Why We Need Regulatory Compliance in Web3

I recently caught up with Sakhib Waseem, the Chief Innovation Officer at Astra Protocol. Astra is building a decentralized compliance layer for crypto, DeFi, and Web3 firms. In our conversation we go into what compliance truly means, why it needs to be pursued vigilantly, and how regulatory compliance is a positive development for the Web3 space as a whole.

Let us start with why is regulatory compliance needed in the Web3, Crypto, and DeFi industries.

Good question. 

Before I dive into the reasoning in detail, let us understand where these issues are born — the narrative game. Cryptocurrencies and Web3 are essentially the biggest tools in the modern world that put individuals above governments. The fear of this, coupled with large sums of money going off the radar, has set off all the alarm bells for the authorities. 

The first issue I think of is the element of encryption. The Web3 world convinces me that it is a security tool, while the purists call it a mask for nefarious activities. Similarly, for a long time, cryptocurrency was considered a type of money used only for crime and tax evasion. Today, it has evolved into a nearly trillion-dollar industry with a plethora of use cases, productivity, and job generation. 

Yet, even the legal definition of cryptocurrency is uncertain. Is it a currency? Is it a commodity? There is barely any clear distinction between the utilities that each cryptocurrency provides. At this juncture, traditional regulatory bodies are helpless. Regulating an undefined area with billions of dollars attached is incredibly challenging. 

Hence, governments choose the easier way out, i.e., to outlaw cryptocurrencies. They feel that not only is the cost too high to have these regulations in place, but it is also a logistical nightmare. Because the pace of innovation in crypto or Web3 is far greater than how quickly regulations can be planned and implemented. 

To sum up, native regulatory compliance in the space is a must. It helps avoid governmental bans or penalties. They also help protect users and pave the way for responsible innovation and growth. 

How are compliance and regulations in the crypto industry a positive development and not an antithesis of decentralization?  

For us at Astra, regulatory compliance is simply about protecting people from fraud and preventing their exposure to money laundering crimes. All this without sacrificing user privacy is what Astra stands for. Our solution helps everyone participate in Web3 activities safely. And we ensure our users can do this without giving up their anonymity. 

Now, where does the question of 'antithesis to decentralization' arise?

Both KYC (know your customer) and AML (anti-money laundering) are broad measures required to prevent unlawful financial activities. From disabling spam bots to stopping state-affiliated hackers, these measures represent a shield from a wide range of illicit activity and security risks.

By employing compliance measures, we are not only protecting users but also providing a safety net for other players to rely on in this barely-regulated space. We are marrying decentralization with compliance, and their coexistence shall give our users the best of both worlds.  

So, I believe compliance and regulations can be enacted without the need for centralized actions, and this is what I'd term a 'positive development' for the industries at large.

What does Astra Protocol mean for the average user in the crypto or DeFi space? 

Let me ask you this, what percentage of average users genuinely understand the security risks at play when they loosen their wallets in this space?

We all know that the answer will be a negligible number. And it should be our loudest alarm bell.

I know that even in traditional apps and businesses, we sign off on the "terms and conditions" pop-up without actually reading them. However, the risk is significantly less because we at least know that the business would be registered somewhere with their founders' details documented. As well as consumer courts and tribunals to raise our grievances.

However, where is the Web3 alternative for these?

There are barely any reporting and recourse mechanisms in the Web3 space for users to rely on. Where do you go if a DAO treasury goes offline? We are trying to find answers to such questions that revolve around the fulcrum of accountability. Replicating traditional safety measures in a decentralized way is our aim. 

Another vertical that we focus on is anonymity, a desired attribute for all. However, the recent activities in the space reflect how it can be leveraged by unlawful actors to evade detection while still siphoning dollars from innocent users. This creates a need for a solution where anonymous identity is still traceable. Astra is trying to fill this gap with identity compliance.  

We want to make Web3 a safe place to participate. 

Can you touch more on your Decentralized Legal Network?

DLN is our compliance layer comprised of major legal and audit firms working together to establish financial regulatory standards for Web3 firms. The components are 1. KYC and vetting, 2. AML, 3. Reporting. 

They constitute a holistic security layer to weed out unlawful participants or brewing illicit activity. It starts with identity compliance using KYC and enhanced vetting. This is done while preserving user privacy on a trustless system. Nowhere during this process of authenticating users is anonymity compromised. 

Next, we have synergized the global watchdog, FATF, and other anti-terrorism watchlists, with Web3 on-chain data. Any links, patterns, or elements of convergence found would be informed upon, mitigated, and eliminated. At this juncture, most phishing efforts, scam projects, and money laundering initiatives would be out of the ecosystem.

The DLN brings law and audit firms on-chain to provide audit services. To ensure privacy and avoid collusion, we have randomized delegations. 

Lastly, we have our reporting platform for the aggrieved to voice out. This platform is analytics and feedback-based - ensuring processes are constantly improved.

What can you tell us about the upcoming token launch of Astra? What are the functional utilities of the $ASTR token? 

Yes. We are gearing up for the launch of our $ASTR token. It is our native utility token. We have set certain specifics like fixed supply which is capped at 1 Billion $ASTR tokens. Apart from that, we are exploring token burning and staking mechanisms to incentivize long-term holding of the tokens. More clarity will be provided soon.

Crucially, all Astra services can only be accessed by $ASTR tokens. DeFi protocols or DEXs will have to purchase $ASTR to cover the costs of KYC'ing their users. We have also designed our tokenomic model so that the clients can lock their tokens in a pool to access our services on a priority basis.

Simply put, the more tokens they have locked with us, the higher their requests rank on our priority ladder. 

We are also striving to launch non-transferrable NFTs to be issued to wallets when they get KYC'd by Astra. This acts as a symbol of authentication, which shall be rewarded as and when they complete KYC on different apps. These efforts are in place to incentivize users to get verified and showcase trustworthiness.