A public blockchain is a decentralized and distributed ledger technology that allows anyone to participate in transaction validation and network maintenance. Compliance is key for public chains to be widely applied in regulated industries like finance, requiring them to meet legal and regulatory standards, such as KYC (Know Your Customer) and AML (Anti-Money Laundering). Compliance can enhance trust from users and regulators towards public chains and effectively reduce the risk of illegal activities such as money laundering and fraud. Globally, public chains also need to comply with regulations like the EU's General Data Protection Regulation (GDPR) to ensure legality and sustainable development.
Global Public Chain Regulatory Policies and Trends
As the core application of blockchain technology, the regulatory environment for public chains is rapidly evolving. From initial widespread skepticism to cautious acceptance today, the international community's attitude toward public chains is gradually changing. The decentralization, transparency, and immutability of public chains are seen as having revolutionary potential but also bring challenges such as market volatility, financial crime, and regulatory difficulties. Therefore, global regulatory agencies are striving to formulate frameworks that seek a balance between encouraging innovation and controlling risks.
Regulatory Trends: Countries are increasingly tightening regulations on public chains and crypto assets. For example, the EU passed the Markets in Crypto-Assets Regulation (MiCA) in 2023, becoming the first comprehensive legal framework regulating crypto assets globally.
Policy Divergence: Regulatory strategies differ significantly between countries. China has completely banned cryptocurrency trading and mining, while the U.S. and the EU are gradually regulating through legislation. The EU implements bank-like regulations on stablecoins and cryptocurrencies to protect financial stability and consumer rights, while the U.S. tends to support stablecoins, maintaining the global status of the dollar.
Balancing Innovation and Risk: Despite tightening regulations, many countries still recognize the potential of public chains in finance, supply chain, and healthcare. For instance, Singapore and Japan, while maintaining strict regulations, leave space for blockchain innovation.
The Paradox of Compliance and Development
The Web3 industry is unique due to its decentralization and anonymity, but this also subjects it to complex compliance requirements across countries. These requirements aim to ensure projects operate legally but often restrict their freedom to develop and expand globally. Compliance not only increases operational costs but also poses legal risks, leading project founders or core members to face serious consequences such as lawsuits, hefty fines, or even imprisonment.
1. Rising Operational Costs
Compliance requirements force blockchain projects to invest significant resources in legal consulting, compliance audits, and regulatory reporting to ensure adherence to laws in various countries. This high cost directly pressures the financial condition of the projects, particularly for startups, potentially becoming a heavy burden on development.
Binance: In 2023, Binance was fined $4.3 billion by the U.S. Department of Justice for money laundering and violations of the Bank Secrecy Act. This hefty fine not only weakened its financial strength but could also lead to a loss of market share.
2. Increased Legal Risks
The complexity of compliance requirements and the inconsistency of regulatory policies across countries make it difficult for project teams to fully foresee and address legal risks. Once regulatory red lines are crossed, projects may face lawsuits, fines, or even business interruptions, severely affecting development progress.
Ripple: Due to the question of whether XRP is a security, it has been embroiled in litigation with the U.S. Securities and Exchange Commission (SEC). In 2023, the court ruled partially in favor of Ripple but still imposed a $125 million fine. During the litigation, Ripple expended significant resources, and the market performance and project ecosystem development of XRP were also significantly hindered.
3. Market Access Restrictions
Compliance requirements may lead to projects being prohibited from operating in certain regions, limiting their global layout. If tokens are deemed unregistered securities, they may be delisted from exchanges, harming the user base and market share.
Solana: In 2022, Solana faced a class action lawsuit due to the SOL token being labeled as an unregistered security, which hindered its promotion in certain markets.
Polygon: In 2023, the SEC labeled MATIC as an unregistered security in the lawsuit against Binance, leading to its removal from platforms like Robinhood, directly impacting market share and user growth.
4. Innovation Constraints
Compliance requirements may restrict project teams' exploration space regarding technological innovation and business models. To avoid regulatory risks, projects may have to adjust their development direction or abandon certain cutting-edge attempts, thereby weakening their competitiveness and long-term development potential.
Cardano: In 2023, the SEC labeled ADA as a security in lawsuits against Kraken and Binance. This label may limit Cardano's promotional applications in certain markets, forcing it to take a more conservative strategy in ecosystem development, thereby slowing innovation.
5. Core Member Risk
Compliance issues not only affect the projects themselves but can also impact the founders or core members, exposing them to legal action, fines, or even imprisonment. This not only shakes the stability of the project but could also negatively affect the reputation of the entire industry.
Binance founder Changpeng Zhao: In 2023, Zhao pleaded guilty to compliance issues and resigned as CEO of Binance, subsequently being sentenced to four months in prison. This incident directly affected Binance's operations and may weaken its leadership position in the industry.
6. Other Typical Cases
Tether
/USDT: Tether settled with the U.S. Commodity Futures Trading Commission (CFTC) for misleading reserve statements, paying a $40 million fine, and continues to face the possibility of violations from federal investigations. These events pose threats to its market credibility and business expansion.
Compliance requirements pose multiple constraints on the development of blockchain projects, especially during critical stages of exploring new markets and increasing market share, where compliance requirements may become a 'tightening spell' for blockchain projects. Therefore, project teams need to pay high attention to compliance challenges while pursuing innovation and expansion, formulating strategies to balance development and compliance.
Current Regulatory Status and Market Position of the Sui Chain
Sui, as a public chain project launched in May 2023, has quickly emerged in the blockchain field due to its unique technical architecture and user-friendly design.
Compared to many other public chain projects, Sui has demonstrated remarkable robustness in nearly two years since its launch, especially in regulatory compliance and network security. To date, Sui has not faced any lawsuits or accusations related to regulatory issues or security incidents, a performance that not only highlights the rigorous approach of its development team towards technology and compliance but also earns trust and reputation in the highly competitive blockchain market.
At the same time, Sui's recent performance further demonstrates its market potential. With the rapid development of the Sui chain ecosystem and sustained community enthusiasm, Sui's market capitalization has soared to over $11 billion, ranking in the top 11 of the global cryptocurrency market capitalization leaderboard. This market capitalization not only reflects the market's high recognition of Sui's technological innovation and application prospects but also signifies its important position in the competition within the public chain field.
Figure 1: Cryptocurrency Market Capitalization Rankings
Among the top ten cryptocurrency projects by global market capitalization, USDT and USDC as stablecoins, along with DOGE as a MEME coin, occupy a unique position. Excluding these three, Sui ranks 8th in public chain market capitalization. This achievement is particularly noteworthy because among the top ten, the youngest project is Solana, which launched in March 2020 and has been operational for five years. In contrast, Sui, launched only in May 2023, has entered the global market cap TOP11 in just two short years. This achievement is undoubtedly remarkable and fully reflects Sui's extraordinary development speed and potential in the blockchain field.
Figure 2: Currency Launch Timelines and Attributes
So, how does Sui manage to grow rapidly while maintaining compliance and establish a foothold in the fierce competition of WEB3?
Characteristics of the Sui Chain
The Sui chain is an emerging L1 blockchain platform developed by Mysten Labs, aimed at providing fast, secure, and scalable solutions for Web3 applications. It uses the Move programming language, emphasizing high transaction speed and low latency, prioritizing quick and secure transaction execution, particularly suitable for real-time applications like gaming and finance. Sui provides a familiar user experience, such as logging in through web credentials (zkLogin), and supports large-scale applications by scaling network capacity according to demand.
The modular design of the Move language allows developers to organize code into reusable modules, supporting formal verification to ensure that smart contract behaviors meet expectations. Compared to the more widely used EVM languages, the Move language offers more advanced features and is better suited for the current development of blockchain.
1. Security: Resource Model and Vulnerability Prevention
It has significant advantages in security, mainly due to its resource model. In Move, each data object (Object) has clear ownership, ensuring that resources cannot be accidentally or maliciously copied or destroyed.
2. Performance and Scalability: Parallel Execution and High TPS
Another key advantage of the Move language is its performance and scalability. Move supports parallel execution of transactions, whereas EVM uses sequential processing, which may lead to transaction congestion and rising fees under high loads.
3. Developer Experience: Modularity and Learning Curve
The modular design of Move provides advantages in developer experience. Move programs are organized into modules, sharing resources and functions, facilitating upgrades and combinations.
Recently, Ethereum (ETH) founder Vitalik also proposed replacing the Ethereum Virtual Machine with RISC-V. RISC-V shares many similarities with the Move language, the main one being modularity and scalability. Both RISC-V and Move emphasize modularity and scalability in their designs, supporting user-defined instruction extensions, enabling adaptation to various application scenarios for use across different blockchain applications. This further highlights the technical superiority of the Move language.
Figure 3: Vitalik proposed to replace the Ethereum Virtual Machine (EVM) with RISC-V
Operational Direction of the Sui Chain
1. Community Incentives
Figure 4: Sui Token Distribution Ratio
From Figure 4, we can see the token distribution model of Sui, with three uses meant to support the Sui ecosystem community construction.
Community Access Program: 5.82%
Stake Subsidies: 9.49%
Community Reserves: 10.65%
The proportion of tokens used to support the Sui ecosystem community building is 26%, reaching 54.37% of the announced release plan (47.82% to be released by 2030), accounting for more than half of the total circulating tokens.
Among them, 5.82% of the community access plan is used for project incentives, supporting on-chain projects, addressing high early customer acquisition costs, and encouraging user participation in on-chain DeFi. For example, in on-chain lending projects, early lending pool funds are relatively limited, and incentives are used to encourage users to participate in deposits and borrowing.
Community reserves account for 10.65%, focusing more on the long-term construction of the Sui ecosystem, such as funding the development of DApps in the Move language, supporting community governance, or reserving funds for future expansion.
Figure 5: Sui Token Unlocking Plan
In Figure 5, the Sui token unlocking plan and unlocking proportions can be seen. Apart from a large unlocking in May 2024, the remaining tokens will gradually unlock according to their respective allocation ratios, with the unlocking speed gradually decreasing.
At the beginning of a public chain's launch, both projects and users are limited, so a small amount of tokens is released first. As projects and users increase, the demand for tokens rises, and the supply gradually increases according to the unlocking plan to match the demand. This unlocking mechanism ensures a balance between supply and demand and the stability of token prices.
2. Building Key Projects
In some key projects, such as on-chain infrastructure or projects with slow returns on investment, construction is carried out by Mysten Labs' official operations.
For example:
Sui Name Service (SNS): Provides human-readable name services to simplify wallet address management.
SuiPlay0x1: Next-generation handheld gaming device supporting WEB2 + Web3 games.
Walrus: Decentralized storage protocol.
Seal: Decentralized secret management service designed to protect sensitive data through on-chain access control policies.
Deep Book: Centralized limit order book (CLOB), parallel execution and low transaction fees, providing high throughput and low-latency trading experiences.
Officially operated projects by Mysten Labs, such as the Deep Book order book project, provide liquidity and quick transaction matching for on-chain trading; the Sui Name Service offers domain services for the Sui chain, facilitating user interaction and the entry of WEB2 companies; the Walrus decentralized storage protocol and Seal centralized secret management service enable builders to securely store information and protect sensitive data through these two projects.
The SuiPlay0x1 handheld gaming device, due to its hardware design and mass production requirements, and the need to adapt games to various platforms, supports WEB2 + WEB3 gaming. It belongs to projects with high initial investment and slow returns. Without a complete ecosystem and the integration of WEB2 game developers, it is challenging for WEB3 gaming companies (which are usually smaller in scale) to develop, so the official team has led the R&D from the project's preparation stage.
3. Offline Activities
Sui's offline activities aim to promote Sui blockchain technology, shorten the distance between WEB3 and WEB2, attract developers, investors, and partners to join the ecosystem, enhance community cohesion, and improve brand awareness. Leveraging Sui's high performance and scalability to solve traditional problems, emphasizing education, collaboration, and innovation.
Activities take various forms, including global conferences, industry summits, community gatherings, technical workshops, and hackathons. Content covers Sui's technological advancements, Move language education, ecosystem project showcases, industry trend discussions, and developer practices, helping participants gain insights into Sui, learn development, and establish connections. Activities span regions including North America, Asia, and Europe, collectively promoting the development of the Sui ecosystem.
Compliance Solutions
The Sui blockchain has taken various measures to ensure compliance with regulatory requirements, including anti-money laundering (AML) and other legal compliance. However, Sui, as a decentralized blockchain, does not directly enforce AML or KYC but provides necessary tools and infrastructure for projects built on the platform to meet regulatory standards.
1. Compliance and Legal Requirements
According to Sui's Terms of Service, users must comply with all applicable laws when using the platform, including AML, anti-terror financing, and sanctions regulations. The terms explicitly prohibit engaging in illegal activities such as money laundering, terrorist financing, or violating OFAC sanctions. Users are responsible for tax compliance, including maintaining records and reporting transactions to tax authorities. Sui may report user activities as required by law to ensure transparency.
2. Partner Support
The decentralized nature of Sui makes it difficult to directly implement AML/KYC like traditional financial institutions. However, by providing transparent transaction records and partner tools, it supports projects in meeting regulatory needs. For example, the Sui blockchain collaborates with Ant Digital to utilize its ZAN platform to provide KYC and AML tools to support the compliant tokenization of real-world assets (RWA). As an RPC node operator for Sui, ZAN connects to the infrastructure of Sui. This means that ZAN's tools can seamlessly communicate with Sui's blockchain network, enhancing its scalability and security.
Additionally, Sui's Terms of Service allow for the freezing of funds or restricting use to comply with legal requirements, ensuring overall compliance. (If the $1.46 billion theft from Bybit occurs on the Sui chain, the terms may allow for the freezing of the stolen funds.)
3. Project-Level Compliance
Sui itself does not enforce KYC (Know Your Customer) or AML (Anti-Money Laundering) since it is a decentralized blockchain network. Research shows that Sui DeFi tools usually only require connecting to the Sui wallet for use, without KYC, bank card, or email registration. However, when it involves fiat deposits or withdrawals, for example, selling Sui tokens through exchanges, it may trigger multi-level KYC verification. This indicates that compliance is primarily implemented by project parties or third parties on their own, with Sui providing supportive tools instead of directly enforcing compliance.
Specific Compliance Measures
The Sui chain enhances compliance levels through on-chain infrastructure support, compliance partners, and project reviews, isolating compliance risks.
1. Supported by Infrastructure
Adopt innovative technologies to enhance compliance. For instance, Walrus, Seal, and zkLogin significantly improve compliance with the European Union's General Data Protection Regulation (GDPR). GDPR is an important data protection regulation in the EU aimed at protecting the personal data privacy of EU citizens, requiring organizations to adhere to strict rules regarding data collection, processing, and storage, including data minimization, purpose limitation, storage limitation, integrity and confidentiality, as well as ensuring the rights of data subjects (such as access, correction, deletion, etc.).
Walrus: Supports data deletion, fulfilling the 'right to be forgotten'
Walrus is a decentralized storage protocol designed to handle large binary files (blobs), allowing sensitive personal data to be stored on a separate subchain for easy deletion, in compliance with the GDPR's 'right to be forgotten' (Article 17 GDPR).
Seal: Secure Management of Sensitive Data
Providing secure storage and access control for sensitive data. Seal ensures that personal data is protected during storage and processing, complying with GDPR's requirements for data security and privacy.
zkLogin: Privacy-preserving authentication, supporting data minimization.
zkLogin is a native feature of Sui that allows users to log into decentralized applications (DApps) using familiar Web2 credentials (like Google and Facebook) without managing private keys or seed phrases. By not disclosing user credentials and utilizing zero-knowledge proofs, it supports the data minimization principle of GDPR (Article 5 GDPR). It reduces the amount of personal data stored on-chain while ensuring user privacy is protected. Additionally, zkLogin's design avoids the complexities of traditional private key management and lowers the risk of data breaches.
2. Collaboration with Third Parties
The Sui chain collaborates with third parties like Chainalysis through its community-driven Sui Guardian program to enhance compliance. Sui Guardian tracks scams and phishing websites, while Chainalysis's analytical tools can monitor and analyze on-chain transactions to identify addresses or patterns associated with known illegal activities. By analyzing transaction patterns, Chainalysis can identify potential phishing attack victims, helping exchanges and users take preventive measures. This helps Sui comply with global AML and KYC regulatory requirements, such as the EU’s Fifth Anti-Money Laundering Directive (5AMLD) and the Bank Secrecy Act (BSA) in the United States.
3. Project Self-Restraint
Through various tools, help developers self-regulate and ensure compliance, such as geographical restrictions. For instance, Sui partnered with Netki to launch DeFi Sentinel, a compliance oracle that provides developers with automated compliance tools, including real-time KYC/AML (Know Your Customer/Anti-Money Laundering), wallet screening, and financial transaction monitoring. These tools help dApps verify user locations, ensuring that only users in compliant regions can access services.
For example, the Doubleup gambling project is only open to users in compliant gambling regions.
4. Risk Isolation
In the blockchain ecosystem, public chains typically serve as the foundational layer providing services, while application development is mainly carried out by project teams, including DeFi, DApp, DePin, etc. Users interact through smart contracts written by the project team, with stakeholders primarily being the project team and users (contract participants). Currently, most legal disputes and judicial cases involve the project team and its participants, with public chains rarely being named as defendants unless there is a significant flaw in the public chain that directly causes user losses.
For example, Sui recently announced a partnership with xMoney and xPortal to launch a digital Mastercard (Master card) supporting SUI tokens in Europe. Sui itself, as a technology platform, is mainly responsible for the construction of infrastructure and asset ecology, while the payment side is handled by the licensed institution xMoney, and the user experience on the application side is managed by xPortal.
Analysis of Sui Chain's Compliance Path
From the practices of the Sui chain, we can see that compliance has been regarded as an important development direction since its design, and has been integrated into the top-level design of the public chain.
The layout of public chains should consider the overall picture, adapting to future development directions from a foundational logic perspective. As a public chain project, development planning should not be done from a single project perspective but should consider diverse application scenarios and development trends to prepare for layout in advance.
Managing a blockchain is like governing a country; only with a complete infrastructure construction on-chain, leading the development of high-investment projects, and reasonably distributing incentive measures can we attract more developers and users, gradually developing a rich on-chain ecology.
Conclusion
The Sui chain, as a rising star in the public chain field, successfully finds a balance between compliance and development through its unique technical architecture and well-thought-out operational strategy.
From the very beginning of its design, compliance has been integrated into the top-level architecture, not only meeting global regulatory requirements but also building a vibrant and robust ecosystem through community incentives, key project construction, and offline activities. Its specific measures at the user compliance, partner support, and project level, such as collaborating with third parties to provide KYC/AML tools and adopting innovative technologies to support GDPR compliance, showcase its foresight and execution in addressing regulatory challenges.
The practices of the Sui chain have proven that compliance is not only a necessary condition for public chains to respond to external pressures but also a key bridge to promote the deep integration of blockchain technology with the real world. Compliance serves not only regulatory needs but also the needs of on-chain users, benefiting everyone in the real world.
Although the Web3 world advocates that 'The code is the law', excessive jungle law is rejected by various countries' regulations and mainstream society, which may confine Web3 to the virtual world. Only through compliance can we truly bridge the gap between the virtual and the real world, providing safer and more convenient services to global users and unleashing its revolutionary potential.
Considering how to integrate Web3 with the real world is both the starting point and the endpoint of compliance.
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Author of this article: Crypto Miao