An Alternative Path for Compliant Crypto Payment Startups | Mankun Web3 Legal Education

Compliance Challenges and Solutions in Web3 Implementation

Not long ago, Attorney Liu Honglin of Mankun Law Firm traveled to Hong Kong and Shenzhen on business, attending Web3 industry events, visiting clients, and exchanging ideas with industry partners. It is evident that the current hot sectors in Web3 are primarilyRWA(Real-World Assets) andcross-border payments. Particularly in the field of cross-border payments, as market demand continues to grow, the potential of Web3 payments is gradually emerging. However, within the native Web3 community, Web3 payments are often understood merely as apeer-to-peersolution.

From this perspective, User A can directly transfer their virtual assets or digital currencies to User B via a blockchain network. Without intermediaries or reliance on third-party institutions, the decentralized structure makes the entire process more efficient and relatively lower in cost, potentially even eliminating the cumbersome procedures associated with traditional payments. In theory, Web3 payments can indeed facilitate smoother cross-border capital flows. However, in practice, this peer-to-peer payment model has triggered a series of issues, such as the transparency of fund flows, cross-border management of data assets, and foreign exchange controls. Furthermore, sovereign states have increasingly imposed crackdowns and restrictive policies on virtual currencies.

Precisely because the peer-to-peer Web3 payment model lacks sufficient compliance measures, many entrepreneurs are attempting to provide various solutions to help users address these challenges. For instance, some entrepreneurs are trying to introduce on-chainKYC(Know Your Customer, KYC) to help users complete identity verification on-chain. Unlike KYC in traditional finance, Web3 KYC requires binding with multiple blockchain addresses and accounts, which undoubtedly increases the complexity and technical difficulty of compliance processing. Additionally, some entrepreneurs have begun exploring services for aggregating virtual addresses, allowing users to centrally manage assets across multiple on-chain addresses, thereby enjoying greater convenience in payments and settlements.

However, the act of aggregating assets on-chain may further attract regulatory attention and even pose potential legal risks. Moreover, compliance issues in cross-border payments are particularly severe for startups—they must not only comply with local regulatory requirements but also report compliant operations to major global regulators, and possibly even establish early warning mechanisms. This series of compliance measures undoubtedly increases the operational burden on startups, especially for Web3 entrepreneurs with high operating costs, where every compliance expenditure may squeeze overall operational margins.

Innovative "Sandwich Structure" Payment Model: Balancing User Experience and Compliance Needs

In response to these challenges, many entrepreneurs have begun experimenting with a new payment structure, known as the "sandwich structure," to balance user experience with compliance requirements. The innovation of the sandwich structure lies in completely stripping the compliance aspects of cross-border payments from end-users (C-side) and transferring them to inter-institutional on-chain transactions. This allows users to enjoy an experience similar to traditional Web2 payments, while the efficiency and asset security of blockchain are achieved through inter-institutional settlements.

Specifically, when a user in Country A needs to pay a user in Country B, the sandwich structure allows the payer in Country A to first receive funds in fiat currency. The user completes the payment locally, with all processes resembling a domestic payment, without requiring any cross-border operations. Subsequently, the institution in Country A uses blockchain technology to complete an on-chain transfer to the payee in Country B in the form of stablecoins or recognized virtual currencies. The institution in Country B then converts these funds into fiat currency locally to complete the payment to the user in Country B.

In this model, users do not need to understand the underlying cross-border payment process. Inter-institutional on-chain settlements improve payment efficiency, avoid the complex procedures of traditional cross-border payments, and retain the high-efficiency advantages of Web3 payments. This model not only provides users with a seamless payment experience but also significantly reduces the compliance burden of cross-border payments, while ensuring the security and efficiency of fund flows.

Within the sandwich structure, institutions can manage transactions through on-chain compliance measures, such as whitelist management and compliance reporting, thereby ensuring efficient completion of cross-border payments under compliant conditions. Meanwhile, the use of stablecoins not only facilitates fund transfers between two countries but also reduces the high costs associated with traditional cross-border payments, making this model combine the stability of traditional payment experiences with the low-cost advantages brought by Web3 decentralization.

This undoubtedly introduces a new entrepreneurial model for cross-border payments, organically combining the traditional Web2 payment experience with the efficiency and asset security of Web3. For the development of Web3 payments, such innovation represents a future trend in the industry, namely the integration of convenience and compliance, which will inevitably drive the entire cross-border payment industry toward a more open and efficient direction.

Balancing Business Innovation and Compliance: Learning and Challenges for Web3 Lawyers

As a commercial service lawyer specializing in Web3, through communication with numerous clients, Attorney Liu Honglin deeply appreciates the compliance challenges and innovation needs faced by Web3-era entrepreneurs when exploring new businesses and scenarios.

The exploration of Web3 compliance is not one-dimensional but a continuous process of adjustment, optimization, and innovation. Precisely for this reason, as a Web3 commercial lawyer, the sense of achievement and enjoyment derived from this exploration is unique. Collaborating with clients to conceive and implement solutions constitutes repeated learning and challenges in exploring compliance boundaries amidst business innovation, and it is also the source of our sense of achievement.

We look forward to collaborating with more entrepreneurs who innovate by combining Web2 and Web3, building a more robust foundation for the future of the Web3 industry, and truly steering Web3 business scenarios toward a direction where compliance and innovation proceed in parallel. If you have any needs for exchange or discussion regarding new projects, please feel free to contact Attorney Liu Honglin.

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An Alternative Path for Compliant Crypto Payment Startups | Mankun Web3 Legal Education

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