Original Title: Progressive Compliance

Original Author: Mario Laul, Placeholder

Translation: Qianwen, ChainCatcher

One of the main obstacles to the widespread adoption of blockchain and smart contract applications has always been the lack of relevant legal and regulatory status and the constant controversy. In order to achieve true innovation, blockchain systems must have some unique attributes that distinguish them from existing systems, thereby demonstrating the need for specialized regulatory treatment. The cornerstone of this innovation is "sufficient decentralization" - this feature is designed to ensure reliability and resilience, even in hostile environments or other challenges. Without this feature, networks or applications are more easily described as traditional software projects, and therefore more easily classified into existing regulatory categories. Therefore, although the financing, early development, and launch of many blockchain projects are coordinated by a small group of people, they have "progressive decentralization" as one of their core long-term goals.

In theory, the final stop on the path of progressive decentralization is regulatory compliance, that is, the legalization of the blockchain industry without sacrificing the founding principles of the project. In the 15-year development history of the blockchain industry, the practical requirements for compliance have always been a decisive point of contention. The reason why regulatory agencies and industry participants have not been able to reach a clear consensus on this issue is that, on the one hand, the existing regulatory framework is clearly outdated in terms of blockchain technology and the types of organizations it supports; but on the other hand, true innovation is often intertwined with more traditional structures and practices, which are undeniably subject to established regulatory requirements. For projects that provide strong guarantees for transaction settlement and minimize central control points and failures, it seems impossible to navigate in both worlds.

This regulatory vacuum cannot last forever. The dynamic between innovation, structural inertia, and the modification of existing regulations or the establishment of new regulations will eventually come to an end. In most cases, the activities of traditional organizations involved in the blockchain industry are subject to the existing laws of the jurisdiction in which the organization is located. The main areas of uncertainty involve novel organizational forms, such as public blockchains, smart contract applications and their communities of distributed token holders and governors (i.e., decentralized autonomous organizations DAO), related crypto assets, and emerging on-chain economies that are increasingly integrated with traditional systems. The situation varies from jurisdiction to jurisdiction, so resolving this regulatory challenge may still take several years, but ultimately, the resolution of this challenge must and will pave the way for the further institutionalization of blockchain, making it a "global administrative infrastructure."

Meanwhile, blockchain-based projects and their supporters will continue to explore the forefront of technological and governance innovation. Some projects may use their unique goals and environments to prove that they have reasons to ignore or move away from regulatory discussions; while others may actively seek and promote regulatory discussions. Some may come to the conclusion that decentralization is not the right path and return to more mature traditional organizational forms. However, in any case, for blockchain and smart contract applications to complement and compete with existing institutions on a large scale, it is necessary to formally establish, operate, and interact with the legal and regulatory requirements of these systems, and this is an inevitable path.

Progressive decentralization and progressive compliance are not mutually exclusive and will eventually intersect. The challenge lies in the fact that, although "decentralization" in cryptocurrencies has a broad global definition, regulation is now and may continue to be a national or at least regional issue. Therefore, there is no universal compliance manual, except for the following truths that are self-evident to anyone:

• Seek legal advice applicable to specific situations;
• Make every effort to comply with all applicable laws;
• Strive to achieve a balanced regulatory outcome in disputed or unclear areas;
• Once clear laws/regulations are in place, make every effort to comply with all applicable laws.

However, the most important task at present is to ensure that the above goals are not achieved at the expense of sacrificing the freedom to create and maintain open-source technology, nor at the expense of the fundamental elements of blockchain value propositions: the openness and verifiability of information, the low reliance on human subjective managers (e.g., the automation of blockchain technology), and the balance of power between institutions and individuals leaning towards the latter (self-sovereignty). As long as this is achieved, the unique core of innovation in this industry will remain unchanged regardless of how the law ultimately regulates it.

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