What kind of supervision does Web3 need?

Written by: Luke, Mars Finance

1. Celebrity Meme Coin Chaos: Calls for Harvesting and Regulation

One ​​of the charms of Web3 is the ideal of decentralization, but driven by the celebrity effect, this ideal is often distorted into a hotbed of speculation. Recently, the LIBRA token promoted by Argentine President Javier Milei has become a typical case of market manipulation. When Milei first promoted LIBRA, the market value of the token once exceeded US$4.5 billion. However, just four hours later, the token plummeted 85%, the market value shrank by more than US$4 billion, and investors suffered heavy losses. On-chain data revealed that the project party had quietly ambushed funds before the tweet was released, and cashed out through large-scale sell-offs, with a cumulative profit of more than US$100 million. After deleting the tweet, Miley argued that he "did not know the details of the project". However, when he forwarded the token information again on February 17, the market's speculative sentiment was further stimulated and doubts arose one after another. Even so, Miley insisted in a TV interview: "I just shared information and did not participate in the project", although this behavior has caused losses to many investors.

Miley's words and actions made investors feel exploited, especially before and after the whole incident, he neither assumed political responsibility nor provided any substantial protection for retail investors, but played Web3 like a monkey. This chaos has made the voices of Web3 investors more intense, and they urgently need a regulatory framework that can find a balance between market freedom and investor protection.

In this case, the issue of regulation in the Web3 field is particularly urgent. The consequences of market manipulation and false propaganda have not only destroyed investors' confidence, but also put the legitimacy of the entire crypto industry to a severe test. How to establish an effective legal framework while maintaining the spirit of decentralization? How to avoid the abuse of celebrity effects like Mile? These issues have triggered extensive discussions inside and outside the industry, and calls for regulation are growing.

2. Exploration of regulatory framework: from MiCA Act to technology-driven compliance innovation

With the wild growth of Web3, the lack of regulation has gradually revealed its drawbacks, but how to find a balance between the core value of decentralization and market norms has always been an urgent problem to be solved. The EU's Crypto-Asset Market Regulation (MiCA) provides a regulatory framework worthy of reference, aiming to control the risks brought by crypto assets through layered management. MiCA establishes strict reserve requirements for stablecoins such as asset reference tokens (ARTs) and electronic money tokens (EMTs), and sets an upper limit on daily trading volume to avoid excessive volatility and triggering systemic risks. The regulatory requirements for crypto asset service providers (CASPs) emphasize the segregation of customer funds, transparent pricing and licensing systems to ensure the compliance of the market.

This hierarchical regulatory model can be effectively extended to the management of Meme coins. For project parties, it is particularly important to force the disclosure of the token distribution mechanism and lock-up strategy. By setting more transparent rules, celebrities can be prevented from making short-term profits by "taking advantage of the situation to hype". At the same time, by learning from MiCA's practice, setting risk warnings for high-volatility assets on exchanges and imposing moderate restrictions on leveraged transactions can further protect the interests of retail investors and prevent them from becoming "cannon fodder" in the turbulent market.

However, there is still an obvious conflict between the traditional KYC (customer identity verification) mechanism and the decentralized principle of Web3. In order to make up for this contradiction, technological innovation provides new solutions. For example, zero-knowledge proof (ZKPs) technology has found a balance between privacy protection and compliance. Through innovative tools such as zCloak, users can selectively disclose necessary information (such as nationality, age, etc.) without exposing complete personal data. This approach not only meets regulatory requirements such as anti-money laundering, but also fully protects users' privacy rights.

For high-risk assets such as Meme coins, this technology should be adopted in particular to ensure that only investors with corresponding risk tolerance can participate. In addition, the application of smart contracts also has great potential in monitoring market manipulation and identifying insider trading. For example, smart contracts can track large token transfers in real time, combine on-chain data analysis, identify abnormal behavior, and promptly warn of possible market manipulation. This technology-driven compliance approach can not only strengthen market supervision, but also ensure transparency through decentralized means.

In summary, from the regulatory framework of the MiCA Act to technology-driven compliance innovation, the regulatory prospects in the Web3 field are not without merit. Although it is still facing the game between technology and regulations, with the continuous development of technology and the gradual improvement of regulatory policies, a safer and more transparent Web3 market may be just around the corner.

3. Balance between decentralization and centralization: Building a regulatory philosophy of "moderate intervention"

The core value of Web3 is to eliminate intermediaries, promote the ideal of decentralization, and give individuals greater freedom and control. However, completely letting this freedom go may eventually lead to market chaos, or even disorderly competition like the "law of the jungle". To this end, the ideal regulatory framework should pursue "moderate intervention", which can not only protect the innovative spirit of decentralization, but also prevent the market from falling into extreme speculation and manipulation.

The primary goal of supervision should focus on core areas - anti-money laundering, investor protection and market fairness. Excessive intervention in the technical protocol itself may undermine the innovation foundation of Web3. Therefore, supervision should avoid excessively touching the protocol level, but focus on more substantial risk points. For example, how the platform can ensure the safety of investors' funds during operation, how to prevent market manipulation, and how to ensure transparent information disclosure are the areas that supervision should focus on.

At the same time, the decentralization feature has made the concept of "code is law" increasingly popular in the Web3 field. This means that regulatory rules are not just on paper, and technical means such as smart contracts can enable legal provisions to be directly executed on the chain. For example, rules such as token lock-up and tax withholding can be automatically executed through smart contracts, thereby reducing the space for human discretion. With this "code is law" approach, supervision no longer relies on a single third-party agency to execute, but rather uses decentralized technology to ensure its fairness and transparency.

In addition, global collaboration is also an important part of building an effective regulatory framework. Web3 is a global digital ecosystem, and the supervision of a single country or region often finds it difficult to cope with the complex situation of cross-border transactions and market manipulation. In order to prevent regulatory arbitrage, countries around the world need to strengthen coordination and establish a cross-border regulatory sandbox to provide a compliant "experimental field" for various crypto assets and trading platforms. This mechanism will help unify regulatory standards worldwide and avoid market chaos caused by policy differences among countries.

Take the EU's MiCA Act as an example. Its implementation adopts a phased strategy, such as setting a transition period of 12 to 18 months, aiming to balance market adaptability and risk prevention and control. This transition period not only gives the market enough time to adjust and adapt to the new regulations, but also effectively reduces the suppression of industry innovation. In addition, regulators should work closely with the Web3 community to ensure that the policy-making process is more transparent and inclusive. For example, it is possible to consider incorporating decentralized autonomous organizations (DAOs) into the governance framework, allowing the community to participate in the formulation of rules, and ensuring that more stakeholders' voices are heard.

Finding a balance between decentralization and centralization is not easy, but with the advancement of technology and the deepening of global regulatory cooperation, a regulatory framework that can protect the rights and interests of investors and maintain the spirit of decentralization will gradually take shape. This "moderate intervention" regulatory philosophy may be the key to the development of the Web3 field.

Fourth, Future Outlook: From Chaos Governance to Ecological Reconstruction

Milai's Meme coin incident exposed the fragility of the Web3 ecosystem and sounded the alarm for the lack of supervision in the industry. However, this incident does not represent the end of Web3, but is the only way for the industry to mature. In the future, Web3 will not only be a market full of speculative bubbles, but is expected to become an important infrastructure for promoting financial democratization and promoting economic innovation.

Technological progress will play a key role in this process. Through innovative means such as smart contracts, on-chain monitoring and privacy protection technology, Web3 can improve market transparency while ensuring the rights and interests of investors. The application of these technical tools can effectively monitor market behavior, prevent manipulation and insider trading, and lay the foundation for the healthy development of the industry.

However, the role of supervision is not only to crack down on illegal activities, but also to guide the industry towards a more stable and mature direction. Through the symbiosis of a reasonable regulatory framework and technology, Web3 has the potential to achieve a balance between decentralization and compliance, avoiding extreme speculation in the market while encouraging innovation and value creation.

The future of Web3 requires the joint efforts of all parties. With the deepening of global regulatory collaboration and the continuous innovation of technology, Web3 will not only be able to get rid of bubbles and gradually mature, but also become an indispensable part of the global financial system. Ultimately, Web3 will not only be synonymous with digital currency, it will bring profound changes to the global economy.