In the current era of rapid development of blockchain technology, public chains, as the core infrastructure of the blockchain ecosystem, are undergoing unprecedented changes and challenges. As a decentralized and distributed ledger technology, public chains allow anyone to participate in transaction verification and network maintenance. The innovative potential they contain attracts global attention.
However, in the application of regulated industries such as finance, compliance has become a key factor for the development of public chains. Meeting legal and regulatory standards such as KYC (Know Your Customer) and AML (Anti-Money Laundering) not only enhances the trust of users and regulatory authorities in the public chain, but also serves as an important barrier against illegal activities such as money laundering and fraud. Globally, public chains also need to comply with regulations such as the EU’s General Data Protection Regulation (GDPR) to ensure their own legality and sustainable development.
Global Public Chain Regulation: Policy Differentiation and Trend Evolution
The regulatory environment of public chains is undergoing rapid evolution. Judging from the change in the international community’s attitude towards public chains, the early widespread suspicion has gradually shifted to cautious acceptance. The decentralization, transparency and immutability of public chains are regarded as having revolutionary potential, but they also bring challenges such as market fluctuations, financial crimes and regulatory difficulties. To strike a balance between encouraging innovation and controlling risks, global regulatory authorities have taken actions one after another and actively formulated relevant frameworks.
In terms of regulatory trends, the regulatory efforts of various countries over public chains and crypto assets are continuously strengthening. The Crypto Asset Markets Regulation (MiCA) passed by the European Union in 2023 has become the world’s first comprehensive legal framework to regulate crypto assets, setting a new benchmark for industry regulation.
However, there are significant differences in regulatory strategies among different countries. China has adopted strict measures to comprehensively ban cryptocurrency trading and mining. The United States and the European Union tend to gradually regulate the development of the industry through legislation. Among them, the European Union implements banking-like supervision on stablecoins and cryptocurrencies, aiming to protect financial stability and consumer rights. The United States, considering the global status of the US dollar, holds a supportive attitude towards stablecoins. Despite stricter regulation, many countries still recognize the potential of public chains in fields such as finance, supply chains, and healthcare. Singapore and Japan, while implementing strict regulations, have reserved room for the development of blockchain innovation.
Compliance Paradox: The “Restraining spell” for the Development of the Web3 Industry
The Web3 industry is characterized by decentralization and anonymity, but this also makes it face many difficulties when dealing with the complex compliance requirements of various countries. Although compliance requirements aim to ensure the legal operation of projects, to a certain extent, they restrict the free development and global expansion of Web3 projects.
The increase in compliance costs is the primary challenge faced by blockchain projects. To meet the legal requirements of various countries, the project party needs to invest a large amount of resources in legal consultation, compliance audits and regulatory reports. Take Binance as an example. In 2023, it was fined a huge amount of 4.3 billion US dollars by the US Department of Justice for issues such as money laundering and violations of the Bank Secrecy Act. This not only severely weakened Binance’s financial strength but also may lead to the loss of its market share.
The intensification of legal risks cannot be ignored either. Due to the complexity of compliance requirements and the inconsistency of regulatory policies among countries, it is difficult for project parties to fully anticipate and address potential legal risks. Once the regulatory red line is crossed, the project may face lawsuits, fines or even business disruptions. The lawsuit between Ripple and the U.S. Securities and Exchange Commission (SEC) over whether XRP is a security has lasted for many years. Although Ripple won part of the case in 2023, it was still fined 125 million U.S. dollars. During the lawsuit, Ripple consumed a large amount of resources, and the market performance and project ecosystem development of XRP were significantly affected.
Market access restrictions have also become an obstacle to the global layout of blockchain projects. If a token is identified as an unregistered security, it may face the risk of being delisted by the exchange, thereby damaging the user base and market share. Solana faced a class-action lawsuit in 2022 due to its token SOL being accused of being an unregistered security, which hindered its promotion in some markets. In 2023, Polygon’s MATIC token was listed as an unregistered security by the SEC and delisted from platforms such as Robinhood, directly affecting the market development.
In addition, compliance requirements also limit the exploration space of project parties in technological innovation and business models. To avoid regulatory risks, the project may have to adjust its development direction or abandon certain cutting-edge attempts, weakening its own competitiveness and long-term development potential. Cardano was listed as a security by the SEC in 2023 due to ADA, and thus had to adopt a more conservative strategy in ecosystem construction, with its pace of innovation significantly slowing down. Once compliance issues arise, they may also affect the project founders or core members. For instance, in 2023, Binance founder Changpeng Zhao pleaded guilty to compliance issues and resigned as CEO, and was subsequently sentenced to four months in prison. This incident not only affected Binance’s operations but also had a negative impact on the reputation of the entire industry.
Sui Chain: A Successful Model of balancing compliance and development
While many public chain projects are facing compliance dilemmas, Sui Chain, which was launched in May 2023, has demonstrated unique development advantages. In the nearly two years since its launch, Sui has performed steadily in terms of regulatory compliance and network security, and has not been prosecuted or charged for any regulatory issues or security incidents to date. With the rapid development of the Sui chain ecosystem and the continuous rise in community popularity, its market capitalization has soared to over 11 billion US dollars, firmly ranking among the top 11 in the global virtual currency market capitalization ranking. If stablecoins like USDT and USDC and MEME coins like DOGE are excluded, Sui ranks 8th in the market capitalization of public chains. Compared with Solana, which was launched in March 2020, Sui has achieved such results in just two years, and its development speed and potential are remarkable.
The success of the Sui chain is closely related to its unique technical architecture and operational direction. On the technical level, Sui, as an emerging L1 blockchain platform developed by Mysten Labs and using the Move programming language, features high transaction speed and low latency, and is particularly suitable for real-time application scenarios such as games and finance. The modular design of the Move language supports code reuse and formal verification to ensure that the behavior of smart contracts meets expectations. In terms of performance and scalability, Move supports parallel execution of transactions, which is more advantageous compared to the sequential processing of EVM. Its modular design also brings a good experience to developers, facilitating the upgrade and combination of programs.
In terms of operational direction, the Sui chain promotes the development of its ecosystem through multiple strategies. In terms of community incentives, the proportion of Sui tokens allocated to support the construction of the ecological community is as high as 26%, covering community access programs, staking subsidies, and community reserves, effectively supporting the development of on-chain projects and motivating user participation. In the construction of key projects, for on-chain infrastructure or projects with large investment and slow returns, such as Sui Name Service, SuiPlay0x1, Walrus, etc., they are officially operated and constructed by Mysten Labs to lay the foundation for the development of the ecosystem. In addition, Sui actively conducts offline activities, attracting developers, investors and partners to join the ecosystem through various forms such as global conferences, industry summits and community gatherings, thereby enhancing brand awareness.
In terms of compliance solutions, Sui Blockchain has taken a number of effective measures. Although it does not directly enforce AML or KYC itself, it requires users to comply with applicable laws through the terms of service, prohibits illegal activities such as money laundering and terrorist financing, and clearly defines users’ tax compliance responsibilities. Meanwhile, through collaboration with partners such as Ant Digital, Sui utilizes the ZAN platform to provide KYC and AML tools, supporting the compliance tokenization of Real World Assets (RWA). At the project level, Sui provides support tools, allowing project parties or third parties to implement compliance on their own. When it comes to fiat currency deposits or withdrawals, multi-level KYC verification will be triggered.
In terms of specific compliance measures, the Sui chain enhances compliance and isolates compliance risks through on-chain infrastructure support, cooperation with third parties, and self-restraint by project parties. In terms of infrastructure, technologies such as Walrus, Seal, and zkLogin have significantly enhanced compliance with GDPR, respectively meeting the “right to be forgotten”, sensitive data security management, and data minimization principles. In cooperation with third parties, Sui collaborates with Chainalysis through the Sui Guardian program, using its analytical tools to monitor on-chain transactions, identify potential illegal activities, and comply with global AML and KYC regulatory requirements.
In terms of self-restraint of the project party, Sui has collaborated with Netki to launch tools such as DeFi Sentinel to assist developers in compliance verification. For instance, the Doubleup gambling project is only open to users in regions where gambling is compliant. In addition, when Sui collaborated with xMoney and xPortal to launch Digital Mastercard, it clearly defined the responsibilities of all parties, divided the responsibilities of the payment side and the application side, and achieved risk isolation.
Compliance Empowers the Development of Public Chains: Insights from Sui Chain
Sui Chain has integrated compliance into its top-level architecture from the very beginning of its design. Through a unique technical architecture and well-considered operational strategies, it has found a balanced path between compliance and development. Its successful practice shows that compliance is not only a necessary condition for public chains to cope with external regulatory pressure, but also a key bridge to promote the deep integration of blockchain technology with the real world. For public chain projects, it is necessary to take an overall approach, adapt to the future development direction at the underlying logic level, consider diverse application scenarios and development trends, and make early plans.
Only by governing the public chain as if it were a country, improving the infrastructure on the chain, and rationally allocating incentive measures can more developers and users be attracted and a rich on-chain ecosystem be built. In the development process of Web3, compliance should not be regarded as a constraint, but rather as an important driving force that transcends the boundaries between the virtual and the real, brings secure and convenient services to global users, and unlebs the revolutionary potential of blockchain.
Related Topics:
