With the scythe rampant, what kind of regulation does Web3 need?

Author: Luke, Mars Finance

I. The Chaos of Celebrity Meme Coins: Calls for Harvesting and Regulation

One of the attractions of Web3 lies in the ideal of decentralization, but under the influence of celebrity effects, this ideal is often distorted into a breeding ground for speculation. Recently, the LIBRA token promoted by Argentine President Javier Milei has become a typical case of market manipulation. When Milei first promoted LIBRA, the token's market value briefly exceeded $4.5 billion. However, just four hours later, the token plummeted by 85%, with its market value shrinking by over $4 billion, resulting in significant losses for investors. On-chain data revealed that the project team had quietly ambushed funds before the tweet was published and profited over $100 million through large-scale sell-offs. After deleting the tweet, Milei argued that he "did not understand the project details," yet when he retweeted information about the token on February 17, the speculative sentiment in the market was further ignited, leading to a chorus of skepticism. Nevertheless, in a television interview, Milei insisted, "I am just sharing information and did not participate in the project," despite this behavior causing losses for many investors.

Milei's words and actions made investors feel exploited, especially since he did not take political responsibility throughout the event nor provided any substantial protection for retail investors, treating Web3 as a joke. This chaos has intensified the calls from Web3 investors, who urgently need a regulatory framework that can find a balance between market freedom and investor protection.

In this context, the regulatory issues in the Web3 space have become particularly urgent. The consequences of market manipulation and false advertising not only destroy investor confidence but also put the legitimacy of the entire crypto industry to a severe test. How to establish an effective legal framework while maintaining the spirit of decentralization? How to avoid the abuse of celebrity effects like that of Milei? These questions have sparked widespread discussion both within and outside the industry, with calls for regulation growing louder.

II. Exploring Regulatory Frameworks: From the MiCA Act to Technology-Driven Compliance Innovation

As Web3 grows wildly, the lack of regulation has gradually revealed its drawbacks, but finding a balance between the core value of decentralization and market norms remains a pressing issue. The European Union's Markets in Crypto-Assets Regulation (MiCA) provides a regulatory framework worth referencing, aiming to control the risks brought by crypto assets through tiered management. MiCA has established strict reserve requirements for stablecoins such as Asset-Referenced Tokens (ARTs) and Electronic Money Tokens (EMTs), and set limits on daily trading volumes to avoid excessive volatility that could trigger systemic risks. The regulatory requirements for Crypto Asset Service Providers (CASPs) emphasize the segregation of customer funds, transparent pricing, and licensing systems, ensuring compliant market operations.

This tiered regulatory model can effectively extend to the management of meme coins. For project teams, it is particularly important to mandate the disclosure of token distribution mechanisms and lock-up strategies. By setting clearer rules, it can prevent celebrities from profiting from "hype" for short-term gains. Additionally, borrowing from MiCA's approach, setting risk warnings for highly volatile assets on exchanges and moderately limiting leveraged trading can further protect retail investors' interests, preventing them from becoming "cannon fodder" during market fluctuations.

However, a significant conflict still exists between traditional KYC (Know Your Customer) mechanisms and the decentralization principles of Web3. To bridge this gap, technological innovation offers new solutions. For instance, Zero-Knowledge Proofs (ZKPs) technology has found a balance between privacy protection and compliance. Through innovative tools like zCloak, users can selectively disclose necessary information (such as nationality, age, etc.) without exposing complete personal data. This approach meets regulatory requirements such as anti-money laundering while fully safeguarding users' privacy rights.

For high-risk assets like meme coins, this technology should be particularly adopted to ensure that only investors with appropriate risk tolerance can participate. Furthermore, the application of smart contracts has enormous potential in monitoring market manipulation and identifying insider trading. For example, smart contracts can track large token transfers in real-time, combining on-chain data analysis to identify abnormal behaviors and promptly warn of potential market manipulation. This technology-driven compliance approach not only strengthens market regulation but also ensures transparency through decentralized means.

In summary, from the regulatory framework of the MiCA Act to technology-driven compliance innovations, the regulatory prospects in the Web3 space are not entirely bleak. Although there are still challenges in the interplay between technology and regulation, with continuous technological advancements and gradual improvements in regulatory policies, a safer and more transparent Web3 market may be just around the corner.

III. Balancing Decentralization and Centralization: Building a "Moderate Intervention" Regulatory Philosophy

The core value of Web3 lies in eliminating intermediaries, advocating for the ideal of decentralization, and granting individuals greater freedom and control. However, completely unleashing this freedom may ultimately lead to market chaos, even resulting in a "law of the jungle" type of disorderly competition. Therefore, an ideal regulatory framework should pursue "moderate intervention," which can safeguard the innovative spirit of decentralization while preventing the market from falling into extreme speculation and manipulation.

The primary goal of regulation should focus on core areas—anti-money laundering, investor protection, and market fairness. Overly intervening in the technical protocols themselves could undermine the innovative foundation of Web3; thus, regulation should avoid excessive interference at the protocol level and instead focus on more substantive risk points. For example, how platforms ensure the safety of investor funds during operations, how to prevent market manipulation, and how to ensure transparent information disclosure should be the key areas of regulatory focus.

At the same time, the characteristics of decentralization promote the increasing popularity of the "code is law" concept in the Web3 space. This means that regulatory rules should not merely remain on paper; technologies such as smart contracts can enable legal provisions to be executed directly on-chain. For instance, rules regarding token lock-ups and tax withholding can be automatically executed through smart contracts, thereby reducing the space for human discretion. With this "code is law" approach, regulation no longer relies on a single third-party institution for enforcement but instead ensures its fairness and transparency through decentralized technology.

Moreover, global collaboration is also an indispensable part of building an effective regulatory framework. Web3 is a global digital ecosystem, and the regulation of a single country or region often struggles to address the complexities of cross-border transactions and market manipulation. To prevent regulatory arbitrage, countries around the world need to strengthen coordination and establish cross-border regulatory sandboxes to provide compliant "testing grounds" for various crypto assets and trading platforms. This mechanism will help unify regulatory standards globally and avoid market chaos caused by policy differences among countries.

Taking the EU's MiCA Act as an example, its implementation adopts a phased strategy, such as setting a transition period of 12 to 18 months, aiming to balance market adaptability and risk prevention. This transition period not only allows the market sufficient time to adjust and adapt to new regulations but also effectively reduces the suppression of industry innovation. Additionally, regulatory agencies should maintain close cooperation with the Web3 community to ensure that the policy-making process is more transparent and inclusive. For instance, consideration could be given to incorporating Decentralized Autonomous Organizations (DAOs) into the governance framework, allowing the community to participate in rule-making and ensuring that the voices of more stakeholders are heard.

Finding a balance between decentralization and centralization is no easy task, but with technological advancements and deepening global regulatory cooperation, a regulatory framework that can protect investor rights while maintaining the spirit of decentralization will gradually take shape. This "moderate intervention" regulatory philosophy may be key to the development of the Web3 space.

IV. Future Outlook: From Chaos Governance to Ecological Reconstruction

The Milei meme coin incident exposed the vulnerabilities of the Web3 ecosystem and sounded the alarm for the industry's regulatory shortcomings. However, this incident does not signify the end of Web3 but rather a necessary path toward industry maturity. In the future, Web3 will not merely be a market filled with speculative bubbles but is expected to become an important infrastructure for promoting financial democratization and fostering economic innovation.

Technological advancements will play a crucial role in this process. Through innovations such as smart contracts, on-chain monitoring, and privacy protection technologies, Web3 can enhance market transparency while ensuring investor rights. The application of these technological tools can effectively monitor market behavior, prevent manipulation and insider trading, laying the foundation for the healthy development of the industry.

However, the role of regulation is not just to combat illegal activities but also to guide the industry toward a more stable and mature direction. Through a reasonable regulatory framework and the symbiosis of technology, Web3 has the potential to achieve a balance between decentralization and compliance, avoiding extreme speculation in the market while encouraging innovation and value creation.

The future of Web3 requires joint efforts from all parties. With the deepening of global regulatory collaboration and continuous technological innovation, Web3 can not only escape the bubble and gradually mature but also become an indispensable part of the global financial system. Ultimately, Web3 will not merely be synonymous with digital currency; it will bring profound changes to the global economy.