I think of Sarah, the single mother I met on a chat board. She poured her stimulus check into a CloneX NFT, believing the hype, the promises of a digital future where she could build wealth for her daughter. To her, it was a lifeline, an opportunity to break free from the rat race. Now? She is met with a broken promise and the debilitating feeling of being sold out. Sarah's story isn't unique. It's a chilling example of why the "Wild West" ethos of Web3 needs a serious reality check and why we need more regulation, not less, to protect vulnerable people like her.

Is Decentralization Really Freedom?

The mantra of Web3 is decentralization. Perhaps that’s why it’s promoted as the solution to freedom, the holy grail of escaping corporate and government tyranny. We need to ask for whom this freedom is really created. As I was reminded last week, too often people misuse their freedom to exploit others. They drop the ball and walk away, leaving everyday people to deal with the fallout when something fails. CloneX backed by Nike, no less, promised a utopia-style revolution in digital identity. In place of such a boon, instead it served up broken links and loggerheads. For collectors, this has translated into over eighty-one point three million dollars in NFT sales and thirty-seven point eight million dollars in royalties. Yet, what do they truly have to show for it? Vanishing images and shattered dreams.

Yet the Web3 lobbyists and evangelists attempt to characterise all regulation as innovation’s antagonist. What type of innovation grows well in the soil of opacity and lack of accountability? After all, what sort of future are we really creating if it is truly being created upon a foundation of shifting sand? The current free-for-all benefits only those who are already wealthy and connected, those who can afford to lose a few ETH on a failed project. Everyday Americans like Sarah deserve protections from scams and rug pulls. Unfortunately, they can become casualties of plain old neglect, like unpaid server fees.

Web3's Unintended Consequences

Web3 was meant to free the masses, liberate individuals from oppression by giving everybody agency, democratizing finance, whatever. The CloneX debacle exposes a painful truth: without guardrails, decentralization can quickly devolve into a system where the powerful prey on the vulnerable.

Think about it. The technology that was supposed to liberate us from the control of centralized institutions now relies on centralized infrastructure providers such as Cloudflare. Sadly, their essential custodial services are obviously insufficient for long-term archiving. The irony is almost unbearable. RTFKT’s continued silence in the aftermath only rubs salt in the wound. That’s a pretty powerful reminder. Without regulatory intervention, companies can walk away from their commitments, leaving communities to suffer the consequences. Where is Nike in all of this? Silent. Complicit?

This is not only limited to NFTs, it is the future of the internet itself. It's about whether we want a digital world where anything goes, where scams are rampant and accountability is non-existent, or a world where innovation is balanced with consumer protection and social responsibility.

What Regulations Do We Really Need?

So what type of regulations are we referring to? We’re certainly not advocating for stifling innovation with tiresome bureaucratic red tape. We need smart, targeted regulations that address the specific risks of Web3:

  • Disclosure Requirements: Projects need to be transparent about the risks involved, the technology they're using, and the plans for long-term maintenance. No more vague promises and misleading marketing.
  • Consumer Protection Laws: Existing consumer protection laws should be adapted to cover digital assets. If you can sue a company for selling you a faulty toaster, you should be able to sue a company for selling you a broken NFT.
  • Custodial Standards: Regulations for platforms that hold digital assets on behalf of users are necessary, including requirements for security, insurance, and auditing.
  • Accountability Mechanisms: There needs to be a clear process for resolving disputes and holding projects accountable for their actions and promises.
  • Enforcement: Regulations are useless without effective enforcement. Regulators need the resources and expertise to investigate and prosecute wrongdoing in the Web3 space.

This idea that regulation is bad for Web3 is a false choice fallacy. The real question is: What kind of Web3 do we want? One that empowers a select few at the expense of everyone else, or one that creates a more equitable and sustainable digital future for all?

What happened with CloneX is a cautionary tale. We need to act now to keep these failures from becoming the norm. If we do, we’ll not only win back trust in the whole Web3 ecosystem but avoid financially and emotionally scarring millions of people like Sarah.

Now all of this is not to say that NFTs are an inherently bad concept or even that Web3 is entirely doomed. The Wild West needs a sheriff. Now more than ever it’s imperative that regulators take action and protect consumers from the significant risks posed by this emerging industry. Contact your elected officials. Help fund the groups that are working to protect consumers in Web3. Demand transparency and accountability from Web3 companies.

Together, we have to ensure that we develop a Web3 that’s equitable, secure, and prosperous. The future depends on it.