The Web3 industry, covering the wide ambit of blockchain, crypto, DeFi, and now vying to engulf AI as well, is notorious for functioning in the grey. Mass media often associates it with the black market, dark web, and scams. Such is the way of our world; innovation runs ahead while legislation struggles to catch up. Every new advancement in tech fosters a lawless environment long before any regulatory guidelines come into the picture. Case in point: India’s IT (Intermediary and Media Ethics) guidelines regulating social media intermediaries were passed in April 2021, a full 17 years after Facebook’s launch and 15 years after its entry into the Indian markets. Several countries across the world are yet to frame basic guidelines for online data privacy and protection despite the internet being in existence for almost four decades.
In fact, as we stand today, the law is working overtime to ensure it regulates as much of the virtual digital assets (VDA) industry as possible. Several jurisdictions, including the infamous tax havens such as BVI and Caymans, boast a robust legal framework that only permits licensed businesses to function. For a virtual asset service provider (VASP), it becomes imperative to include legal resources right from the product development stage. For a VDA product, such as a wallet or exchange, to be allowed to operate, it obviously needs to fulfil certain basic requirements varying across jurisdictions.
As an in-house legal counsel for a new-age tech company, I work as a compliance and legal professional, and a product developer overseeing marketing. The stages of my work, in brief, encompass:
Incorporation and Licensing Depending upon the business model and the type of service the VASP wants to provide, the first decision is to choose the place of incorporation. This needs to be undertaken keeping in mind not just the business friendliness of the place but also the VASP regulatory framework that exists in the jurisdiction. With most regulations being fairly new, much ambiguity exists on the ground reality of licensing.
Certain products must incorporate very specific features to operate. You could build the best, most smooth-functioning Custodial Wallet or Exchange, and if you do not have Know Your Customer (KYC) at the right stage of use, your product will attract sanctions. For instance, the Virtual Assets Regulatory Authority in Dubai has meticulous technical and compliance handbooks that the product needs to comply with from the first moment of initiation or risk being massively fined.
Both the UK’s Financial Conduct Author-ity and India’s Advertising Standards Council of India have released guidelines for VASPs to comply with when it comes to marketing their products or services. While the latter mandates disclaim-ers along the lines of “crypto products and NFTs are unregulated and can be highly risky,” the former warns VASPs to ensure that they do not use their status as a regulated entity to claim they have an advantage over other non-regulated firms. So not only must you make sure your business and product are compliant, but you can’t even boast about how much better you are than the ones who continue to operate in the free waters. What a pity.
Global Workforce Compliance
With “decentralisation” at the very crux of the industry, many VASPs prefer not to let man-made borders restrict their use of talent and function with global teams. This means that not only does the company workforce policy need to comply with the company domicile, but it also needs to make sure it does not violate any country’s laws from where a professional might be engaged to work!
It’s exciting and nerve-wracking; it’s how I imagine a trapeze artist asked to juggle knives must feel. There are no godfathers, no precedents you can follow because everyone’s guess is as good as yours. You take what you know and try to apply it in a field of unknown uncertainty. In conclusion, I’m sure the blame for the excesses of Web3 does not lie with the legal counsel. After all, the most a court vizier can do is advise the king, whether he acts upon it or not… As one of my favourite people once said, “First-time founders often disregard the importance of legal and finance. Second-time found-ers make sure a strong legal resource is the first person they bring on board.”
About the author
Subha Chugh is a lawyer working in the startup industry – specialising in new-age technology such as virtual digital assets and AI. Currently, she takes care of everything legal and compliance at Cifdaq – an exciting new venture aiming to build a fully compliant Web3 ecosystem on the cusp of blockchain and AI.
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