Europe’s Third Way is Web3

Why the EU Should Embrace Crypto

This article first appeared on the Stanford Law School Blog on November 12th 2021.

Between the alleged Chinese techno-authoritarianism and the US model of what Harvard Professor Shoshana Zuboff coined as surveillance capitalism (i.e., private tech giants accumulating and using personal data for profit), the European Union (EU) has been striving for a “third way” in technology and economic policy for years. Despite numerous policy proposals and political speeches, the search for greater digital sovereignty remains somewhat vague and unclear. Plus, in view of the outcomes of recent policies (e.g., GDPR) and the current status of European tech companies, it is safe to say that whatever the current “third way” model is, this strategy is failing. Instead of catching up economically, Europe is falling more and more behind.

In this article, I want to outline why crypto and Web3 offer the “third-way” path the EU has long sought. Not only do Web3 values perfectly align with the sought-after notion of digital sovereignty, but crypto would also make the EU more financially independent from the US and offer a unique economic opportunity to revive its struggling economy in the Web2 era. Furthermore, I argue that there are several geopolitical reasons why Europe, compared to the leading global superpowers US or China, has the greatest potential upside from massively adopting and supporting Web3. 

My primary argument is threefold. For those interested in learning more about the upcoming rules for crypto-asset companies in Europe (EU Markets in Crypto-Assets Regulation – MiCA), you can find an overview of its rules and implications here.

1. Web3 is the EU’s most promising path to digital sovereignty

The topic of digital sovereignty underpins every single digital policy proposal in the EU. It is the common theme of the GDPR, the Digital Markets Act, the Digital Services Act, and many more political initiatives. According to Angela Merkel, “digital sovereignty” describes the ability of both individuals and society to shape digital transformation. She underlines that the commitment to a shared, free, open, and secure global internet is in fact an expression of digital sovereignty, and that people must be involved and have control over their data. The core concept of digital sovereignty is the self-determined control by the individual in opposition to the concentration of power, be it by governments or companies.

Web3 is the perfect vehicle towards that end. In Web3, ownership and control of data can be decentralized. Users and builders (e.g., of social networks) can own pieces of internet services by owning tokens, both non-fungible (NFTs) and fungible. This fixes the main problem of centralized networks, where the value is accumulated by one company, and where incentives between network participants (e.g., users, content creators, builders) are not aligned. 

In Web3, users can shape the internet platforms they use through governance and governance tokens. More importantly, they will be able to benefit economically from the value they create on these platforms.

While content creators are currently only rewarded with hearts and likes on Twitter and elsewhere, they will get financially rewarded through tokens in Web3. And lastly, users and creators will always be able to opt-out of centralized services. Unlike Twitter handles and hearts, tokens (e.g., NFTs) are linked to a public blockchain address and not locked into a single platform. This will empower builders and creators of Web3 services to be more digitally sovereign.

Up until now, the EU has worked towards the goal of digital sovereignty by exercising its regulatory power. It introduced several legislative proposals forcing internet companies to comply with regulatory requirements with regards to data privacy or content management. Regulations like the GDPR have had at least some success. Citizens are more aware of their rights, such as the right of access, rectification, erasure, or to data portability. They feel empowered by these rights and more comfortable sharing their data online.

But this strategy has its obvious limitations. While, in theory, users are now perfectly informed by ubiquitous cookie popups, privacy policy consent forms, and terms and conditions, in practice only a tiny percentage actually read those documents. People spend (on average) less than a minute on any given website, and almost no one is prepared to read through a popup for that. This is aggravated by the bad and confusing design those cookie banners are purposely created with. 

The outcome of these regulations is an increasingly user-unfriendly internet in the EU. Theoretically empowered users are annoyed by it, while companies spend millions in order to come up with new workarounds to get the users’ consent.

GDPR and related legislation undoubtedly have some benefits with regard to digital sovereignty, but the overall results are rather frustrating and limited. Users will continue to increasingly use internet services and share their private data—no cookie pop-ups will prevent them from doing so. 

In the same way that copyright infringements and piracy were not heavily reduced due to regulation, but rather thanks to the emergence of technological alternatives (streaming giants like Netflix or Spotify), I believe the most effective strategy towards digital sovereignty is the active adoption of an alternative internet architecture, with these values built in (by design) to its core.

2. Crypto will make the EU financially independent from the US

The adoption of crypto will not only serve the EU’s ambition of digital sovereignty but also free it from the dollar’s dominance and the US hegemony over the global financial system.

Let’s face it—the US is dominating the global financial system. The dollar denominates close to half of all cross-border activity, as well as large parts of securities and derivatives settlements and foreign exchange trades. It has by far the deepest and most liquid capital markets. It is home to the biggest global payments giants in terms of international reach and acceptance—Paypal, VISA, and Mastercard—and has significant influence over SWIFT, the global messaging network used for international payments.

The dollar gives the US leverage. No single EU bank or company can afford to lose access to the US payment system.

This became crystal-clear to everyone when the EU’s efforts to work around former President Donald Trump’s Iran sanctions failed completely. Iranian banks and financial institutions were cut off from the US-Dollar based payment system, and despite a strong political determination by European politicians, the EU had no way of bypassing the US sanctions. Alternative payment vehicles like INSTEX saw little to no adoption. The risk of being cut off from the US Dollar and USD-denominated payment systems proved to be too high to European banks and companies.

Crypto can reduce the US-dominance over the global financial system. It is, by definition, free from national interests and political manipulation. It is an open, transparent, decentralized and censorship-free financial infrastructure where payments, money and capital markets can be built on top by anyone and used by everyone. The greater the adoption of crypto, the more global finance will be independent of political interference. 

There is no doubt the US will be reluctant to give up its leverage over the current financial system. Crypto and Web3 represent one of the biggest financial, economic and geopolitical chances for Europe to step in and lead the way in building and pioneering the future of global finance on crypto rails. Europe’s “third way” would oppose both the current politicized and USD-dominated system, as well as the Chinese response to the status quo: a CBDC as a potential technological surveillance tool (possibly) under full political control. Instead, promoting a decentralized, non-political, free, and open payment system based on crypto will not only be financially and politically advantageous, but also attract talent, capital, and companies from around the world.

This article focuses on “why” Europe should embrace crypto and not on “how” (which will be addressed in a future article). Nevertheless, there is one thing worth stressing here: stablecoins will play a major role in the future of payments. The current stablecoin market is already heavily dominated by USD-stablecoins (over 99%). This brings not only FX-risks for European consumers (e.g., using DeFi), but more importantly, leads once again to significant political influence from the US government, and similarly significant amounts of economic value creation being denominated in USD. 

If crypto “eats the world,” the power of governments and central banks (e.g., the effectiveness of their monetary policy) will largely depend on the relative importance and adoption of stablecoins denominated in their currency. For example, if in a future European crypto-economy, all activity (financial & economic) is denominated in USD-stablecoins (meaning people and businesses lend, borrow and pay everything in USD-stablecoins), the effectiveness of the monetary policy by the ECB—for example raising the EURO interest rates—will approach zero. 

Given this, perhaps the EU, especially the ECB, should aim to support EURO-based stablecoins instead of impeding them.

3. Web3 is Europe’s single biggest opportunity to revive economically and technologically

The EU may well be the world’s leading tech regulator, but the old continent is undeniably not succeeding when it comes to building and scaling technology companies. Of the world’s 20 largest tech giants, not a single one is European. While Europe accounted for 41 of the 100 biggest companies by market cap in 2000, this number is down to 15 in 2021. Europe’s share in the value of global equity markets has almost halved over the past 20 years. Looking at the market cap of venture-backed unicorns, the US and China are outpacing Europe by 3-5x.

Clearly, Europe has fallen behind economically in the Web2 era. The reasons for that, amongst others (e.g., the size of the domestic market, capital markets, universities, R&D, mentality, language), are manyfold and not at the center of this article. Suffice to say that the associated loss of value creation and talent (brain drain) have been extremely painful for the European economy. There are now two ways to react to the current status quo of European tech.

The first one seems to be currently favored by government officials and corporate leaders. It comprises regulatory actions (e.g., Digital Markets Act), protectionist measures (e.g., Chips Act), or large-scale government-initiated tech projects (e.g., GAIA-X) with the goal of reinforcing the competitiveness of established European players.

The second way entails massive investment and facilitation of new technologies and startup businesses that might disrupt the current landscape and become major economic forces themselves.

In all likelihood, the odds of succeeding are higher with the latter model. Additionally, I think that Europe might have some competitive advantage with regards to crypto and should put Web3 at the center of its economic comeback strategy. Why?

Europe is currently the largest crypto economy with over $1T in transactions. 

Europe might not have the largest crypto businesses and no publicly traded company like Coinbase, but it does have the most active population and individuals. According to Chainalysis, Europe accounted for 25% of global crypto activity between July 2020 and June 2021, with a sharp uptick in transaction volume across all crypto sub-categories, especially decentralized finance. Also, the EU has the highest number of Bitcoin and Ethereum nodes in the world, trumping even the USA or China.

Admittedly, there is still a long road ahead and most of the innovation in crypto and Web3 is currently being created by US businesses. Nevertheless, having the crypto-savviest population is a good precondition for the future growth and adoption of this industry.

The EU has the most advanced and harmonized regulation around the corner

The next phase of large-scale crypto adoption will be institutional. And institutions need legal certainty and regulatory clarity. 

The Markets in Crypto-Assets Regulation (MiCA) that was adopted in April 2024 will create a fully harmonized and binding regulatory framework in Europe. Agreed, it has its flaws, but at least offers transparent guidelines for both issuers and service providers with clear supervisory responsibilities and regimes.

In the meantime, financial regulation in the US—and specifically crypto regulation— is a mess. Regulation varies amongst states, lacks clear supervisory regimes, and offers great potential for conflicting requirements from different regulatory bodies or conflicting laws at state and federal level. Coinbase, for instance, has 50 different state regulators for money transmission licenses and 50 state regulators for lending licenses on top of the federal regulators FINCEN, SEC, CFTC, IRS, Treasury and OFAC.

US regulators such as the new SEC-chair Gary Gensler have hardened their tone towards crypto and signaled tougher regulatory and supervisory action. The lack of regulatory clarity is accompanied by regulation by enforcement.

Needless to say, but the outright ban of crypto in China takes China out of the equation here and represents a huge opportunity for the rest of the world.

If the EU is able to get MiCA right, Europe has the chance to attract talent, companies, and capital from around the world and spearhead the next phase of institutional crypto adoption.

Europe has by far the biggest upside and the lowest cost of disruption

This might be the most important strategic and geopolitical advantage with regard to Web3 adoption compared to the USA and China. Web3 heralds an enormous financial, economic, political, and societal revolution. It will not come without costs. Financial institutions, Web2 tech companies, and political institutions will all face great disruptions.

The USA has Wall Street, Silicon Valley, and the global reserve currency. The cost of disruption to these institutions is tremendous, which is why I expect the resistance against crypto to be fierce. The more crypto will grow, the stronger this resistance will come to the fore. Web3 challenges the economic, financial, and political powerhouses and foundations of the current USA.

China on the other hand has what some analysts have called a techno-authoritarian surveillance state. The adoption of crypto in China would imply nothing less than an extreme loss of power for the Chinese government. That is likely why the CCP is fighting and will continue to fight crypto by all means possible.

No doubt, the evolution towards Web3 will come with its costs for European companies as well. But let’s be honest—European banks have been struggling existentially since 2008, Europe has not created a single tech giant in the Web2 era (perhaps with the exception of Spotify), and the Euro as currency/ the Eurozone as monetary union are under attack from around the continent. Long-term, the unique EURO-architecture of a common monetary policy, but no fiscal union (national deficits, debts, budgets etc.) stands on shaky legs.

This isn’t to say that the EU should give up its banks, Web2 companies, and currency. Rather, it is an assessment that the EU has a desperate need for innovation and that a head-on Web3 strategy might prove way less painful than the continuation of the current status quo. 

Compared to the US or China, Europe has by far the lowest cost of disruption and the biggest potential upside. The cost-benefit-analysis with regards to Web3 seems clear. The outlined benefits (digital sovereignty, financial independence, economic opportunity) will substantially outweigh the costs. 

The EU had better not miss that unique strategic and geopolitical opportunity.

 Conclusion

In this article, I outlined several financial, economic, and geopolitical reasons why Europe should embrace Web3. Web3 might not only allow the EU to finally achieve digital sovereignty and financial independence but also represents the single biggest opportunity to revive its struggling economy since the Web2 era. 

Additionally, compared to the USA or China, the EU has several geopolitical advantages (crypto-savvy population, regulation, lower disruption costs) that allow it to benefit the most from a head-on Web3 strategy. This is why I think that the EU has a real shot at playing a major global role in Web3 and why we should do everything in our power to make it one of the key political and economic priorities in the decade ahead.

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Any views and opinions expressed are strictly personal and do not necessarily represent the views of my employer. This blog post does not constitute legal or financial advice.

Twitter: @paddi_hansen 

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