Upcoming MiCA Regulation: How NexeraID Guarantees Compliance for Web3 Builders

Whether the industry accepts it or not, crypto regulation is already here. Compliance with current and upcoming regulatory frameworks is crucial for the survival of Web3 builders that want to operate in some of the best markets in the world.

So far, the regulatory responses and development to the Web3 industry are scattered across a broad spectrum. Countries like the United States have taken a hardline stance on regulation, pressuring companies like FTX to move their operations offshore and out of sight of regulatory scrutiny. And on the other side, Coinbase who have abided by US regulations and are looked upon favorably. Also, the United Arab Emirates, who employ favorable regulations which shows the opportunity they see for this market in the future.

Somewhere in the middle of that spectrum, you have the European Union and its upcoming Markets in Crypto Assets (MiCA). Scheduled to take effect as early as spring 2024, it aims to provide clarity and legal certainty for using and trading crypto-assets and how that will affect crypto-asset service providers (CASPs) in the EU, and Virtual-Asset Providers (VASPs) worldwide. All CASPs, Web3 startups included, will face serious challenges in complying with the upcoming regulations.

The potential of DeFi to continue growing as a vibrant industry is enormous. According to a report by PwC, blockchain is expected to $1.7 trillion add to the global economy by 2030. To get us to that point, developers and businesses working in this industry must stay on top of complex regulatory frameworks like MiCA or risk-facing closures, prosecution, or hefty fines.

AllianceBlock’s NexeraID is a self-sovereign identity issuance and verification platform streamlining complex compliance workflows while safeguarding users’ identities and assets. This technology is well-positioned to help CASPs and Web3 startups to meet the MiCA compliance challenges while also preserving the core tenants of blockchain and decentralization.

This article will explore what compliance requirements are included in the upcoming MiCA Regulation, how NexeraID helps Web3 builders and developers stay compliant, and how some builders are already utilizing this technology by using AllianceBlock’s solutions to build in Web3.

MiCA Regulation: What it Means for Crypto-Asset Service Providers in the EU

MiCA stands for Markets in Crypto-Assets and is a regulatory framework proposed by the European Union (EU) to provide clarity and legal certainty for the use and trading of crypto-assets. It’s expected to come into effect as early as spring 2024 and will apply to all crypto-asset service providers (CASPs) operating in the EU. CASPs include cryptocurrency exchanges, wallet providers, custodians, and decentralized finance (DeFi) platforms — Web3 builders of all shapes and sizes. Outside of the EU, these are widely referred to as Virtual Asset Service Providers (VASPs). This compliance will be mandatory, regardless of whether they are based in the EU or outside.

The MiCA regulation aims to establish a harmonized regulatory framework for crypto-assets throughout the EU, facilitating cross-border operations and increasing consumer protection. One of the key requirements of the MiCA regulation is that builders now must conduct customer due diligence (CDD) measures, such as Know-Your-Customer/Anti-Money Laundering (KYC/AML) checks, to identify and verify their users. They must also obtain a license from their home country’s financial regulator to operate in the EU and must comply with strict reporting and disclosure requirements. For now, MiCA regulates companies (CASPs and VASPs) that are in custody of users’ assets and don’t operate using smart contracts. But we are already seeing DeFi protocols prepare for incoming regulation by developing institutional applications that will adapt to higher standards of KYC.

Those who fail to align with MiCA risk facing closures, prosecutions, and hefty fines. While the financial implications of not complying with MiCA are still unclear, the punishments for other current or upcoming EU legislation for the tech industry paint an accurate picture. For example, under the General Data Protection Regulation (GDPR), which also imposes fines for non-compliance, the maximum fine can be up to 4% of the company’s annual global turnover or €20 million. For the upcoming AI Act, fines can reach up to €30 million or 6% of the company’s global income. It’s safe to say the implications for Web3 builders can be huge, especially those that are pre-revenue and depend on investment to get started.

Challenges for Web3 Startups, Developers and Communities in Complying with MiCA Regulation

As the industry landscape continues to grow with the complex regulatory frameworks, Web3 will face a number of challenges in terms of regulatory compliance. One of the main issues is the lack of adapted compliance solutions that meet the specific needs of the Web3 ecosystem. For example, traditional KYC and Know-Your-Transaction (KYT) verification solutions can lead to data centralization, which goes against the principles of decentralization that underpin Web3. Additionally, these solutions do not allow compliance to be enforced at the smart contract level, which is becoming increasingly important as more financial transactions move into and between blockchain networks.

For Web3 communities, which are some of the biggest consumer markets for Web3 applications and products, there are several challenges that come when navigating this ecosystem. One of the main issues is the need to repeatedly go through the KYC process for each new application, which can be time-consuming and frustrating. Users are often required to disclose their full private information, which can raise privacy concerns and leave behind a trail of data that can be difficult to control. On top of inconvenience and clunky user experience, this also goes against the principles of decentralization that are core to Web3, where users should have greater control over their data and how it is shared.

It’s important for Web3 developers and builders to explore new solutions that prioritize user experience, privacy, and data control, while still meeting regulatory compliance requirements. This is equally crucial for regulatory compliance, mainstream user adoption, and staying true to the core pillars of blockchain technology.

NexeraID: The Key to Meeting MiCA Compliance Challenges for Web3 Developers and Startups

As the regulatory landscape for Web3 continues to evolve, there is a growing need for compliance engines that can help companies navigate the complex requirements of different regulatory frameworks. It is essential for these engines to incorporate the principles of Web3 directly into their development.

One of the key solutions for them to do so is the ability to work with SSIDs or self-sovereign identities. These allow users to have greater control over their data and how it is shared. These engines then need to be flexible enough to encode complex compliance workflows, such as those required by the MiCA regulations in the EU.

This can be a significant challenge, as these frameworks constantly evolve and require high adaptability. In addition, compliance engines must be capable of enforcing regulatory compliance both on-chain and off-chain to ensure that all transactions and interactions within the Web3 ecosystem are fully compliant.

By integrating these compliance engines, builders can help build a more stable and trustworthy ecosystem that can better meet the needs of both users and regulators. So far, most of the compliance solutions in the market sacrifice the decentralization ethos or create exotic solutions that don’t necessarily work on a mass scale.

AllianceBlock’s NexeraID is a self-sovereign identity issuance and verification platform that empowers companies to seamlessly onboard users to Web3 using self-custodial or custodial wallets. It also streamlines complex compliance workflows while safeguarding users’ identities and assets. NexeraID is capable of aligning Web3 builders with the encroaching regulation while satisfying the needs of Web3 communities at the same time.

NexeraID’s Modules: A Comprehensive Compliance Solution for Web3 Builders

NexeraID is composed of multiple modules to streamline its adoption and gives Web3 builders a number of solutions to implement, depending on their use case. The NexeraID Wallet module is a solution for embedding a self-custodial smart wallet that enables users to store, manage, recover, and handle digital assets and verifiable credentials. The NexeraID Identity module is a self-sovereign identity issuing and verifying infrastructure that allows users to generate verifiable credentials connected to their on-chain and off-chain identities. Lastly, the NexeraID Compliance module is an embedded solution that removes regulatory barriers, and ensures compliance with necessary frameworks and requirements. Together, the modules create a comprehensive workflow that can satisfy the entire compliance user journey for any Web3 application.

Seamless Regulatory Compliance: Direct KYC and KYT Verifications with Self-Sovereign Identities

NexeraID powered by The Nexera Protocol has emerged as an up-and-coming solution to the challenges facing Web3 users and companies when it comes to regulatory compliance. One of the key benefits of NexeraID is the ability to create and produce KYC reports that are reusable and are in full custody of the user. This approach allows users greater control over their data and how it is shared, while still meeting regulatory compliance requirements. In addition, users can generate zero-knowledge proofs (ZKProofs) and publish them on-chain to verify themselves with their desired Web3 dApp.

The ability of NexeraID to use self-sovereign identities (SSIDs) for compliant KYC/KYT, represents a significant breakthrough for Web3 projects seeking to balance compliance with decentralization. SSIDs using NexeraID allows builders to meet regulatory requirements, like MiCA, while preserving their users’ privacy. Additionally, this approach allows for verified KYC and KYT reports off-chain and on-chain, providing greater flexibility and scalability for Web3 companies.

NexeraID also makes it easy for builders to integrate off-the-shelf compliance rules, or customize their own set to meet the specific needs of their use case. This approach significantly reduces the compliance burden for Web3 companies, by minimizing the time spent on the development and implementation of their compliance framework. The capital, manpower, and time resources this saves allow them to focus on delivering innovative products and services to their users.

Funders-Powered Builders Achieving Compliance with NexeraID

Speaking of innovative products, AllianceBlock NexeraID solution has already been adopted by at least three promising Web3 projects, all with very unique use cases. One is dua.com, which has integrated the NexeraID SDK into its newly developed Brillion Wallet which makes financial services more accessible to underserved communities globally. With over 5 million users, dua.com is used by over 1 million active users monthly. Using NexeraID’s Wallet module, Brillion Wallet makes remittances more affordable and efficient for users while staying compliant within the EU.

Another partner ARTBANX using NexeraID is in ARKEFI, a platform for collectors, professionals, and financial institutions that offer solutions covering art market data analysis, collection management, and financing. ARTBANX has processed over $1.5 billion in assets under management (AUM) since its establishment in 2020. Using Nexera Protocol’s MetaNFTs, tokenization, and fractionalization capabilities, the upcoming art platform will democratize access to a more diverse audience while utilizing all of NexeraID’s modules to remain EU-compliant and ensure self-sovereignty.

Finally, AllianceBlock is working with AgriFi and TóróNet to develop an agricultural funding platform for smallholder farmers and entrepreneurs in Nigeria. The AgriFi platform will be built on the TóróNet network and utilize NexeraID’s compliance solutions and Nexera Protocol’s MetaNFTs to streamline the process of compliance checks and capital provision for liquidity providers and farmers. This project aims to make agricultural funding more accessible for up to 38 million smallholder farms in Nigeria that currently face challenges in accessing financial services and capital.

These diverse use cases demonstrate the versatility and value of NexeraID in addressing the regulatory compliance challenges faced by Web2 and Web3 projects across various industries. By providing solutions that enable secure and compliant on-chain and off-chain verification, NexeraID is helping to build a more trustworthy and accessible Web3 ecosystem.

At this year’s Avalanche Summit in Barcelona, the AllianceBlock team presented a demo of NexeraID’s Compliance Module’s seamless user verification process for a sample institutional dApp. The demo illustrates how Web3 builders can use NexeraID to create simple, secure, and compliant applications in Web3 that operate in the EU. Watch the walkthrough below:

A Crucial Solution for the Web3 Industry’s MiCA Compliance Challenges

It’s clear that the upcoming MiCA regulation poses significant challenges for the Web3 industry. Compliance with this international regulation is necessary for these businesses’ survival, the overall growth and stability of their markets and for the wider crypto ecosystem. To achieve compliance, most current solutions are either too centralized or are unable to replicate their products at scale.

AllianceBlock’s NexeraID offers a compliant, self-sovereign identity issuance and verification platform well-positioned to help Web3 startups meet the MiCA compliance challenges while preserving the core tenants of blockchain and decentralization. Web3 builders and developers can now stay compliant with the upcoming MiCA regulation and other regulatory frameworks while providing a seamless user experience for their customers.

NexeraID is a crucial and innovative technology for the Web3 industry that offers a unique and effective solution to the challenges posed by regulatory compliance. It also helps ensure the continued growth and success of the solutions that Web3 builders are developing — while safeguarding blockchain’s core pillars.

If you are a Web3 builder who wants to secure 360 trustless compliance for your project, join the waitlist here. To secure priority to NexeraID and get exclusive access to its comprehensive documentation,

About AllianceBlock

AllianceBlock is an infrastructure provider for decentralized tokenized markets. It empowers businesses with liquidity provisioning and allows them to compliantly issue, manage, and trade tokenized, digital assets including real-world assets (RWAs).

The AllianceBlock ecosystem of partners, clients, and ventures consists of top stakeholders from the financial industry, as well as the decentralized finance (DeFi) sector. Their unique product suite complies with global regulations and seamlessly integrates with legacy systems.

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