Regulatory Challenges and Opportunities in Web 3

Abstract

The novel use of distributed ledger technology (DLT) in the financial sector poses considerable regulatory challenges, such as anonymity, technology neutrality, interconnectedness within the market of virtual assets, as well as with the traditional financial system and new legal risks to regulators around the globe. At the same time, the novelty of DLT for financial uses embodies also significant potential benefits to the financial sector, like innovation, inclusion, and competition. This chapter analyses these challenges and opportunities in detail and subsequently reviews possible regulatory responses at the current stage of virtual asset revolution and financial services innovation. Given the ongoing rapid development in the DLT financial services sphere, the analysis identifies the risk-based regulatory approach as potentially the most universal approach for national/regional regulators with advantages of high flexibility and resource efficiency.