3. However, a recent survey by research firm Acuiti shows that about 57% of startup companies have not complied with the extant regulations, mostly due to a conflict with their ethos.

MiCA was designed to sanitize the EU's crypto market and crypto-related activities by putting well-defined rules in place for the protection of investors. Some of the challenges it has been able to address range from the classification of crypto assets, requirements for issuance of licenses, regulation of crypto assets service providers (CASPs), consumer protection, and prevention of abuse.

Penalties such as, for instance, fines capped at €5 million or 3 % of the turnover of the company may be applied against such companies in case of suspicion of such activity. In addition, businesses that do not comply with the regulation are faced with a ban, which prevents them from operating in the EU-regulated markets, therefore limiting the scope of their expansion.

Regulatory frameworks such as the MiCA are therefore simply one relevant example out of the many arising across the globe. Many such countries and regions are busy preparing a more or less complete framework of rules for managing the crypto industry. So, what does it all mean for the crypto companies?

The products offered in web3 appeal to a global population, yet laws are specific to each jurisdiction. This presents two key problems for crypto firms:

Ensuring their clients are up-to-date with the ever-evolving legislation on cryptocurrency in all the countries they are present.

Building genuine and usable products catering to economically different yet legal boundaries without crossing the set policies.

For a start-up that operates with little time and even fewer funds, this particular change may seem all but impossible. However, a greater concern is that some enterprises in the crypto space are not even inclined to seek compliance for two primary reasons:

One, many new companies feel that being decentralized is an advantage that exonerates them from any regulation pertaining to the governance of the space. On the contrary, this is not true in any way because, under the law, demarcations between distant and mainstream cryptocurrencies may be difficult to find.

And even when such a situation is not true, a number of companies that would tag themselves as being decentralized could actually belong to the domain of centralized platforms without even knowing it.

Secondly, there is a large number of Web3 startups that cannot be flexible in terms of compliance with the help of admitting that it is better to go a legal route than retain their principles and destroy their products. But does this have to be the case?

Compliance is an inevitability that is going to determine the future of Web3 Companies.

Whatever the reason for compliance being disregarded, it is not a viable long-term strategy – other than for the firm itself, for the entire industry as a whole.

The Arguments In Favor of Regulation

First, the journey to mainstream adoption is becoming increasingly traversed through regulated territories. If solutions that are required in real life are to be created, then such solutions should also consider the real-life constraints on regulation.

The only problem is that Web3 will probably very quickly reach such a ceiling.

Secondly, the consequences of inaction are not the sole purview of individual companies as they are in the first case.

If even more motivation towards being a smaller, dedicated player is going to be lagging behind then large corporate bodies with deep pockets will take over.

Companies like Binance employ hundreds of compliance professionals to help navigate the complexity emanating from compliance.

But will they care as much about the values that gave birth to crypto in the first place - decentralization, transparency, user privacy, and so on? Or will they just operate like any other traditional business? That could be the death knell for the idea of a decentralized and open Web3 industry, built by users for users.

Innovation Compliance Solutions

There are solutions that could help all players in the industry adapt while staying true to their ethos - no matter how many resources they have. These are Innovative Compliance Solutions that are in line with the Web3 Spirit

The crypto world has always been good at coming up with clever solutions to tough problems. Fortunately, there are already some solutions based on blockchain technology that can help companies follow certain rules and regulations. For example:

Decentralized Identities (DIDs)

Decentralized Identities (DID) can be used for privacy-friendly identity checks, like Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures. By adding DIDs to your product, you can meet KYC and AML requirements while still protecting your users' privacy as much as possible. DIDs allow you to verify if a user is allowed to use your product without actually seeing or keeping their personal information.

Token Wrapping

Token wrapping is a way to make existing tokens follow the rules in different countries without having to completely change how they work. It's like putting a new coat on the token that makes it behave in a way that's allowed in that particular market.