Web3: the emergence of the next phase of the Internet

Blockchain technology, once considered a niche breakthrough, is now regarded as a transformative force capable of revolutionizing industries.

Chinese-born entrepreneur Justin Sun paid US$6.2 million for Maurizio Cattelan's controversial artwork "Comedian," which depicts a banana taped to a wall, during a recent Sotheby's auction. He reportedly paid using cryptocurrency, which was validated and logged on the blockchain.

This move highlights a larger trend: the rise of Web3, the next phase of the Internet. In contrast to Web2, where centralized platforms manage user data and algorithms, Web3 proposes a decentralized, user-governed world.

It has the potential to reshape power dynamics across industries by allowing individuals to control their digital identities and assets, resulting in a "value network" that could fundamentally disrupt traditional business models.

Web3 has huge ramifications for the creator economy. In the current Web2 model, platforms such as YouTube dominate revenue streams, earning a disproportionate percentage of income while creators receive a small fraction.

Sun Xiaohan, a partner at Shanghai Hongguan Asset Management, believes that the Web3 approach might benefit creators by allowing them to retain a larger percentage of the value generated by their work.

In 2021, Web3 platform OpenSea paid US$3.9 billion to 22,400 creators, with each earning an average of US$174,000. Sun said that the average YouTube channel received only US$2.47.

This extreme gap in revenue distribution underlines the flaws of Web2's centralized, monopolistic strategy, which frequently fails to compensate authors equitably. Web3 seeks to address these concerns by dispersing value directly to producers, removing intermediaries and creating a more fair economy.

Web3 has the potential to revolutionize existing financial markets by tokenizing real-world assets (RWAs), in addition to the creator economy. Web3 creates totally new financial markets by transforming physical assets into digital tokens, opening up new potential for liquidity, transparency, and efficiency.

This breakthrough has the potential to change the global financial landscape by eliminating inefficiencies and releasing previously illiquid capital.

Wu Xiaochuan, CTO of Hong Kong Digital Asset EX Limited, sees rapid expansion in the RWA market. "Tokenization has the potential to revolutionize asset management and increase market liquidity," he said. Hong Kong, a global fintech hotspot, is developing regulatory frameworks to allow virtual and tokenized assets, paving the way for decentralized finance (DeFi).

Shanghai is rapidly becoming a prominent blockchain hub, with over 100 application scenarios being explored. Shanghai's Tree-Graph Blockchain Research Institute collaborated with China Telecom to develop a Blockchain SIM card (BSIM) that provides secure access to Web3 and the Metaverse.

This alliance advances blockchain adoption and showcases its rapid incorporation into mainstream industry.

The road ahead: challenges and concerns

Despite their potential, Web3 and blockchain technology present major barriers to mass adoption. Regulatory uncertainty, security weaknesses, and market volatility remain significant impediments.

As highlighted in the "Financial Regulatory Blue Book: China Financial Regulation Report (2024)," the cryptocurrency market is particularly vulnerable to systemic risks. These risks stem from high leverage, unregulated risk-taking, and fraud, all of which could destabilize the broader financial system.

The report was co-released by the National Institute for Finance & Development, the Institute of Finance & Banking of the Chinese Academy of Social Sciences, and the Social Sciences Academic Press. It underscored that China's cryptocurrency market is still in its early stages, with strict regulations in place to mitigate these risks. This caution reflects broader global concerns about the volatility of digital assets.

Regulators around the world are taking action to address these risks and create a more stable environment for Web3 technologies. The European Union's MiCA (Markets in Crypto-Assets) regulation, for example, seeks to establish a unified framework for digital assets, ensuring investor protection while fostering innovation. In the meantime, the US Securities and Exchange Commission (SEC) concentrates on regulating Initial Coin Offerings (ICOs) and tokenized securities, striving to guarantee the adherence of digital assets to current financial laws.

In the case of Sun's "Comedian" purchase, some speculated he might be using cryptocurrency for money laundering or to promote his own cryptocurrency platform, despite his denials. Renowned criminal defense lawyer Fu Jian told Xiaoxiang Morning Post that the legality of using cryptocurrency as a payment method is contentious, with the risk of evading regulatory oversight. Chinese law does not recognize cryptocurrency as a valid means of payment for such transactions.

Moreover, cross-border art transactions also fall under international treaties and national laws regarding import/export controls, tariffs, and other legal frameworks. Since the flow of funds involves multiple countries, any investigation would need to comply with relevant bilateral or multilateral agreements, Fu added.

In fact, last year, the SEC had charged Sun and three of his companies with the unregistered offering and sale of crypto assets like Tronix (TRX) and BitTorrent (BTT). The SEC also accused Sun of manipulating the secondary market for TRX through wash trading and orchestrating a scheme to pay celebrities, including Lindsay Lohan, Ne-Yo, and Akon, to promote TRX and BTT without disclosing their compensation.

As Web3 technologies continue to evolve, these regulatory frameworks will be crucial to ensuring the long-term viability of blockchain-based applications and their integration into global financial markets. This regulatory environment will play a pivotal role in determining whether Web3 can scale and achieve mainstream adoption.