The MiCA effect: Europe's share of crypto VC funding up 700%

This is why regulation matters.

The amount of capital being pumped into Europe-based crypto startups has soared by 7x year on year.?

Between Q1 2022 and Q1 2023, the share of venture capital (VC) funding for early-stage crypto and blockchain businesses in Europe climbed from 5.9% to 47.6%, a 700% increase.

Over the same period, the share of US VC funding into crypto startups dropped from 57.2% to 30.5%, a fall of 46%, according to data from Pitchbook and Bloomberg.?

This is largely the result of regulatory certainty being introduced into Europe’s 27-member state by MiCA, the EU’s landmark Markets in Crypto Assets legislation. On 20 April 2023, Europe became the first continent with comprehensive rules of the road as regards cryptoassets and blockchain technology.?

This opens the door to many more blockchain and web3 businesses to innovate and settle in Europe. It includes the likes of USDC stablecoin issuer Circle, which tellingly chose Paris for its new European headquarters, while also filing to register as a crypto provider in France and seeking a license as an e-money provider for its euro-backed stablecoin EUROC.?

Companies in the EU have up to two years to come into regulatory compliance with MiCA, a generous timeline by any standards.?

New rules around stablecoins are due to come into effect in Europe by July 2024, while regulation for cryptoasset service providers, such as digital asset exchanges, are expected to be enforced from January 2025.?

Regulatory certainty is almost always a precursor to growing market share. And companies who are innovating in the crypto space have found a more hostile picture in recent years from US regulators and lawmakers.?

US loses lead handed by China

In the early days of cryptocurrency and blockchain the United States was a global leader in offering crypto businesses legislative certainty, albeit on a state-by-state basis and not at a federal level.

New York’s State Department of Financial Services (NYDFS) issued its first BitLicense in 2015 to Circle. This came two years after NYDFS had begun discussions over how to appropriately regulate virtual currencies. At the time in 2013, America’s largest crypto rival China had ordered third party payment providers to stop using Bitcoin.?

NYDFS Acting Superintendent Anthony Albanese noted: “Issuing the first BitLicense is an important milestone in the long-term development of the virtual currency industry. Putting in place rules of the road that help protect consumers…is vital to building trust in this new financial technology.”

China’s war on crypto took further turns in the intervening years. In 2017 state officials put a stop to token sales through booming Initial Coin Offerings and pledged to ramp up enforcement of digital asset exchanges.

In June 2019, trading cryptocurrency was officially banned in China, despite investors in the country accounting for the largest proportion of all bitcoin transactions — and Bitcoin miners in the country representing the largest share of hashrate globally. While businesses were still dealing with the fallout from the decision, in September 2021 the People’s Bank of China declared all crypto transactions to be illegal and engaged in mass arrests of industry participants suspected to be flouting the ban.?

This did nothing to end the growth of crypto: China’s crackdown simply meant the nascent industry flourished elsewhere. The US was being handed the keys to the castle as regards dominance of this fast-growth industry.?

However, that picture has soured over the last two years. The US has failed to regulate at a national level and has two market regulators — the CFTC and the SEC — still engaged in a damaging turf war on which should have oversight of crypto markets.?

Amid these delays and the threat of prosecution for innovation, crypto companies are now making their most inventive moves outside of the United States. Testament to this fact is that the leading US digital asset exchange Coinbase and its rival Gemini have both launched derivatives exchanges for solely non-US institutional customers, targeting growth markets in Hong Kong, Singapore and Brazil.?

Adding to the grim picture for US crypto businesses is the language coming from political elites: in May 2023 President Joe Biden’s White House released proposals for a 30% tax on crypto miners, with hostility again the order of the day, noting: “[This tax] encourages firms to start taking better account of the harms they impose on society.”?

Coinbase CEO Brian Armstrong noted in recent comments that while his company would not quit America entirely, rival jurisdictions like the United Arab Emirates could be the exchange’s new ‘international hub’. Armstrong said that the country “serves as a bridge between” Asia and Europe, and that locations like Dubai were more forward-thinking than the States in terms of their approach to crypto regulation.

Today in the United States crypto companies face regulation by enforcement. US businesses in the sector could not come into compliance even if they wanted to, as there are no overarching rules for them to follow. This has a supremely deleterious effect on growth and business confidence. So after being handed the crypto industry on a plate, America appears to have unwittingly locked itself out of this global leader status.?

This contrasts sharply with the state of play in Europe. While MiCA is not perfect and does not yet address some of the largest growth markets for crypto — in the form of lending markets, DeFi and NFTs — it does at least show willingness from European regulators to engage with an industry that has grown 1,000 times larger in market cap in the last decade, from $1 billion in 2013 to $1 trillion in 2023.