The Future of Web3 Regulation Under the Trump Administration: Clarity or Chaos?

The inauguration of President Donald Trump in January 2025 has ushered in a transformative era for Web3 regulation, policy, and legal frameworks in the United States. As the administration signals a shift in its approach to digital assets, the debate over regulation—what kind, how much, and who should enforce it—has intensified.

This article delves into the evolving global regulatory landscape of Web3, with a particular focus on the significant shifts introduced by the new Trump administration, the unresolved battle between the SEC and CFTC over crypto jurisdiction, and the broader implications for Web3 innovation.

Introduction: The Intersection of Web3 and Regulatory Evolution

Web3 technologies, encompassing decentralized finance (DeFi), non-fungible tokens (NFTs), and decentralized autonomous organizations (DAOs), have experienced exponential growth, reshaping traditional financial and digital ecosystems. This rapid expansion has prompted governments worldwide to reassess and formulate regulatory approaches to address the unique challenges and opportunities presented by these innovations.

At the heart of this regulatory debate is a fundamental tension: How can governments balance innovation with consumer protection and financial stability?

• Overregulation could stifle the very innovation that makes Web3 revolutionary.

• Underregulation could leave users vulnerable to fraud, hacks, and systemic financial risks.

• A lack of clear, consistent rules has led to uncertainty, discouraging legitimate projects from operating in the U.S.

As the Trump administration takes charge, its regulatory approach—marked by a deregulatory stance on traditional financial markets—raises the question: Will Web3 flourish under reduced oversight, or will ambiguity and legal battles continue to plague the industry?

The US Regulatory Structure: A Mostly Non-Boring Overview

Before diving into the regulatory debate, a brief overview of the U.S. financial regulatory system is helpful.

At the federal level, financial regulation is divided among multiple agencies, each with its jurisdiction. To complicate matters more, states also enforce their own rules, meaning businesses often have to navigate multiple regulatory environments simultaneously.

Here are the key players in Web3 regulation at the federal level:

Securities and Exchange Commission (SEC)

• The most well-known financial regulator, established in 1934 to oversee securities, stock exchanges, and investment advisors.

• Operates as an independent agency, meaning it doesn’t answer directly to the president, but its chairman is appointed by the administration.

• The SEC has aggressively pursued crypto enforcement, arguing that most tokens are securities and should be registered.

Commodity Futures Trading Commission (CFTC)

• Created in 1974, the CFTC oversees commodities, derivatives, futures, and margin trading.

• Unlike the SEC, which sees most crypto as securities, the CFTC argues that Bitcoin and potentially other tokens are commodities.

• Generally viewed as more favorable to Web3 due to its lighter regulatory requirements, which do not impose the same registration and compliance burdens as securities laws.

Department of Justice (DOJ)

• Enforces criminal laws related to financial crimes, including fraud, money laundering, and sanctions violations.

• The National Cryptocurrency Enforcement Team (NCET), established in 2021, focuses specifically on crypto-related cases.

Consumer Financial Protection Bureau (CFPB)

• Established in 2011 following the 2008 financial crisis, the CFPB is responsible for protecting consumers from deceptive or fraudulent financial practices.

• In the Web3 space, the CFPB may oversee DeFi lending platforms and digital payment services to ensure fair treatment of consumers.

• As of earlier this month, the Trump administration has ordered the CFPB to cease operations.

Internal Revenue Service (IRS)

• Not a financial regulator per se, but plays a crucial role in tax enforcement on crypto transactions.

• Continues to refine its stance on crypto tax reporting, staking rewards, and NFT taxation.

Am I a Commodity? Am I a Security? Am I Both?

Crypto projects are often caught in a legal gray area: Are digital assets securities or commodities? This is not just a philosophical debate—it determines who regulates Web3 and what legal hurdles companies must overcome.

Why does this matter?

• Securities = SEC oversight = extremely burdensome regulations.

  • If a digital asset is classified as a security, it must be registered with the SEC, traded on SEC-approved exchanges, and held by SEC-licensed custodians.

  • This precludes decentralization, as SEC-compliant entities must have centralized control.

  • The crypto industry spends billions lobbying to avoid this classification since it could suffocate many Web3 projects.

  • The SEC follows the Spreme Court’s “Howey Test” when deciding what is a sescurity and what is not.

• Commodities = CFTC oversight = a much lighter touch.

  • Unlike the SEC, which requires strict investor protections, the CFTC treats commodities as tradeable assets rather than investment contracts.

  • This means fewer compliance barriers and greater flexibility for innovation.

  • However, the CFTC lacks enforcement power over spot markets, meaning crypto exchanges operate in a regulatory gap.

The Trump administration has signaled support for the CFTC's more hands-off approach, potentially shifting oversight away from the SEC. However, unless Congress steps in, the SEC and CFTC will continue fighting for control in the courts.

Navigating Decentralization: Why It’s a Legal Nightmare

Decentralization is one of Web3’s core principles, but regulators see it as a challenge to accountability.

DAOs: Who Is Responsible When Things Go Wrong?

• The CFTC’s case against Ooki DAO set a dangerous precedent:

  • Regulators argued that anyone who voted on governance proposals was legally liable for the DAO’s activities.

  • This means participating in a DAO could expose individuals to legal and financial risk.

• In response, many DAOs are shifting toward legal structures like LLCs or foundations to protect members.

DeFi Protocols: How Can You Regulate Code?

• Traditional finance relies on intermediaries (banks, brokers, exchanges) that regulators can oversee.

• DeFi eliminates intermediaries, making enforcement difficult.

• Some regulators propose forcing DeFi protocols to register as financial institutions, but this contradicts the ethos of decentralization.

Regulators face a dilemma: How do you enforce laws in a system with no central entity?

Anti-Money Laundering (AML) and Know Your Customer (KYC) Compliance

The Privacy vs. Transparency Debate

• Regulators argue that crypto enables financial crime due to its pseudonymous nature.

• Web3 advocates counter that on-chain transparency makes transactions more traceable than cash-based systems.

Potential Solutions

• Zero-Knowledge Proofs (ZKPs): Allow users to verify their identity without revealing personal data.

• Decentralized Identity Systems: Provide selective disclosure for compliance without compromising privacy. (See last week’s issue)

Risks and Regulations: Why Governments Care

Key Risks Regulators Want to Address:

• Fraud and Rug Pulls → Investors lose money in scam projects that disappear overnight.

• Market Manipulation → Wash trading and price manipulation hurt market integrity.

• Consumer Protections → Web3 lacks safety nets for retail investors.

• DeFi Exploits → Smart contract bugs have drained billions from users.

  ***Wash trading is a form of market manipulation in which an entity simultaneously sells and buys the same financial instruments, creating a false impression of market activity***

Regulatory Responses and Their Consequences

• Strict regulation → Drives Web3 innovation offshore (e.g., Binance left the U.S.).

• No regulation → Leads to systemic financial risks (e.g., the 2008 or 2022 market crashes).

• Balanced regulation → Encourages responsible innovation while protecting users.

Web3 Regulation in the Present: What’s Happening Now?

European Union: Regulatory Clarity Through MiCA

The European Union continues to advance its regulatory framework:

• Markets in Crypto-Assets (MiCA) Regulation: MiCA aims to provide clear guidelines on digital asset classifications, stablecoin issuance, and licensing requirements, offering a harmonized approach across member states.

• Impact on Innovation: While MiCA seeks to protect consumers and ensure market integrity, there are concerns about potential compliance burdens that may affect the agility of startups and smaller enterprises in the Web3 space.

Asia: Diverse Crypto Regulatory Approaches

Asian countries exhibit a spectrum of regulatory stances:

• Hong Kong and Singapore: Both regions have implemented pro-crypto regulatory frameworks, attracting significant institutional investment while enforcing stringent compliance measures to mitigate risks.

• China: Maintains a prohibitive stance on cryptocurrency activities, emphasizing the promotion of its own digital yuan.

• Japan: Operates under a licensing model that allows crypto businesses to function legally, provided they adhere to established regulatory standards.

United States: A Paradigm Shift Under the Trump Administration

The Trump administration has embarked on a decisive shift in cryptocurrency and digital asset policy:

• Executive Order on Digital Financial Technology: On January 23, 2025, President Trump signed the "Strengthening American Leadership in Digital Financial Technology" executive order. This directive emphasizes the administration's commitment to fostering the growth of blockchain technologies and digital assets, aiming to position the U.S. as a global leader in this sector.

• Prohibition of Central Bank Digital Currencies (CBDCs): The executive order explicitly bans the establishment and promotion of U.S. CBDCs (Central Bank Digital Currency), citing concerns over financial stability and individual privacy. This move delineates a clear preference for private-sector-led digital currencies over government-issued alternatives.

• Formation of the Digital Asset Working Group: The order establishes a working group, chaired by Special Advisor for AI and Crypto, David Sacks. This group is tasked with reviewing existing cryptocurrency regulations and proposing a comprehensive federal framework within 180 days.

The Future of Web3 Regulation: What Happens Next?

In the United States, the Trump administration’s approach to Web3 regulation is likely to lean toward deregulation and industry self-governance, reducing the SEC’s aggressive enforcement actions and possibly shifting oversight to the CFTC’s more lenient framework. However, without clear legislation from Congress, legal uncertainty will persist, leading to continued regulatory battles in the courts. Stablecoin regulation and crypto tax policies will likely be hot topics, while DAOs and DeFi platforms remain in a gray area of compliance.

In the European Union, the introduction of MiCA (Markets in Crypto-Assets Regulation) provides a clear legal framework for stablecoins, exchanges, and token issuers, setting a precedent for global regulation. However, DeFi, DAOs, and NFTs are still largely unaddressed, meaning further legislative updates will be needed. The EU’s focus on consumer protection and financial stability suggests that additional rules could emerge, especially as policymakers monitor the risks and successes of MiCA’s implementation across member states.

In Asia, regulatory stances vary widely. Hong Kong and Singapore are positioning themselves as crypto-friendly hubs, introducing clear licensing structures to attract Web3 companies while maintaining strict compliance standards. Japan continues its progressive but cautious regulatory approach, ensuring that crypto businesses operate within a well-defined legal framework. Meanwhile, China maintains its ban on crypto trading and mining, pushing innovation offshore. In contrast, India’s high taxation and unclear policies have made it difficult for Web3 companies to thrive, though the government is exploring potential frameworks for digital assets.

A Defining Moment For Web3 Regulation

The next few years will be critical in shaping the future of Web3 regulation across the globe. While the U.S. grapples with regulatory uncertainty, the EU sets a structured legal foundation, and Asia remains a patchwork of varying approaches, one thing is clear—governments can no longer ignore Web3.

The challenge lies in finding a balance between fostering innovation and ensuring financial stability, without forcing the industry into regulatory exile or stifling its core principles of decentralization. Whether the Trump administration embraces a clear, innovation-friendly framework or leaves Web3 in a legal gray zone, the decisions made today will determine whether the U.S. remains a leader in digital asset development or cedes ground to other jurisdictions.

For builders, investors, and policymakers alike, engagement in this regulatory debate is not optional—it’s essential to ensuring Web3’s long-term success.

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Other Articles In This Issue:

• The Case Study: Ooki DAO vs. CFTC

• The Editorial: Can Web3 Thrive Without Overregulation? 

• CHECK OUT OUR PREVIOUS EDITIONS