In Part 1 of Regulation of Web3 in 2023, we analysed the macro logics, and anatomy of mismanagement of Web3 companies. 
Here, in Part 2, if we take a look back at the objectives of regulators, we can summarise their main aims as upholding integrity and reputation of the market and preventing systemic risk while protecting retail investors in the market.
Now, let’s assess the crypto explosion in 2022, and how it ties in with the regulators’ objectives. Let’s ask ourselves these 3 questions:
Question 1: Is the FTX collapse a big enough systemic risk, something that will pressure regulators to spend a lot of time on it?
If we take a step back, the magnitude of the FTX collapse was US$8bil – large but much smaller compared to the other explosions (financial and otherwise) that have happened in the last 20 years.
Attention and manpower (of regulators) are both finite resources.
Would/ should the regulators spend time going after Web3 or on other potentially bigger problems in the traditional markets, bigger fishes in the pond so to speak?
This is something that I’m sure regulators are assessing as they read the news.
Question 2: What would regulators be regulating in the world of Web3?
We had a discussion in the team preparing for the meeting… on what is Web3. And as you can see from the slide from the event, people in the team have different understanding of what constitutes Web3.
And I am sure that even in the corporate world or in the realm of regulators, they are having similar discussions.
And just to state a fact – Crypto does not represent all of Web3.
Regulators, just as decision makers in corporations, are all finding ways to make sense of this frontier tech world. What should they be regulating, and how should they be regulating this space?
And most importantly – are retail investors affected to the extent that regulators must come in now?
If we were to take a step back, and to visit recent history, we can take a look at how and when Chinese regulators came in to regulate Ant Group. This may lead to insights as to what goes through a regulator’s mind when dealing with innovation.
As we all know today, Ant Group is one of the most innovative Chinese financial technology companies.
What most people know is that it was slapped with heavy regulatory oversight in 2020 after Jack Ma gave a speech at the Bund Summit in Shanghai that year.
Overnight, four authorities: People’s Bank of China (PBOC), China Securities Regulatory Commission (CSRC), China Banking and Insurance Regulatory Commission (CBIRC), and the State Administration of Foreign Exchange (SAFE), participated in the current regulatory actions against Ant Group.
However, there are criticisms that regulators took too long to start regulating Ant Group heavily.
On this point, our CEO, Jianggan shared in the talk: “Over the last few years, we have had lots of discussions with people who were in the ecosystem in China for payment in the early days. There were lots of opinions about what should be done because this is clearly financial innovation and there’s lending business and then the lending business was growing up very rapidly, what should the regulators do?”
At the end of the day, amongst all the different regulators, the four main ones in China, had been concerned about Ants’ business areas for a while. They just needed to make clear who should take action, and decide on what sort of actions to take.
There were lots of discussions over the years and I think it took a long time for the regulators to come together to act. It is what it is. And I think we should not argue for regulators to come in too early because otherwise I mean the landscape will become very different.
They acted when a risk became too much (i.e. when the leverage that the consumer lending business was taking become too much), and it actually created a systemic risk and posed a sort of danger to retail investors and consumers.
So one could say that they used Jack Ma’s speech as a catalyst to implement actions that they had been considering for a while. Of course if they acted earlier on creating regulations, we’ll probably not see the adoption of consumer fintech, mobile payment etc as we are seeing today.
Interestingly, we are seeing in India and a number of the countries in southeast Asia that the regulators are bringing the participants together to build infrastructure, instead of letting one company run free. This came in a bit too late in China’s case.
Conclusion
Learning from Ant Financial, and the complexity of the Web3 universe, we can appreciate that there are no straightforward answers or clear boundaries in what regulators should and could regulate.
What is clear as we set the stage in Regulations of Web3 in 2023 part 1 blog, Centralised Finance (CeFi) companies should be regulated. But what about Decentralised Finance (DeFi) companies and the others? And who should bear the cost?
Perhaps one logic that we can put forth is that regulations should only come in when the activity relies on a person making a judgement and then taking action on that transaction. If that holds, then DeFi (read Part 1 here to understand what is DeFi), which logic relies on codes, should not be regulated. What do you think?
If you would like to learn more, feel free to check out these related articles – Event Recap: Off The Record: Web3’s brutal year and Two ways corporations are using blockchains without you noticing it.
You can download the full event deck of Off the Record: Web3’s Brutal Year as well as our other reports, such as The Future of NFTs, Who is Axie Infinity?, The Future of Ethereum, and Web3: The inevitable Next Step, for a behind-the-scenes look at Web3 applications and the future of the Web3 landscape.
If you want to watch a replay of the event on our YouTube channel, click here.
