From speculation to compliance, how can Web3 startups say goodbye to “wild growth”?

Authors: Iris, Lawyer Liu Honglin

In the past year, although BTC still attracted much attention, the mainstream of the virtual currency market was filled with various MEMECoins. These currencies, which were hyped up by "stalks" and emotions, attracted a large amount of speculative capital at an alarming rate. However, today, with the decline of the overall market value of virtual currencies and the acceleration of supervision in the global mainstream market, the global virtual currency market seems to have begun to calm down.

On March 14, 2025, Maria Shen, partner of Electric Capital, said that in the future Web3 will pay more attention to practicality and sustainability, and features such as clear supervision and consumer friendliness will also become trends.

In this regard, attorney Mankiw believes that since regulators in various countries and regions began to intervene, Web3 entrepreneurship is gradually moving from an era of "wild growth" to a new era with business compliance as the core.

So, what challenges will Web3 entrepreneurs face in the coming era of full compliance? And how should they deal with these changes?

In this article, let’s talk about these issues.

The compliance dilemma faced by Web3 startups

Over the past few years, Web3 entrepreneurs seem to rarely take the word "compliance" to heart.

Because of the lag in regulation, there was almost no regulatory framework to refer to in the past for Web3, a completely new product. At that time, most teams were developing projects while naturally continuing the original intention of decentralization, operating in the form of informal entities such as foundations. However, when the market gradually returned from speculation to the essence of business and the regulatory environment became clearer, this "casual" business model was bound to feel seriously "unsuitable".

This kind of "incompatibility" is mainly manifested in the following aspects under the background of increasingly strict global supervision:

1. Team structure issues

Most Web3 projects usually do not immediately choose to register a formal commercial company in the initial stage, but a few founders or core members start operations directly based on verbal agreements, simple agreements or even tacit consensus. This seemingly flexible model can indeed help the team quickly start the project in the early stages, but at a time when supervision is becoming stricter, it gradually exposes serious governance risks.

This kind of "casual" cooperation often leads to unclear rights and responsibilities among members. For example, the Yescoin incident that Attorney Mankiw talked about with everyone last week was also due to the lack of formal agreements, company charters or shareholder documents in the early stages of the project, which made it difficult to clearly define everyone's rights and interests. In the end, when the project financing was successful or actual profits appeared, it triggered internal disputes and disputes over their respective rights and interests within the team. (For details, please see "Interpretation of the Yescoin Internal Conflict: Why Did a Joint Venture Turn into a Criminal Offense?")

In addition, as the regulatory authorities’ requirements for Web3 projects become clearer, projects that have not established formal business entities often find it difficult to pass regulatory approval. For example, regulatory authorities such as the Securities and Futures Commission (SFC) of Hong Kong and the Monetary Authority of Singapore (MAS) generally require that virtual asset service providers must be clear business entities and have a sound corporate governance structure in order to obtain the corresponding licenses. If a project has been operating in the form of a "verbal agreement" or informal organization, it will be difficult to meet these regulatory requirements, thereby losing the opportunity to enter the mainstream financial market.

2. Profit model issues

When it comes to how Web3 projects can quickly make profits, most people often think of issuing coins first - or even think that "a project that does not issue coins is not a good project." This way of thinking has led many teams to focus too much on the design of economic models, while ignoring more basic and critical business model design and compliance issues.

However, as the Web3 ecosystem continues to mature, the profit model is no longer limited to simply issuing coins, but has evolved into more diversified methods, such as token airdrops, rebate invitations, etc. Although these methods can quickly attract user traffic and capital, there are huge regulatory risks behind them: a large number of airdrops may be identified as illegal securities issuance or unauthorized financing; once the rebate mechanism involves multi-level promotion, it is easy to touch the legal red line of illegal fundraising or pyramid schemes.

In addition, some Web3 projects provide users with so-called "automatic income services" through smart contracts or on-chain protocols, such as automated trading strategies, arbitrage tools, or investment products similar to financial derivatives. From the perspective of traditional financial supervision, these services are obviously financial businesses that require a license to conduct. Providing these services without obtaining the corresponding license may essentially constitute illegal financial activities. In recent years, the US SEC has frequently launched law enforcement actions against Web3 projects such as Terraform Labs and Uniswap that provide income-generating token services or automatic income products. This is a clear warning from the regulatory authorities on the compliance of this model.

3. User management issues

Web3's "decentralized" concept has caused many projects to completely ignore user identification (KYC) and anti-money laundering (AML) requirements in the early stages, and even regard them as troubles that hinder the rapid growth of projects. However, in the context of increasingly stringent global financial supervision, the lack of this link has become one of the most significant compliance risks for Web3 projects.

For example, the Hong Kong Securities and Futures Commission (SFC), Dubai Virtual Asset Regulatory Authority (VARA) and EU MiCA Act all explicitly require virtual asset service providers to strictly implement KYC and AML measures, and record user identities and fund flows in detail to prevent illegal activities such as money laundering and terrorist financing. The past "anonymous" and "examination-free" models have become ineffective in the era of compliance supervision.

For projects, supplementing this system not only means huge technical and compliance costs, but more seriously, the large amount of anonymous user data accumulated in the past can hardly meet compliance requirements. In some strictly regulated jurisdictions, this may even mean that a large number of existing users need to be cleared out, seriously affecting the survival basis of the project and making the business model unsustainable.

Of course, in addition to these three types of compliance dilemmas, Web3 startups also face more specific and detailed compliance issues. So, in the face of this dilemma, how can Web3 entrepreneurs quickly adapt to the regulatory environment and get rid of the current situation of "not adapting to the local environment"?

The most direct and realistic answer is to actively learn from the regulatory experience of traditional Internet companies.

Why learn from traditional Internet entrepreneurship experience?

When it comes to the compliance path for Web3 entrepreneurship, we may be able to draw inspiration from Hong Kong’s virtual asset trading regulatory cases.

In 2023, when the Hong Kong Securities and Futures Commission officially implemented the licensing system for virtual asset exchanges, the market generally expected that world-renowned crypto trading platforms would be able to quickly enter the Hong Kong market, but the actual situation was not the case.

Except for OSL and HashKey HK, which have been operating in accordance with Hong Kong regulatory requirements from the beginning, almost all newly established local platforms have successfully obtained virtual asset trading licenses. Others that can indirectly provide virtual asset services to users are mostly local brokerages and banks with traditional financial backgrounds, who enter the market by cooperating with licensed exchanges or applying for upgrades to existing licenses, while large international crypto exchanges have been slow to enter.

This obvious contrast actually reflects a core problem: the virtual asset regulatory framework currently promoted by the Hong Kong Securities and Futures Commission is essentially an extension and reshaping of the traditional financial regulatory model, and many international trading platforms that are accustomed to "offshore" and "decentralized" lack similar compliance structures in the early days, which has led to the obvious "incompatibility" today. Traditional Internet financial companies, and even newly established local trading platforms, are familiar with the traditional financial regulatory system and compliance rules, so they can meet regulatory requirements more quickly and obtain entry qualifications in the license application process.

In fact, this kind of "incompatibility" is not limited to Hong Kong. This trend is also clearly visible in the United States and the European Union.

Taking the United States as an example, the U.S. SEC launched intensive enforcement actions against trading platforms such as Coinbase, Kraken and Gemini from 2023 to 2024. The core legal basis is the Securities Act of 1933 and the Securities Exchange Act of 1934, especially the unregistered securities issuance and securities brokerage business. Among them, the crypto asset staking service provided by Kraken was identified as an "unregistered securities issuance", and some currencies provided by Coinbase were also listed as "securities" by the SEC due to their obvious profit expectations and centralized management characteristics. It can be seen that the U.S. regulators did not create new rules specifically for Web3, but directly borrowed the traditional financial regulatory logic, further clarifying that virtual asset transactions should return to the traditional securities regulatory framework.

Looking at the EU, the Markets in Crypto-Assets Regulation (MiCA), which was officially adopted in April 2023, highly refers to the compliance standards of traditional banking and financial market regulations, and puts forward strict requirements for virtual asset trading platforms' fund custody, reserve requirements, risk management system construction, and information disclosure mechanisms. For example, stablecoin issuers are required to strictly reserve corresponding assets in accordance with the reserve standards of the banking industry; and user assets of trading platforms must be held in custody by compliant third-party banks or trust institutions, and strict user KYC/AML processes must be implemented. These requirements are almost completely consistent with the regulatory framework of the traditional financial industry.

This trend shows that Web3 compliance is not a new and unknown exploration, but more like an extension of traditional financial supervision in the digital economy era. Although Web3 entrepreneurship has certain "decentralized" characteristics, its essence is still a commercial activity. Therefore, actively learning from traditional Internet companies and drawing on their mature regulatory experience, compliance processes and governance structures is not a step backward for Web3 entrepreneurship, but can avoid paying higher trial and error costs on the road to compliance.

Especially when the global regulatory trend has clearly returned to the traditional financial and commercial regulatory framework, Web3 companies actively approach and adapt to the compliance standards under the traditional Internet model, which will not only make it easier to gain recognition from regulators, but also be more conducive to the long-term development of the company.

Attorney Mankiw's Summary

As attorney Mankiw has always said: When starting a Web3 business, don’t be too Web3.

The so-called "not too Web3" does not mean that you should completely abandon the core spirit of Web3's decentralization, openness and transparency, but rather that we hope that entrepreneurial teams can return to the essence of business. After all, no matter how decentralized a project is, it will eventually have to integrate into the real business environment and accept the test of global supervision.

Today, the era of commercial compliance for Web3 startups is about to arrive, and market logic and regulatory orientation are gradually shifting to commercial rationality and compliance norms. Entrepreneurs need to take the initiative to bid farewell to the "barbaric growth" model, carefully build a corporate governance structure, optimize the token economic model, ensure the safety of funds, and establish a complete user compliance management system.