Web3: The future of the Internet. What’s it all about? More importantly, what do the regulators think…?
What’s Web3 all about?
What do you think of when someone says “Web3”? The next generation of the Internet? A move away from centralisation and the re-distribution of power from large companies to end users? An ecosystem where we have control over our own data (surely not)? Nothing but a vacant expression?
Well, a group of DRCF member regulators – the CMA, Ofcom, ICO and FCA – have joined forces and offered their perspective on the future vision of Web3. Their recent Insight Paper addresses a few things:
- It sets out a conceptual and technical overview of Web3
- It addresses the benefits, risks and harms arising from “decentralisation”
- It describes the key technology through which the vision may be achieve
- It discusses regulatory considerations (including challenges which come with enforcement)
- It considers the next steps for regulators and interested stakeholders
Why do we need to know about all of this? Well, (eventually) it will affect everyone. It will have an impact on innovators in this space (either encouraging or dissuading innovation), centralised entities which currently control large swathes of the Internet and, therefore, the most valuable commodity in the modern world, data (think Big Tech (Meta, Alphabet, Amazon, Microsoft), end consumers who use the Internet (you and me), and regulators (not just those mentioned in the Paper, but others like HMRC).
Is the Paper worth reading?
If you have some time, then definitely (we have included a link to the Paper at the bottom of the page). Although these are baby steps towards offering any regulatory guidance, the Paper is a valuable contribution to the ongoing conversation around the future of the Internet. It offers interesting perspectives on the potential opportunities and limitations of Web3, and it even challenges the key concept of decentralisation.
There is also a very helpful Glossary of definitions on the back page, which clarifies references to associated concepts in the Paper. For those of you who are just starting to delve into this area, it is definitely worth a read!
Some things we spotted…
What remains to be seen is whether the Paper will help to achieve and promote the DRCF regulators’ goal of “fostering responsible innovation” and giving technologies space to develop and mature, whilst helping to ensure that associated risks and harms are minimised. For example, we would challenge the argument that it might be difficult to assign responsibility to end users for actions taken by a DAO. It fails to acknowledge that DAOs could, in the absence of having legal status in the UK, be considered general partnerships, where the principle of unlimited joint/several liability would mean that all users are responsible and therefore can be held individually liable for the actions of the DAO community. If this is the case then users may be deterred from becoming part of a DAO, and involvement and/or innovation in this area could be discouraged.
The Paper also points to existing regulatory regimes (including the UK GDPR, the Competition Act and consumer legislation) and acknowledges that both existing and forthcoming regulations may apply to decentralised entities. It acknowledges that it is the governance of these decentralised entities that could raise practical questions for regulators. An example use case is how compliance obligations and enforcement under the UK GDPR would interact with DAOs. It is suggested that the application of existing regulatory frameworks could create more uncertainty than certainty within the current governance model used by DAOs.
We have also considered a fundamental regulator who will be key to ensure a financially stable ecosystem within the Web3 community, HMRC. Currently, there is no definition of Decentralised Finance in either the UK regulatory framework, or existing tax legislation. Furthermore, on 16 November 2022 the Law Commission launched a call for evidence, raising the concern liability for taxes. If a DAO makes a profit, are those profits taxable? If so, and that DAO operates across multiple jurisdictions, which jurisdiction is entitled to tax those earnings? Have the DRCF deliberately decided to omit this regulator from its Paper to focus on the broader issues of regulation?
So what next?
According to the DRCF members, they will continue to monitor Web3 developments and will work collaboratively with industries, academia, regulators and other stakeholders to ensure they are combining their knowledge and perspectives on this topic.
Whilst the Paper does not provide any clear regulatory guidance and it is questionable whether the regulators are “staying ahead of the changes in digital and online services” (their words, not ours), it does acknowledge that understanding the paths the Internet might take is of significant importance and that regulation in this area will continue to rapidly evolve.
If you are an interested stakeholder then we welcome you to engage with Shoosmiths (contacting Prakash Kerai or Joe Stephenson, Shoosmiths’ NFTs & Metaverse specialists) while we wait for, and monitor, further developments. You are also encouraged by the DRCF members to engage with regulators and policy makers on this topic and the Paper provides a contact email address for you to do so.
Insight paper on Web3 (publishing.service.gov.uk)
- The world’s most valuable resource is no longer oil, but data The Economist
- Law Commission seeks views on decentralised autonomous organisations (DAOs) - Law Commission
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