According to the World Economic Forum, distributed ledger technology ('DLT') and blockchain are one of six technological megatrends of the future. Through an early concentration of start-ups, DLT protocols and thought leaders from the DLT ecosystem in the European Economic Area as well as progressive regulation, Europe could succeed in leading the way in DLT technology, balance the technological imbalance between the USA, China and Europe more fairly and strengthen Europe as a future-relevant technology hub.
Blockchain and distributed ledger technologies (DLT) have the potential to fundamentally change existing business models and processes in various areas. They enable companies - from start-ups to large enterprises - and governments to provide decentralized, trusted, transparent and user-centric digital services. This will lead to new and more efficient business models and processes that stimulate sustainable economic growth and bring benefits to society.
Europe's poor starting position for digital business models
Due to the decreasing relevance of established European companies, it is now highly relevant for Europe to become a leader in future-oriented technologies. While the USA and China are already home to virtually all relevant platforms, e.g. Facebook, Amazon, Apple, Netflix, Google ('FAANG') and Baidu, Alibaba and Tencent ('BAT'), the USA and China also seem to be ahead of Europe in artificial intelligence (AI), big data, quantum technology and 3D printing. Although Europe excels in research, it rarely succeeds in transforming knowledge into successful business models. One reason for this is the different amounts of investment capital flowing into start-ups in the respective economic areas. In 2018, VC funds invested around 23 billion US dollars in European start-ups, 92 billion US dollars in China and even 130 billion US dollars in the USA.
The problem is clear: Europe must understand digitisation more clearly, tackle it proactively and take the lead in at least one future-relevant technology if it does not want to lose touch with the USA and China in the long term. In the area of distributed ledger and block chain technologies, Europe is in a fundamentally good starting position.
Because DLT start-ups and developers of DLT protocols have established themselves in Europe at an early stage, the starting situation for the European economic area is rather good. In addition, the regulation of crypto assets provides a first level of regulatory security for companies operating in the market. The blockchain strategy of the Federal Government and the crypto-custody law in Germany, which is active from 2020 onwards and recognizes crypto assets as financial instruments, can already be considered very progressive and could become the basis for a comprehensive regulation in Europe.
Regulatory institutions lack the necessary speed of implementation
Unfortunately, the initial and commendable enthusiasm of the German federal government in implementing the blockchain strategy has come to halt. This makes it even more welcome that the Ministry of Finance and the Ministry of Economics have now presented a draft bill. This bill proposes to remove the security from its original certificate ('dematerialisation'), to enable self-registers for digital securities and thus to stimulate competition among the providers and to consider a general representation of securities on the blockchain as legally compliant. These innovations enable Germany to create a capital market 2.0. In order to expand the significant lead over the USA and China, the law should be passed in a timely manner.
Operating companies are already shaping a distributed ledger and blockchain-based future
Despite the lack of a regulatory framework up to now, startups are already shaping the future of distributed ledger and blockchain technology together with major players. Daimler, for example, placed a blockchain-based promissory note loan of EUR 100 million via LBBW. Bankhaus Scheich, the securities specialist from Frankfurt, went one step further: it issued DAX shares as certificate-like, digital securities ('asset-linked tokens').
The digitalisation of trading is also in full progress: the Stuttgart stock exchange, for example, is with its Digital Exchange working on a trading platform to make digital securities accessible to the secondary market. Infrastructure providers for tokenisation and secondary markets are thus creating a completely digital and securities-agnostic capital market 2.0.
The most important steps for the European ecosystem to become a leader in DLT and Blockchain
In order not to lose touch with China and the USA, regulatory institutions in Germany and Europe must take action now. The most important factor here is speed, with which the following points must be implemented:
1. Standardised Crypto Assets regulations for Europe:
In order to create a uniform internal market for Crypto Assets, it is important not only to implement EU directives, see 5th EU Money Laundering Directive, but also to enforce a comprehensive EU regulation. The topic is clarified by a statement of Patrick Hansen from the association Bitkom e.V.: 'An EU directive leads to a patchwork quilt due to the respective different implementation in the member states, which ultimately leads to uncertainty among companies and consumers'.
2. Development of a European Central Bank Digital Currency ('CBDC')
To exploit the full potential behind DLT applications, the Euro-on-Chain is needed. This is necessary to achieve full automation of processes, such as delivery vs. payment (DvP) transactions in securities trading or the automated payment and settlement of loading procedures for e-cars. At the moment, the only options available for exploiting the full potential of real-time DVP transactions are crypto-currencies, stablecoins, e-money-on-chain and, soon, perhaps Facebook's crypto-currency Libra. However, these are only suitable to a limited extent, since - with the exception of e-money concepts such as cash-on-ledger - they are crypto-currencies that only meet the requirements of institutional market participants to a certain extent. Since other countries such as China are already planning to introduce a CBDC, Europe must act quickly.
3. Targeted investments in the Distributed ledger start-up ecosystem
One thing is clear: without the provision of capital there will be no European Facebook, Amazon or Tencent. That is why state investment funds should invest more heavily, specifically in promising early-stage start-ups and also make it easier for them to access promotional loans. This would enable them to show a certain growth rate and make them attractive to large international VCs and investment funds.
4. Establishing industrial standards
In order for users to be able to rely on the high quality of DLT applications while using and also to be able to introduce certain regulatory standards, it is essential for the DLT and blockchain industry to establish industry standards. There are active associations on a European level, such as the International Token Standardisation Association ('ITSA') or the International Association of Trusted Blockchain Applications ('INATBA'), which promote industry standards and encourage the exchange between established and new market participants, and regulatory authorities.
5. Creating a space for regulatory sandboxes
The European member states should also create less regulated experimental space for innovative DLT/blockchain applications, which are available to resident companies. This would particularly encourage innovation in the currently highly regulated financial industry.
What can the Ecosystem do?
Of course, the state does not take appropriate measures of its own accord. That is why we at Cashlink specifically call upon the German and European DLT and blockchain ecosystem to actively participate in associations such as Bitkom, ITSA and INATBA. Furthermore, the blockchain ecosystem must intensify the exchange with politics and regulatory institutions. The numerous advantages of a DLT-based financial infrastructure should be made clear. In this way, we can jointly create a new Europe that will not be dependent on the USA, China or other countries for DLT and blockchain applications in the future. The entire society can benefit from a pioneering role of Germany in this new technology.