How Europe is losing to the US in yet another tech-revolution
In the past century Europe has slumbered away many a technological revolution, whether it was the age of electronics or that of cloud computing. Just try to think of European tech giants. It is hard. Sure, there are unicorns such as Spotify or Zalando and some established players like SAP, but none that can rival the likes of Google or Microsoft.
Very concerningly, Europe is also losing its grip outside of the top 10. In the year 2000, according to The Economist, 41 out of the world’s 100 most valued companies were headquartered in Europe. One year later only 15 were. Not just that no new titans are added, but former big companies are not growing. Compare the highest valued companies in America and Europe and you will notice that those at the top of European lists are multiple times as old as its American counterparts.
With a new IT-breakthrough called blockchain, many see the chance to catch up with America. The blockchain is known to the broader public as the mechanism that fuels cryptocurrencies, most notably Bitcoin. Its distributed records can be used in many areas to trim costs. Through the internet the sharing of information became ubiquitous and cheap; through the blockchain it is trust-enriched information that will scale exponentially.
While the media and crypto-pundits depict the American Congress and regulation as blockchain-hostile (not even to mention China that has completely banned cryptocurrencies), the European Commission has publicly declared it aims to see Europe at the forefront of the new technology. The EU’s MiCA - the regulation on Markets in Crypto-Assets - is probably the most comprehensive framework bringing significant clarity on what companies and banks are allowed to do around crypto and what kind of licenses they need.
Regulatory arbitrage is also one of the reasons why the Facebook-led Libra initiative (later Diem) was headquartered in Switzerland rather than in the US before it had to shut down. Furthermore, the number of European blockchain-hubs is impressive – London, Amsterdam, Berlin. Not to mention the Swiss city of Zug, hailed by insiders as the Crypto Valley in which hundreds of startups are working on tomorrow’s distributed digital economy.
Yet while some European technocrats might complacently sit back in their chairs, the truth is this: Despite vivid blockchain-activity, Europe has not produced one serious contender to power tomorrow’s distributed economy.
The plain numbers
First, let us have a look at whether the picture hawked by the media is reflected in the quantitative data. The most basic indicator is the number of companies working on the new technology. As of 2019, the US counted 726 registered blockchain companies, while the UK as the closest follower had a mere 186 enterprises. While the study unfortunately hasn’t been updated ever since, there is a recent analysis done by CB Inisghts about the 50 most promising blockchain companies in 2022 (excluding public ones). Of the top 50 blockchain companies 28 come from the US and again the UK is a distant number two (with five companies). Countries such as France or Switzerland only contribute two companies each to the ranking.
The same study found that the largest investors come from America as well. Coinbase Ventures, Andreessen Horowitz, and Paradigm make up the top three.
What about the research output? The most straightforward way to measure the results of research activity is via patent applications. Here China accounts for 84% of all blockchain-patent applications worldwide. Though those applications have a very poor approval rate - only 19% - that does not make the picture any rosier for Europe, because countries like the US or South Korea are also far ahead in terms of patent applications.
Incumbent contenders in stars and stripes
A truth ignored in most discussions on new tech is that innovation – even radical one – does not necessarily obliterate the dominance of incumbents. Despite the troves of new challengers, it is big banks and IT-giants that will scrape most value of the crypto-economy.
IBM is a prime example; already back in 2015 it got involved in the Hyperledger-project to utilize blockchain for enterprises. Ever since it has been hammering out blockchain projects incessantly. Data goliaths in particular have shown a remarkable appetite for powering the new economy. Google is the world’s second largest investor in blockchain startups and Amazon runs the biggest global infrastructure for building end-to-end blockchain platforms.
European banks are the closest to a challenger the continent’s companies amount to. Yet even here they are shyer than their US-rivals. JPMorgan Chase in particular was the leading blockchain adopter for the past five years. And in 2019 it became the first bank to successfully test its own digital coin (JPM Coin) – of course pegged to the US dollar. European giants, on the other hand, approach the topic almost exclusively via consortia, and hardly ever tackle more than one use case at a time.
A very telling moment came when the European Central Bank built the proof of concept for a blockchain-based digital Euro. It did so based on the Corda-platform and had it developed by Accenture. Corda is excellently positioned to become the blockchain protocol for banks and even corporations more generally. Unsurprisingly, the company behind it is American: R3, a New York-based startup funded mostly by banking behemoths.
OK, so American companies dominate the decentralized blockchain world, but how about more traditional crypto-applications that claim to decentralize decision power? Currently the DeFi-wave (decentralized finance) is rolling across the finance world. DeFi is the most promising alternative to the centralized blockchains deployed by Big Tech and Big Banking. So it makes sense to have a look at where the most likely DeFi kings are based.
One of the most promising companies is Coinbase. It is among the largest traditional cryptocurrency-exchanges, but it is also strategically branching out in directions such as stablecoins or crypto-payment infrastructure. Coinbase is American.
Other potential candidates for DeFi dominance include Uniswap, the world’s largest decentralized exchange. Though theoretically it should be run by a global, leaderless protocol, Uniswap is de facto governed by Uniswap Labs and its founder Hayden Adams, who is based in New York.
If DeFi really continues with its impressive growth, companies such as Coinbase, Compound, and Uniswap will get to build tomorrow’s blockchain world. Protocols that are conceived by Europeans such as Aave are rather the exception than the rule.
Here is what Europe must do
The rise of the internet gave birth to countless businesses, many of which stood the test of time. Some are still highly profitable corporations, but only a handful of them underpins our daily lives, whether it is IBM with cloud services, Microsoft with Windows, or Apple with its phones. Similarly, a handful of giants will generate most of the world’s blockchain-value.
China is also taking huge steps to grab the lead on both blockchain and AI, each of them by strategically fostering national champions. Alipay, for example, uses distributed ledgers to enable migrant workers to send money home at negligible cost. Unlike China and America, Europe quite simply doesn’t have digital giants to piggyback on.
But Europe is not doing much to build new ones either. Much of American dominance can be explained by its tech titans, but Europe trails the US in innovation more generally. While the EU spends only 0.8% of GDP less on R&D than the US, the gap with private investments is astounding. And eventually it is private companies, not the government, that push forward innovation.
The major roadblocks are regulation and the lack of tax-based incentives. If Europe really wants to become the world’s purveyor of blockchain technology, it must stop its government-driven approach to innovation and slash obstructing legislation. It must emulate America in its uncompromising pursuit of free-market capitalism.
What the examples of the past tell us, is that the rise of new corporate giants always means that newcomers must blitzscale. This means that companies accept many imperfections and flout compliance and other rules in order to sustain excessive growth. Perhaps increased regulatory tolerance could finally foster the rise of European titans.
And the EU must finally deliver on its ultimate promise of the true Single Market. There are still too many hurdles for companies to grow outside of their states’ boundaries. European integration is a slow piecemeal process. A plentitude of languages, legal systems, as well as tax and licensing regimes are a handbrake to the EU’s real potential. Even the EU’s largest achievement – the Euro – is not yet rolled out in all member states. On top, with the Brexit the largest innovator among the states has left the block. Until these issues don’t get fixed, it is hard to imagine the continent producing any viable challenger to the likes of Amazon or Google, even as a new techno-economic age is beckoning.