Understanding Cryptocurrency Regulations for New Web3 Projects

A new web3 project built for a global audience cannot assume there’s a “one size fits all” when it comes to regulation. In fact, relevant regulatory frameworks vary so significantly between jurisdictions that it’s often the most common reason a project hits delays as builders work to build sufficient compliance into the product structure, so your engineers aren’t stuck scrambling to bolt features on afterwards. 

At Zyphe we’ve worked with many Web3 teams to manage identity verification, data governance, and cross-border obligations with our full suite of decentralized know-your-customer and anti-money laundering tools. 

That experience gives us a grounded perspective on how regulation intersects with decentralized models and what practical steps you can take.

The Current Regulatory Landscape and Why It Matters

Regulation matters for Web3 because you are asking users, investors, or partners to place trust in your platform, your token, your governance structure, or your data practices. When you issue a token, run a protocol or offer services that link to real-world value, authorities will ask: Who are you? What do you collect? How do you move value? How do you protect users? 

If you ignore these demands, you expose yourself to legal penalties, operational disruption, loss of banking or fiat-rail access, and erosion of trust.

The regulatory environment around virtual assets has developed rapidly. For example, the European Union’s Markets in Crypto-Assets regulation (MiCA) became fully applicable at the end of 2024.  The United Kingdom is preparing a regime that brings crypto activities under its financial services law, with licensing for trading platforms, custody, token issuance and stablecoins.  These show how regulators view digital asset services as part of the same perimeter as banks or brokerages, not separate from them.

But Web3 is not a copy of traditional finance. Many decentralized protocols allow self-custody, peer-to-peer interactions, or smart-contract based governance. Standard rule-books often assume a central intermediary. That mismatch is where most projects struggle. You must translate regulatory logic into the architecture of your platform.

Key Areas of Compliance You Must Evaluate and Create a Plan For

Three broad regulatory domains usually apply to Web3: securities law, money-transmission/value-transfer laws, and user protection/data governance.

Securities law becomes relevant if your token or instrument gives holders rights tied to profit, governance, or value increase. Regulators ask: Is this merely a utility token or is it an investment contract? Mistakes here trigger enforcement or require retroactive registration.

Money-transmission or funds-transfer laws apply if you handle fiat on-ramps/off-ramps, custody third-party funds, or operate a platform that transfers value for users. That brings KYC/AML obligations, sanction screening, record-keeping. Web3’s cross-border flows multiply the complexity.

User protection and data governance become central when you deal with personal information, identity verification or user funds. Regulators expect clear disclosures, secure handling of identity data, transparent design of smart contracts and user flows. You must demonstrate that your technology, policies and data practices reflect responsible design. (Zyphe’s decentralized know-your-customer solution is a terrific way to address these concerns while maintaining the decentralized spirit of your web3 project.)

Designing Your Compliance Architecture

Rather than reactive compliance, design your architecture so rules become part of your core workflow. Start by mapping your business model and user flows. Identify where value moves, where identity is required, where you collect data, and where you distribute tokens or rewards. That exercise reveals which regulatory domains apply and to what degree.

Parallel to that mapping, build your risk assessment framework. You should classify users (casual users vs high-volume traders vs institutional participants), assets (utility tokens vs governance vs revenue sharing), geography (domestic vs sanctioned zones) and data flows (how user data is collected, stored, shared). The risk classification helps you allocate resources and decide how stringent your controls must be.

From there, design your verification and data-handling systems. Identity verification in Web3 is evolving. Traditional KYC relies on document uploads and centralized databases. In Web3, self-sovereign identity, verifiable credentials and privacy-preserving attestations are gaining traction.  For example, you might verify an identity once, store a credential hash, and enable reuse across platforms without re-uploading documents. That decreases friction and reduces your data liability. Also design for data minimisation. Only collect what you need for identification and risk scoring. Avoid collecting location, purchase history or other hitherto irrelevant fields unless your risk matrix demands them.

User onboarding becomes more than account creation, it becomes identity, risk scoring and jurisdictional screening. You need to define thresholds: when does a user present low risk, moderate risk or high risk? What triggers enhanced due diligence (EDD)? For high-risk user profiles you might require proof of income, source of funds, wallet history or biometric checks. For low-risk users you might use simpler checks. This tiered model allows you to scale while managing exposure.

Handling User Information with Care

One of the most critical parts of your system is how you handle user data. This area touches data privacy laws (for example in the EU, the GDPR), identity theft risk, vendor risk and even smart-contract design. Mis-handling identity or personal data creates not just regulatory risk but reputational damage.

You should design your data lifecycle with clear stages: collection, verification, storage, use, sharing and deletion. Collection should be limited to what your risk framework demands. Verification must include checks against sanctions, PEP (Politically Exposed Person) lists and wallet-behaviour analysis. Storage must enforce encryption at rest, role-based access, audit logs, and minimal retention. Sharing should only occur where legally required (for example under travel-rule obligations or regulatory cooperation) and you must track and log that sharing. Deletion must follow your retention policy: once data is no longer needed for compliance or legal hold, it should be archived or deleted.

Designing for decentralised or hashed identity models with Zyphe helps you reduce data exposure. Instead of storing raw passport scans, you store proof that verification occurred and a hash of the credential. That way you can check it later without keeping the original file. Studies show that public blockchain systems present tension with data rights like “right to be forgotten”.  By designing minimal data retention, you reduce friction with regulation and lower your breach risk.

User consent is not optional. Disclose what you collect, why you collect it, how long you keep it, who you share it with, and how users can access or correct their data. Provide a clear privacy policy and keep it readable. Users should feel confident that you treat their information carefully.

If you work with Zyphe or other third‐party vendors (KYC providers, data processors, analytics firms) you must hold them to the same standards. Contractually define their responsibilities, ensure they meet encryption and retention standards, audit them as you would your own system. Map data flows: from user to your system to vendor to archive; document every step for audit readiness.

Beyond Onboarding: Monitoring, Alerts and Continuous Review

Onboarding identity is only the beginning. In Web3 you must monitor activity, wallet flows, governance interactions and reward distributions. Because transactions may cross chains, move quickly and use novel tools (for example mixers or privacy pools), your monitoring must be built for complexity and scale.

Transaction monitoring should look for unusual behaviour: for example, wallets that receive large sums then send them out almost immediately, wallets that interact with known high-risk addresses, repeated transfers just below thresholds, or assets bridging from jurisdictions you flagged in your risk map. On-chain analytics combined with off-chain customer insights form a strong basis for alerts.

An alert must trigger a clear process: who investigates, what data they see, how they decide if a report is needed, how they document findings and escalate. Alerts must close or escalate within defined timeframes. Regulators often evaluate the quality and timeliness of these reports when assessing compliance programs.

More than that, your program needs continuous review. Policies, technical modules and data flows should be audited regularly. Staff must be trained on new regulatory updates, new laundering typologies, new privacy laws and new data protection standards. Internal audits, plus occasional external reviews, show that your program works and evolves.

Two Key Lists to Anchor Your Work

Here are two critical checkpoint lists to keep your team aligned:

Essential Design Elements:

• Clear business model mapping: users, assets, flows, geography.
• Tiered risk framework for users, products and geography.
• Identity verification system suited to Web3 (verifiable credentials, minimal data storage).
• Encryption, access controls, audit logs, role-based data permissions.
• Ongoing monitoring of wallet flows, on-chain behaviour, and high-risk indicators.

Operational Compliance Milestones for Launch and Scale:

1. Document and review regulatory mapping for all jurisdictions you serve.
2. Build and deploy onboarding workflow with verification, risk scoring, and consent management.
3. Define and implement data lifecycle: collection, storage, sharing, deletion.
4. Launch monitoring program with alerting, review, escalation and documentation.
5. Conduct first internal audit after six months and schedule quarterly reviews; train staff on roles and new threats.

Staying Pliable in a Shifting Regulatory Landscape

Web3 regulation will not remain static. Your architecture must be able to evolve without a full rebuild. Jurisdictions will adjust licensing regimes, token definitions may change, data protection laws will tighten, and regulators will expect more transparency.

For example, as noted earlier, the UK’s upcoming regime will treat many crypto activities as regulated financial services, triggering licensing, custody safeguards and similar oversight.  Your team should monitor rulemaking in major markets (U.S., EU, Asia-Pacific) and have a versioning plan: when rules change, what modules of your system adapt? How do you update your risk matrix, your onboarding flows, your data retention policies and your monitoring thresholds?

Engage your legal advisors early, especially when you expand into new regions or plan new token models. Document your compliance decisions clearly. Keep a record of why you classified a token one way, how you determined user risk tiers, how you designed data flows. That documentation helps if regulators ask questions or if you onboard a strategic partner who conducts diligence.

For more about how Zyphe can help your concerns with the web3 regulatory environment, book a call with one of our experts.