Shifting Politics in Europe and Implications for Blockchain
Shifting Politics in Europe and Implications for Blockchain
The global political landscape is undergoing significant changes, with far-reaching implications for the blockchain industry. This week, President Biden's announcement that he will not seek the Democratic nomination has reverberated worldwide. Given the administration's critical stance on blockchain over the past few years, this development also creates uncertainty – and potential opportunity – for the industry at large.
Simultaneously, former President Trump is set to speak this week at the Bitcoin conference in Nashville, highlighting his newfound support for blockchain. The Republican Party’s updated policy platform, which now champions blockchain initiatives, states:
"Republicans will end Democrats’ unlawful and un-American Crypto crackdown and oppose the creation of a Central Bank Digital Currency. We will defend the right to mine Bitcoin, ensure every American has the right to self-custody of their Digital Assets, and transact free from Government Surveillance and Control."
For those who have been part of the blockchain community for years, it’s remarkable to witness blockchain's rise to political prominence. For a deeper analysis of this political shift, refer to last month's newsletter: US Election – Crypto Has Become a Campaign Issue. We eagerly await the new Democratic candidate’s stance on blockchain.
While these developments in the US are intriguing, this week’s Letter from London focuses instead on Europe, where major political shifts also hold significant implications for blockchain technology.
The UK's Political Landscape: A New Government and a Multi-Party System
The recent UK general election has ended 14 years of Conservative rule, ushering in a Labour government. However, the election results also signal a potential paradigm shift toward a multi-party system, with smaller parties like the Liberal Democrats, Reform UK, and the Greens making unprecedented gains. This shift away from two-party dominance could reshape the UK's approach to blockchain, as Labour has been relatively silent on the issue compared to the previous Conservative government's ambition to make the UK a ‘cryptoasset hub’.
France Enters Political Turmoil While EU Implements World’s Most Important Blockchain Regulation
In France, parliamentary elections have led to a fragmented government. President Macron's unexpected call for elections, following the far-right's success in the European Parliamentary elections, resulted in the left-wing coalition, the New Popular Front (NFP), winning without securing a majority. This political instability comes as the European Union implements its comprehensive digital asset regulation, potentially positioning the EU as a global leader in blockchain regulation.
As early-stage investors, we are typically focused on long-term trends and often pay little heed to short-term political shifts. However, the major elections this year in the US, France, and the UK could bring about structural changes that are critical for the blockchain industry. These political developments hold the potential to shape the regulatory and economic landscape in ways that will impact blockchain technology and innovation profoundly. We will delve deeper into each of these situations in the following sections, analyzing their implications for our industry and investment strategies.
To hear more about our currently open Blockchain Venture Fund of Funds (Fund VII), please contact IR@blockchaincoinvestors.com.
The UK Enters Uncharted Political Territory
The recent UK general election, held on July 4, 2024, has dramatically reshaped the nation's political landscape. The Labour Party, under the leadership of Keir Starmer, secured a commanding parliamentary victory with 412 seats, granting them a robust majority of around 170 seats in the House of Commons. This landslide victory marks the end of 14 years of Conservative rule and represents the largest defeat in the history of the Conservative Party. Led by Rishi Sunak, the Conservatives were reduced to just 121 seats, losing over 250 seats from the previous election.
The election also saw the centrist, Liberal Democrats achieve their best performance to date, winning 72 seats—a significant increase of 61 seats from the previous election. Meanwhile, Reform UK, a populist party led by Brexiteer Nigel Farage, made its parliamentary debut with five seats.
Notably, Labour and the Conservatives recorded their lowest ever combined vote share at 56%, indicating that nearly half of British voters opted for smaller parties. Despite Labour's substantial seat gain, they received fewer votes than in 2019, which was one of their worst parliamentary losses. These results suggest a shift in the British electorate towards alternative parties, moving away from the traditional two-party dominance.
What Do We Know About the Labour Government’s Stance Toward Crypto?
Throughout the campaign, major parties remained largely silent on crypto and blockchain issues. The Labour Party only briefly mentioned blockchain, with references to tokenization and the digital pound. The final debate between Prime Minister Rishi Sunak and Labour's Keir Starmer focused on the National Health Service, immigration, and taxes, leaving crypto unaddressed.
However, unlike in the US, the UK has made significant bipartisan progress on forward-thinking crypto regulation over the past few years. The Financial Services and Markets Regulation (FSM), which received Royal Assent in June of last year, brought cryptocurrencies under financial regulation, introduced provisions for stablecoins, brought crypto asset promotions under the scope of promotions regulation, and extended AML requirements to crypto businesses.
The UK had also been expected to pass further legislation on stablecoin regulation and other crypto-related rules this year, but this process was delayed due to the early election call.
While crypto was not a central campaign topic, Labour has expressed some positions on digital assets. Their plans include making the UK a global leader in securities tokenization and supporting the Bank of England in developing a central bank digital currency (CBDC). Labour intends to further develop digital-asset regulatory sandboxes and explore issuing tokenized UK government bonds, while aiming to work with other financial centers to establish interoperable standards for the trade of tokenized assets across borders.
Despite some uncertainties with the new government, it seems unlikely that there will be a major rollback of crypto legislation as Labour seeks to implement its pro-growth agenda.
According to Bivu Das, the U.K. managing director for Blockchain Coinvestors portfolio company and leading cryptocurrency exchange Kraken, “The U.K. political landscape has shifted, but for crypto, we think it will be largely business as usual. The incoming government has an opportunity to keep driving innovation and growth in this emerging asset class and reinforce the U.K.’s position as a leading jurisdiction for blockchain-based innovation.”
President Macron Throws France into Political Limbo
Following the unexpected success of right-wing parties in the European parliamentary elections, President Emmanuel Macron stunned Europe by calling for early elections in France. His intent was to counter the rising influence of the right, but the outcome was far from decisive.
The recent two-step legislative election culminated in a surprise victory for the left-wing New Popular Front (NFP) alliance, which secured 188 seats in the National Assembly. Macron's centrist Ensemble (ENS) alliance came in second with 161 seats, and the far-right National Rally (RN) and its allies garnered 142 seats. With no party achieving an outright majority, France is now facing a hung parliament. Voter turnout was notably high at 67%, indicating significant public engagement in this critical election.
During the campaign, cryptocurrency regulation was notably absent from the debates. Instead, the discussions were dominated by traditional political issues such as economic policy, immigration, and the future direction of France’s political landscape. The election essentially turned into a referendum on the far-right National Rally and its potential to secure a majority.
The results have plunged France into a state of political uncertainty. With no party holding a majority, the task of forming a coalition government and selecting a new Prime Minister now begins. France, as one of Europe’s most powerful and influential members, faces a period of instability, which casts a shadow over the continent’s political and economic landscape.
Europe’s MiCA Goes into Effect
Yet, Europe has already set a new standard in crypto regulation with the implementation of the Markets in Crypto-Assets (MiCA) regulation, providing clear guidelines for industry players in the world's largest economy. MiCA is rolling out in two phases this year: the first phase began on June 29, 2024, and the second will take effect on December 30, 2024.
MiCA aims to create a comprehensive regulatory framework for digital assets, offering legal clarity and consumer protection while fostering innovation within the EU's crypto market. Here are some key aspects of the regulation:
Comprehensive Regulatory Framework: MiCA establishes clear rules for the issuance, offering, and provision of services related to crypto-assets within the EU.
Consumer Protection: The regulation enhances consumer protection by ensuring that crypto-asset service providers (CASPs) adhere to strict requirements, including transparency, operational security, and client asset handling.
Stablecoin Regulation: MiCA introduces specific regulations for stablecoins, categorizing them as e-money tokens. Issuers must maintain sufficient reserves, provide redemption rights, and meet strict operational standards to ensure financial stability and consumer confidence.
Licensing and Supervision: MiCA requires all CASPs operating in the EU to obtain authorization from national regulatory authorities and establishes a framework for ongoing supervision and cross-border cooperation.
The potential for clear regulatory rules and access to 27 member states, has already spurred increased activity in the European crypto market, providing financial institutions and blockchain companies with the certainty they need to innovate and expand. Below are just a few recent examples:
Tokenization of Fidelity International's Institutional Liquidity Fund: In March, Swiss-based Sygnum Bank tokenized $50 million of assets in a Fidelity International money-market fund on zkSync, a Blockchain Coinvestors portfolio company.
Tokenization of abrdn’s Euro Money Market Fund: In June, Archax, another Blockchain Coinvestors portfolio company, issued tokenized interests in abrdn’s €3.8 billion Euro Money Market fund on the Algorand blockchain.
Italy's Digital Bond Issuance on Polygon: In July, Italy's state-owned development bank, Cassa Depositi e Prestiti SpA (CDP), and Intesa Sanpaolo, the country's largest lender, completed Italy's first digital bond issuance under new digital asset regulations. The €25 million bond was issued by CDP on the Ethereum-based Polygon network, with Intesa Sanpaolo as the underwriter and sole investor. This issuance is part of the European Central Bank's initiative to explore wholesale fiat money settlement on blockchains.
These developments highlight how MiCA is already paving the way for significant advancements and innovations in the European crypto landscape.
The View from London: How Will the US Respond?
Political developments in the UK and France underscore how political change breeds uncertainty for the business community, especially for innovative asset classes like blockchain. While the UK’s new Labour government has remained relatively silent on its cryptocurrency plans, it has committed to a pro-growth agenda. The existing Financial Services and Markets Act (FSM) has already provided some clarity for cryptoassets, integrating them into the broader financial framework. Although some provisions are still pending, the UK's regulatory progress is unlikely to be reversed by the Labour government.
In contrast, France is engulfed in political chaos, with one of Europe’s most influential nations in a state of limbo. This instability creates uncertainty, yet Europe is already implementing MiCA, the most comprehensive crypto regulation globally. This regulation highlights just how far behind the US is in providing similar clarity.
MiCA offers extensive legal and regulatory guidelines for the entire digital asset market, a feat not yet achieved by the US. The EU, with its market of 450 million relatively affluent consumers, is the largest internal market in the world. The sheer size and influence of this market mean that MiCA is likely to set global standards. Many companies worldwide may adopt MiCA operating standards to ensure streamlined international operations, echoing the "Brussels effect" observed in industries like chemicals, agriculture, and technology.
It’s no surprise that US CFTC Commissioner Caroline Pham warned that global regulatory frameworks like MiCA could fill the gap as the US struggles to provide its own regulatory clarity. The longer the US regulatory vacuum for crypto persists, the greater the global impact of MiCA standards will likely be
As these developments unfold, all eyes now turn back to the US, with its upcoming November election.
How will it respond to the increasing regulatory clarity and market influence of the EU?
We welcome your reactions and invite you to request materials for our Fund of Funds (Fund VII) by contacting ir@blockchaincoinvestors.com.
Thank you for reading.
Mitch Mechigian
Partner, London
About Blockchain Coinvestors
Blockchain Coinvestors is the best way to invest in blockchain businesses. Our vision is that digital monies, commodities, and assets are inevitable and all of the world’s financial infrastructure must be upgraded. Our mission is to provide broad coverage of early stage blockchain investments and access to emerging blockchain unicorns. Blockchain Coinvestors’ investment strategies are now in their 10th year and are backed by 400+ investors globally. To date we have invested in 40+ pure play blockchain venture capital funds in the Americas, Asia, and Europe and in a combined portfolio of 1,250+ blockchain companies and projects including 95 blockchain unicorns. Blockchain Coinvestors’ first fund of funds ranks in the top decile amongst all funds in its category on both Pitchbook and Preqin. Headquartered in San Francisco with a presence in London, New York, Grand Cayman, Zug and Zurich, the alternative investment management firm was co-founded by Alison Davis and Matthew Le Merle.
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