How Web3 Law Firms foster compliance for on-chain startups

The Web3 world is quickly moving to a more regulated environment. The goal is to set up critical frameworks so applications can be more widely adopted and used by everyone, regardless of their level of understanding of the technology behind these decentralized projects.

Each year, there are thousands of new Web3 startups and DAOs to solve current problems with decentralized solutions in various fields such as fintech, healthtech, and even social media. As the Web3 space grows, governments are increasingly concerned with the challenge of fostering innovation and promoting investment while ensuring security, transparency, and compliance for all key stakeholders involved.

Regulatory frameworks are emerging and being widely adopted across the globe to address issues such as fraud, money laundering, data, and consumer protection, which are critical to the legitimacy and sustainability of Web3 businesses. Additionally, investment in Web3 startups is on the rise, with venture capital funding in blockchain projects reaching the value of $33 billion in 2021, a significant jump from $3.1 billion in 2020, as shared by CB Insights.

To comply with regulations in place, operating corporations, no matter how small or big, centralized or decentralized their structures are, must ensure they comply with every regulatory aspect of the countries they run in.

The Web3 Regulatory Landscape

Every country has its own interpretation of the blockchain industry. Some are more keen on supporting innovation and playing a role at the forefront of the technology industry, while others prefer to wait for early adopters to pave the way for new regulations and actionable laws.

European Union

‍Every crypto and financial startup must comply with the Markets in Crypto Assets Regulation (MiICA). This regulation allows for a more harmonized framework for all entities dealing with digital assets, crypto-asset issuers, and crypto-asset service providers, taking full effect by the end of 2024. This is considered the first major jurisdictional document worldwide to take into account the specific sector needs and upcoming technological innovations.

Singapore

‍Considered as one of the world’s leading countries in crypto regulation, companies operating in this territory must comply with the Payment Services Act. This regulatory framework, first created in 2019, grants licensing and regulation to all payment service providers in Singapore, while simultaneously guaranteeing the oversight of payment systems in the country.

United Arab Emirates

‍Also known for leading the digital assets industry, it has two different but complementary legislative frameworks: the VARA regime in the Emirate of Dubai, established in 2022 with the aim of providing a framework to protect investors, reduce high levels of risk, and promote virtual asset innovation; and the ADGM free financial zone in Abu Dhabi, founded in 2013 and fully operational by October 2015, which provides regulatory frameworks to empower innovation in the city.

United Kingdom

‍The UK has announced its intention to establish a digital asset hub in the country, creating the right conditions for accommodating new decentralized applications in the near future by implementing clear, innovation-friendly policies and regulations.

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While the specifics vary, these measures demonstrate governments' desire to embrace blockchain technology's potential while safeguarding consumers and preventing financial crimes. The goal is to strike a balance between innovation and protection.

What role do Law firms play in Web3 regulation?

Web3 Law firms have been key players in the new regulatory framework, by bridging the gap between the tech world and the legal aspect of the market. They understand the technology behind the new products and services provided on-chain, and also can grasp the advantages of a regulated market, as it becomes more transparent and accessible to new founders, DAOs, entrepreneurs, and investors.

These new law firms specialized in blockchain technology companies and regulations can navigate the complexities of the new Web3 world, in matters such as smart contracts, digital copyrights, intellectual property (IP) rights, Anti-Money Laundering practices, and even licensing.

In this article, we’ll explore the importance of these organizations in several fields:

1. Regulatory laws and compliance

The regulatory field is constanting evolving. Sometimes, it is very difficult to keep up with new diplomas, directives, regulations, and even local laws. Web3 lawyers need to know how to navigate these new updates and present their clients with actionable insights on how to proceed to ensure compliance within their businesses.

2. Smart contracts

Smart contracts are a key element of blockchain, allowing two parties to agree on a contract which will be automatically enforced if the predetermined conditions of such consensus are met. However, they don’t always have legal value, as any other agreement between two parties. Web3 Law firms can help provide legal advice and imprint lawful value to these decentralized documents.

3. Licensing

Licensing is a fundamental aspect of any corporation. However, it becomes increasingly more complex and intricate when discussing new, disruptive businesses that have no precedent organization from which to copy a licensing model. This means that acquiring new licenses might be a less straightforward process, which calls for legal intervention.

Specialized Web3 lawyers can help startups and DAOs understand what the requirements for a legal operation to be up and running, such as a VASP license for payment providers are. This will allow organizations to mitigate potential regulatory risks and convey legal value and transparency to operate in full force.

4. DAO incorporation

A DAO (Decentralized Autonomous Organization) is a new blockchain-based organizational model for new businesses, processes, projects, and ideas. As it is a new concept, regulation is still confusing and complex. Web3 Law firms can help navigate these intricacies and explore the best model for incorporating a DAO by reaching out to partners such as OtoCo.

5. Digital assets and cryptocurrencies

Trading, holding, and swapping digital assets is becoming more complex, with more options available to companies and individuals, such as non-custodial exchanges, payment solutions, on- and off-ramping platforms, among others. Digital portfolios are becoming increasingly diverse, and regulation may enforce the need for any legal documents to be presented as required.

Web3 lawyers can help file any legal declaration with the proper government entities, ensuring compliance and minimizing risk.

6. ICO launching

Many companies opt to provide an Initial Coin Offering (ICO) when launching a new project. This is an elaborate process with many moving parts and thorough details. Legal advice is essential to ensure compliance and the success of this operation.

7. Intellectual property rights

Intellectual property (IP) is of paramount importance in highly innovative sectors, such as tech and Web3. A competent and specialized lawyer can make a significant contribution to ensure protection of IP for all new procedures and inventions, helping founders to comply with all legal requirements to grant their due rights. Law firms can also assist to cope with all IP titles, to ensure that new businesses do not violate any restrictions in place.

8. Data protection and privacy

As with any other business, Web3 startups and DAOs usually collect, process, and store user data, so they must implement all compliance mechanisms to grant data integrity. A significant example is the General Data Protection Regulation (GDPR), which sets a compilation of data standards for businesses operating in the European Union space.

9. Anti-Money Laundering / Know Your Customer regulations

AML and KYC are the main regulations to consider when it comes to Web3 Fintech applications. It is imperative that startups and DAOs comply with these guidelines to ensure a smooth operation and tackle every aspect of a potential audit.

Web3 Law firms can help to set up the best practices and incorporate them on a regular basis, ensuring compliance to verify the identity of the business’ clients while monitoring transactions and payments, leading to the investigation and rejection of suspicious activity.

10. Terms of Service

Every business must ensure a complete and transparent policy regarding customer legal rights. These Terms of Service (TOS) are usually written by a legal law firm that is in tune with all regulatory requirements and ensures that the company doesn’t engage in misleading practices.

How Web3 Law Firms can help Web3 founders

There are an increasing number of Web3 Law firms in the market, ready to help new business owners, especially in such an evolving field as blockchain technology. They guarantee up-to-date knowledge on regulations, legislations, and directives to follow to achieve full compliance, and are also equipped to help in any case of litigation or licensing.

Companies are betting on this area to ensure transparency and credibility, so there is a rising trend for Web3 legal advice. According to a report by Gartner, the legal services industry related to blockchain projects is estimated to achieve $5 billion by 2025. This is a clear indication of the need and recognition of the importance of specialized legal services for new and emerging Web3 startups and corporations.

Web3 Law firms can become indispensable in the Web3 space, providing the most up-to-date information, legal frameworks, and regulatory compliance guidelines for the growth of Web3 technologies and their massive mainstream adoption in the near future. 

They provide a safer, more compliant environment, as they can help startups to choose the best partners and providers for all aspects of their business. One of the key providers is the payments entities they choose for all crypto and fiat transactions, as well as portfolio management solutions. It is essential that this provider integrates all key compliance measures into its platform, automates the verification processes and ensures all transactions are legally binding.

How Skyline Digital can help Web3 Law Firms’ clients

Skyline Digital can help Web3 startups, companies, foundations, and DAOs by providing a transparent and compliant product. We are a non-custodial solution for third-party crypto and fiat payment options, bridging the gap between traditional financial services and the Web3 economy. Working for over two years in the crypto space, we are registered as a VASP and financial intermediary in VQF, an SRO supervised by FINMA in Switzerland, and as a VASP registered with OAM in Italy.

One of our most successful use cases is to provide banking and transactional support, giving Web3 companies access to all the financial services useful for running a business operation. Given the complexities and intricacies of the new Web3 world, some business models are misunderstood, and traditional financial providers are concerned about the risks these organizations pose. Web3 payment and banking solutions can become an alternative route for these businesses to fully operate within the on-chain space.

They can prepare the necessary documentation, ensuring compliance with anti-money laundering (AML) and know-your-customer (KYC) regulations. This comprehensive support can significantly improve the chances of successfully opening and maintaining payment accounts, which is useful for operations such as transaction processing, payroll management, account reconciliation, and loans, among others.

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