Legal Nodes predictions for 2023: more Web3 regulations, zero-knowledge protocols, default global companies

2022 was a hell of a year for crypto regulations and web3 businesses. From bankruptcies and  frauds to legal cases against DAOs and the announcement of new regulations coming from all corners of the world, it was an exciting time throughout the year. 

And 2023 looks to be no different. Here’s a couple of our predictions that we think will make 2023 just as spicy as 2022.

#1 More regulations than ever before

We expect to see more efforts to centralize all the developments that have been achieved via decentralization in the past 24 months. This will happen with the planning and introduction of new regulations, like the recent effort by US authorities to make node validators register as Financial Institutions. 

If we break down this prediction to pick out some of the smaller trends, we can see that:

• The cases (some of which that have also gained legal traction) in the past year (including Terra Luna, 3AC, Celsius/Voyager, Tornado Cash, FTX, Genesis/Gemini, Ooki DAO, LBRY) will be thoroughly analyzed by regulatory bodies and lessons will be learned
• New VASP and CASP regimes like MiCA will be introduced
• More stablecoin regulations will emerge (as will a couple of fresh plans to issue bans too)
• Regulators will try to supervise and control some aspects of decentralized projects that they can “reach” with their laws (like mining, nodes, etc.) 
• The US will be a leading trendsetters, introducing new regulation for crypto (with SEC and CFTC being the main players to watch). We aren’t likely to see all-encompassing legislation yet, but we will see a lot of effort on this topic from Congress for sure
• Successful legislative practices of smaller countries (like the Liechtenstein Blockchain Act, which is ~98% compatible with the upcoming MiCA rules) will be used as a starting point by other players to create their regulations

#2 Loss of trust in centralized crypto exchanges and lending platforms (following Celsius, FTX, Gemini, and others)

How has this happened?

• Centralized exchanges have become a type of a “less regulated” bank
• This means that bad actors can do whatever they want with their depositors’ money, (and they do so under the table making it harder for regulators to get involved early on)
• Additionally, not all crypto exchanges go through audits; some aren't ready to do so and some get a “pass” in a fraudulent way

What does this mean? We predict that DEXes will be used in response to this trend, but they are very likely to attract even more attention from regulators this year too. Regulation will, eventually, always catch up.

#3 More developments and advancements in zero-knowledge proof protocols

We think that this prediction will be impacted by two emerging trends on the market. 

Trend #1 (micro-level): the blockchain solutions that survived the market crash are now beginning to compete for users. To market their protocol products effectively they need to capture more user data.

This will create confusion between the decentralized nature of the dApps and how their interfaces will start to collect more user data like device IDs, location, preferences, etc, to improve the product and marketing activities.

Trend # 2 (macro-level): crypto wallets like Metamask are becoming the new default authentication instruments (like Google and Facebook in Web2) to dApps. This creates a situation where they also amass more and more user data while users demand more privacy from dApps. This is where zero-knowledge proof protocols might become a long-term solution that will bring more privacy and scalability.

Both these trends on a micro and macro level create more use cases and demand for developing zero-knowledge systems, and we’ll see more advancements in this direction this year. If this happens, we may also see more regulatory attention on these protocols, as their implementation might be at the expense of their compliance with existing and upcoming regulations.

#4 Default-global companies become the new normal

Are default-global companies the next big thing? Well, quite possibly, yes. The advent of covid plus the growth of Web3 has pushed many companies to embrace the digital world, and offer their goods and services to a global audience. Businesses are becoming inherently more cross-border and international, as they seek cheaper and more efficient resources, and search for new markets far and wide. In order to survive in recessions, companies will need to optimize their resources, their spend, and take advantage of the growing opportunities to hire globally, cutting operational costs.

In terms of Web3 and the crypto space, more regulations are going to affect how founders choose to position, establish, and operate their businesses. Every Web3 founder will be thinking about how the global regulatory landscape could impact their business, both now and in the future, from the very beginning.

How do we at Legal Nodes prepare for these trends? 

In 2022, we introduced the Virtual Legal Officer. Our VLOs are professionals with legal and business backgrounds, and strong knowledge of their specialism (Web3, privacy, and startups). 

VLOs help web3 companies and default-global companies solve their legal tasks by:

• Informing founders about different legal options for their business project
• Helping to build an actionable plan of legal works that meets all compliance obligations and helps businesses to grow 
• Sourcing, hiring, and managing locally-based qualified legal professionals for different tasks
• Quality-checks works to ensure everything meets the latest compliance rules and requirements

With help from a VLO, small- and medium-sized companies can create legal structures that support their global operations and are compliant with all relevant regulations from the very beginning.

We also support the next generation of Web3 legal professionals working with new Web3 and crypto businesses by:

• Open-sourcing legal frameworks for Web3 companies and Web3 model fundraising documents
• Publishing guides on important Web3 topics like fundraising and incorporation
• Preparing a Web3 Legal handbook (coming soon!)

Disclaimer: the information in this guide is provided for informational purposes only. You should not construe any such information as legal, tax, investment, trading, financial, or other advice. Mentioning any of the assets in this article is not an endorsement to purchase them.