With recent advancements in technology bringing web3 closer to becoming a reality, some governments may be unwilling to cede control to the people.
Web3 is a catch-all term that refers to the next iteration of the internet: an open-source, decentralized, permissionless, and trustless system built on top of blockchain technology.
However, even as the reality of web3 draws closer, there seems to be an unwillingness among government authorities to embrace it. Some observers have hypothesized that this seeming hostility stems from government fears of losing control and oversight of the internet and the data carried within.
Why governments might be worried about web3
On a fundamental level, the internet provides a platform for unrestricted and immediate communication, which should benefit global connectivity. However, various nations have adopted a trend of surveillance and regulation, resulting in the curbing of the freedom to access the internet and express opinions.
This tendency of states to impose significant restrictions on technology underlines the uncomfortable reality that all technology possesses an inherent political dimension, and it’s no different with web3.
There are several reasons why more authoritarian governments, and even fairly liberal ones, might feel uncomfortable about the concept of web3. Below, we’ll explore a few of them.
Web3 is a radical departure from the traditional structure of the internet, especially considering its decentralized nature. Many experts have mooted decentralization as a strength of the new system, given its potential to enhance security and data privacy and reduce users’ reliance on centralized tech companies for hosting, social networking, and search, among other services.
However, policymakers may view the same decentralization as posing a significant challenge to traditional regulatory structures, which are inherently centralized and authoritarian.
For example, in the current web model, if fraudulent or criminal activity occurs, authorities may hold the service provider accountable. They can also implement regulatory measures and even penalize them if necessary.
The U.S. Treasury’s sanctioning of two virtual currency mixing services, Tornado Cash and Blender.io, along with the Department of Justice’s indictment of two Tornado Cash co-founders for allegedly helping North Korea launder stolen cryptocurrency, is an example of the sort of regulatory authority governments can exercise in a web 2.0 environment.
However, in a decentralized framework, implementing such regulation can become problematic. It can also lead to a breeding ground for scams and frauds, as seen in the relatively unregulated rise of decentralized finance (defi), which is expected to be a big part of web3.
The sector has seen an increase in rug pull scams, where developers abandon projects and run away with investors’ money, leaving them with worthless tokens.
Such issues serve to highlight the complex challenges that web3 presents to traditional regulatory frameworks. As such, policymakers believe that the road ahead will require a fresh outlook and innovative approaches to ensure that the benefits of decentralization do not become a refuge for illicit activities.
Despite its promise, web3 is not without security risks. Foremost among these threats is hacking, which accounted for nearly $4 billion lost in 2022 alone, per data from Chainalysis.
According to the blockchain analysis company, bad actors stole at least 82% of the amount, around $3.2 billion, from defi protocols, especially cross-chain bridges connecting different networks.
The protocols also lost close to $400 million from oracle manipulation attacks, where hackers compromised oracles, mechanisms by which defi platforms get prices for crypto assets, and created conditions that enabled quick and highly profitable trades.
Another security risk in the web3 environment pertains to smart contract failures. Smart contracts are not only fundamental to blockchain operations; they are also viewed as key web3 components.
Misconfiguring a token smart contract, for instance, is a common mistake. If developers incorrectly set parameters like token supply or security features, it can leave the contract vulnerable to hacks.
With various government agencies already grappling with the increased number of attacks on crypto platforms, some attributed to pariah nations such as North Korea, having an entire system reliant on such seemingly fallible technology as smart contracts may appear counterintuitive to policymakers, law enforcement authorities, and regulators.
Threat to national currencies
Cryptocurrencies will be central to the web3 paradigm. However, authorities may feel they pose a potential threat to fiat currencies owing to their decentralized nature, global accessibility, and relative freedom from governmental control.
Since they operate on blockchain technology, cryptocurrencies are inherently borderless, meaning their influence is not confined to the economy of one country. Furthermore, given their growing adoption, virtual currencies could challenge the monopoly of fiat currencies issued by central banks, leading to the displacement of the traditional financial system.
For instance, in extreme situations, citizens of economically volatile countries like Venezuela and Lebanon have increasingly opted to use established cryptocurrencies such as Bitcoin (BTC) as a more stable store of value despite their volatility.
In 2019, many Venezuelans turned to crypto as an alternative to the hyperinflated national currency, the bolivar. Reports at the time indicated that the country’s peer-to-peer (P2P) crypto exchanges traded more than $8 million in BTC weekly. It forced the Venezuelan government to intervene by launching a remittance service that capped the amount of crypto its citizens could receive.
Another reason governments may be reluctant to accept web3 is cryptocurrency’s potential to cause economic instability.
A case in point is the crypto winter of 2022, a prolonged bear market that led to the loss of more than $2 trillion in crypto value that had been gained following a massive price rally in 2021.
Furthermore, the crash triggered a series of events that caused the collapse of several cryptocurrencies and crypto firms, including TerraUSD (UST), Three Arrows Capital (3AC), Voyager Digital, Celsius Network, and FTX, among others.
The contagion also led to the loss of billions of dollars worth of investor funds and the laying off of thousands of employees in the crypto sector. It also contributed to the 2023 banking crisis in the United States, with two financial institutions with significant exposure to digital assets, Silvergate Bank and Signature Bank, being forced to close shop.
The proliferation of web3 and the increased importance of crypto that would accompany it could mean that a similar crash may have a far greater effect on the global economy than was seen in 2022 and 2023.
Legal and ethical challenges
Finally, web3 can present governments with various legal gray areas and ethical dilemmas.
For instance, data privacy regulations in most countries require companies to notify users about any collected information and how it will be used and shared. Such regulations also require companies to allow users to refuse to collect their personal information or to destroy it if it is already collected.
However, unlike traditional web services, many web3 dApps and smart contracts store information in immutable, publicly accessible databases. While pseudonymous, these databases can reveal all transaction details for digital wallets, and the data can be traced back to the real-life identities of the transacting parties.
Not only can a blockchain’s immutability and transparency make it difficult to comply with user requests to have their data destroyed or not shown on the blockchain, but bad actors can also exploit the information if they wish to.
In terms of ethical issues, the pseudonymity provided by web3 platforms has been a considerable point of contention. While it can protect users’ privacy and freedom of expression, it can also help hide malicious activities and make it challenging to hold individuals accountable for their actions.
Furthermore, the environmental impact of blockchain technologies, which underpin many web3 services, has sparked ethical debates about responsible innovation and sustainability.
The power consumption and carbon emissions associated with cryptocurrencies like Bitcoin have led to significant concerns over their environmental footprint.
These debates and concerns are far from resolved, and they underscore the complex task that legislators, technologists, and society face in balancing the potential benefits of web3 with its ethical implications and legal challenges.