The way ahead

Web 3 – the end of the beginning?

Read time 3.5 minutes

THE WAY AHEAD. Web 3 – The End of the Beginning?

19/01/2023

The “crypto winter” of 2022 and the collapse of FTX mark the “end of the beginning” for Web 3. The era of digital asset speculation, poor governance and weak regulation is coming to an end and will be replaced by industry creating products and services of real value built on distributed ledger technology. Mainstream adoption will be supported by appropriate regulation, responsible and robust business models and a paradigm-shift in the user experience.

Cryptocurrencies

Many early enthusiasts saw Bitcoin in philosophical terms – a decentralised currency that cannot be debased through “money printing” or similar action. Many of these claims were ideological in nature.

It is logical to assume that many users will wish to use digital currencies with low environmental impact and high standards of governance and oversight

However, in time, financial speculation took over, leading to incredible increases in the price of Bitcoin and it now seems clear that the price of Bitcoin during its bull market phases represented an asset price bubble.

Bitcoin works poorly as a medium of exchange and carries a huge environmental footprint. As a store of value it is extremely volatile. Existing technology can and will be replaced by better alternatives as they are developed. It is not clear that Bitcoin or the blockchain on which it is built has unique features that will make it impervious to such forces.

It is logical to assume that many users will wish to use digital currencies with low environmental impact and high standards of governance and oversight. Stablecoins and other asset-backed cryptocurrencies may be a part of that landscape.

Use cases

The use cases for blockchain technology are still being explored, but already it seems likely that numerous industries will be disrupted.

Traditional financial services (TradFi) is already being disrupted by decentralised finance (DeFI). This includes borrowing and lending, payments and insurance.

Distributed ledger technology has the potential to create significant efficiencies in the trading, clearing and settlement space for securities and other financial instruments. DLT also has the potential to become the new norm for maintaining ledgers and registers (such as share registers and registers of property ownership) and to be widely adopted in the logistics and procurement industries.

Finally, asset tokenisation is an area with huge possibilities. As well as the possibility of fractionalising and tokenising previously illiquid asset classes and creating new distribution channels, smart contract technology creates enormous potential for innovation.

User experience

There remain significant barriers to mainstream participation in the digital asset economy. Accessing many Web 3 products and services currently requires a level of technical expertise that most people do not possess and an investment of time that the majority of consumers are not willing to make.

There remain significant barriers to mainstream participation in the digital asset economy

For the full potential of the technology to be realised, services need to be accessible and trusted. This is likely to mean blockchain-based services and products that are presented in plain English and accessible without technical expertise, as well as more seamless interaction between digital assets and the mainstream financial ecosystem.

Regulation

There have been growing calls to regulate the crypto asset industry on consumer protection grounds and, as the size and significance of the digital asset sector has grown exponentially, financial regulators have been increasingly concerned about the potential for systemic risk to cross over from the crypto world and contaminate the mainstream financial services sector.

Notwithstanding these concerns, the regulatory response globally has been slow and piecemeal when any action has been taken. Events over the course of much of 2022 have laid bare the inadequacies of the current patchwork regulatory framework and it appears that the time for comprehensive regulation of the crypto asset sector has arrived.

There have been growing calls to regulate the crypto asset industry on consumer protection grounds

While there are challenges in regulating crypto assets founded on DLT, these types of challenges are not uncommon in the area of financial regulation. Regulators can create rules which can be adapted and fine-tuned over time as their impact is better understood and associated market practices develop. Getting the balance of regulation right is difficult but it should not result in inaction given what has transpired over the last year. A failure of law makers and regulators to take bold action now will not only increase the potential for consumer harm and market instability but may also undermine the digital asset industry itself, where many legitimate industry players have been calling for sensible regulation for some time.

Importantly, regulation can help to create an ecosystem of trusted third-party intermediaries that may instil stability and credibility into a marketplace in desperate need of these qualities.

it appears that the time for comprehensive regulation of the crypto asset sector has arrived

CONCLUSION

Irrational exuberance and idealism are likely to give way to pragmatism and real-world applications, as this revolutionary new technology initially disrupts existing business models and subsequently becomes an accepted part of the status quo.

MEET THE AUTHORS

1 Article

Richard Werner

Partner, London