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The Editorial: Can Web3 Thrive Without Overregulation?

An Argument for Middle Ground Common Sense

Author

Scott Kasten
February 20, 2025

Let’s be real: Web3 has been a regulatory nightmare.

From the early days of crypto anarchy to the chaotic rise of DeFi and DAOs, we’ve seen a wild mix of innovation, speculation, and outright fraud. It’s no wonder regulators are paying attention. The question isn’t whether Web3 needs regulation—but what kind of regulation will allow the space to grow without suffocating it?

And now, with the Trump administration back in the driver’s seat, the regulatory landscape is shifting again. If history is any guide, we can expect less oversight, fewer restrictions, and a whole lot of uncertainty. But is that a good thing?

I’d argue that Web3 doesn’t need zero regulation—it needs the right regulation. And right now, we’re nowhere close to finding that balance.

Regulation: The Two Extremes

Web3 is stuck between two competing visions for the future:

1. The “Code is Law” Purists

This camp believes that smart contracts should replace traditional regulation. No middlemen, no government interference—just immutable code running decentralized networks.

On paper, this sounds great. In reality, we’ve seen what happens when DeFi projects collapse, when DAOs make reckless governance decisions, and when NFT scams run rampant. People lose money. Trust evaporates. And without legal protections, users are often left with no recourse.

The idealism of "code is law" runs into a harsh truth: if no one is responsible, everyone is at risk.

2. The “Ban Everything” Crowd

On the other extreme, you have governments—particularly in China, India, and even parts of the U.S.—that view crypto as a financial crime risk and want to regulate it into oblivion.

For these regulators, Web3 is nothing but a casino for speculators and money launderers, and they’d rather see it dismantled than developed responsibly.

The problem? Overregulation kills innovation. If we bury Web3 under a mountain of compliance rules, the only winners will be big banks and centralized platforms that can afford the legal overhead. The very decentralization that makes Web3 powerful would be lost.

Trump’s Web3 Playbook: Deregulation or Chaos?

So where does the new Trump administration fit into this debate?

Trump’s economic policies tend to favor less regulation, more industry control, and a strong push toward private-sector-led growth. That’s good news for companies that want to innovate without fear of the SEC knocking on their door. But it also comes with a major risk—a total lack of clear rules.

What We Know So Far

🚨 No U.S. CBDC – Trump has explicitly banned the development of a central bank digital currency (CBDC), arguing that it would give the government too much power over financial transactions.

⚖️ Less SEC oversight? – His administration may reduce the SEC’s aggressive crypto enforcement, favoring the more hands-off approach of the CFTC.

🪓 Less Consumer Protection - Trump has ordered the Federal Consumer Protection Bureau to immediately cease operations. Caveat emptor!

📜 A new regulatory framework? – Trump has set up a Digital Asset Working Group, but we don’t yet know if this will lead to clear guidelines or just more confusion.

The upside? More breathing room for Web3 builders. The downside? More uncertainty for investors, startups, and even regulators themselves.

What Web3 Actually Needs

Instead of swinging between overregulation and total deregulation, the Web3 industry needs smart regulation—rules that protect users without stifling innovation.

Here’s what that could look like:

The SEC’s approach to crypto has been a disaster—endless lawsuits, shifting definitions, and no clear framework.

We need real guidelines that define:
* Which tokens are securities and which aren’t.
* How DeFi projects can comply without centralizing.
* How stablecoins should be regulated without crushing competition.

2. DAO Protections Without Liability Nightmares

The Ooki DAO case showed us that regulators can and will hold DAO participants accountable—even if all they did was vote on a governance proposal.

That’s a dangerous precedent. If participating in a DAO means personal legal liability, why would anyone get involved? Fortunately I see many specific circumstances in that case that waterdown its impact as a guiding precedent.

DAOs need a legal framework that protects governance participants while ensuring accountability at the protocol level. Otherwise, we’ll see DAOs shift toward centralized corporate structures just to avoid lawsuits—which defeats the whole purpose of Web3.

3. A Real Approach to Financial Crime Without Banning Privacy

Yes, crypto has been used for illicit activity—just like cash, offshore banking, and traditional finance have been for decades. But the answer isn’t banning privacy—it’s better tools for compliance.

🔹 Zero-Knowledge Proofs (ZKPs) could allow users to prove compliance without revealing private financial data.
🔹 Decentralized identity systems could offer a middle ground between anonymity and transparency.
🔹 On-chain analytics tools are already making it harder, not easier, for criminals to launder money.

Rather than forcing DeFi platforms to implement intrusive surveillance, regulators should support privacy-preserving compliance technologies.

The Bottom Line: Web3 Needs the Right Kind of Rules

Right now, the biggest threat to Web3 isn’t just regulators—it’s bad regulation.

We need a third path between extreme deregulation and suffocating oversight.

We need laws that empower builders without handing control back to traditional institutions.

We need governments that actually engage with the Web3 community rather than legislating out of fear.

The Trump administration has an opportunity to set a new course for Web3 regulation—one that encourages responsible innovation instead of creating another regulatory gray zone.

But will they? That remains to be seen.

What’s clear is this: if Web3 doesn’t shape its own regulatory future, someone else will do it for us. And history suggests that won’t end well.

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