Decentralized continent, the true face of European Web3

When we shift our focus away from the crypto frenzy in the US, Japan, South Korea, and the Middle East and turn to this relatively quiet world, a question arises: What exactly is Europe's unique position in the crypto world landscape?

Author: Ada, TechFlow TechFlow

A-Feng, who has been an entrepreneur in the European Web3 industry for five years, recently returned to Beijing. Over the years, he has traveled between Germany and France, organized numerous industry exchange meetings, and met a group of Web3 practitioners who are also starting businesses in Europe.

When discussing the European Web3 market, A-Feng's assessment is straightforward: it's fertile ground for idealists. Pure idealism hasn't given Europe an absolute advantage in the global encryption landscape, but it hasn't shaken their faith in Web3 idealism either.

From the “Crypto Valley” in Zug, Switzerland, to the Station F incubator in Paris; from Berlin Blockchain Week to the DeFi innovation community in Amsterdam, this ancient continent has been writing its own crypto narrative, completely different from those of the United States and Asia.

When we shift our focus away from the crypto frenzy in the US, Japan, South Korea, and the Middle East and turn to this relatively quiet world, a question arises: What exactly is Europe's unique position in the crypto world landscape?

Decentralized Mainland

If you had to describe Europe's crypto industry in one sentence, Ah Feng would unhesitatingly give four words: "decentralized".

This decentralization, on the one hand, refers to not blindly believing in a single central figure.

In the United States, many people were drawn into Web3 by certain star entrepreneurs and opinion leaders, while in Europe, more people chose to enter the field based on their own beliefs in privacy, open protocols, and free markets. Their motivations are relatively simple; many entrepreneurs' primary goal is not even to make money, but rather "to feel that this is worth doing."

On the other hand, Europe does not have an absolute geographical center. Each country and city has its own character, which together form a fragmented yet layered Web3 map.

First is Germany.

Germany is a country without megacities, and its industries are highly dispersed. Many world-class companies are hidden in ordinary small towns. Its largest city, Berlin, has a population of just over three million, equivalent to an average prefecture-level city in China.

The long winters and somewhat introverted social atmosphere make this place feel like an engineer's paradise. Germans prefer to stay indoors and delve into technology, resulting in strong research and development capabilities. If you attend a conference in Berlin, you'll easily notice that there are always more technical personnel than business people.

“Few Germans choose to go into business; most Germans are in research or development,” said Mike, who works on a wallet project in Germany.

France, on the other hand, has a completely different style.

In France, a large portion of those working in the crypto industry come from traditional fast-moving consumer goods, fashion, and luxury goods sectors. During the peak of NFT popularity, many elites from marketing, branding, and business departments at large companies like L'Oréal and LV were attracted to the field. They already possess strong social and market development skills, and naturally, within Web3, they tend to take on business roles, responsible for negotiating partnerships, promoting projects, building communities, and engaging in market development.

The third country is Switzerland, whose key word is "neutrality".

Switzerland boasts a clear and welcoming compliance framework, and its tax policies are relatively lenient towards cryptocurrencies, making it ideal for non-profit organizations and research institutions. Web3 foundations such as the Ethereum Foundation and the Solana Foundation have chosen to locate in Switzerland precisely because of the stable and predictable institutional environment it offers.

Finally, there's Lisbon, Portugal.

Lisbon is famous in the Web3 community largely because of its people.

Portugal offers digital nomad visas and golden visas, and its comfortable climate and low cost of living have attracted many Americans who have already made money in the Web3 industry to relocate there.

Many of them no longer have projects that require daily management, but they have made enough money, so they simply settle in Lisbon, enjoying a relaxed retirement while participating in some investments, gatherings, and community activities.

Germany's technological prowess, France's business acumen, Switzerland's compliance advantages, and Lisbon's digital nomads together form the fragmented puzzle of Europe's Web3 industry.

Crypto Old Money Wind

When talking about Web3, many people's first reaction is the United States, Hong Kong, and Singapore. But in Afeng's opinion, Europeans are no less sensitive to and have a greater need for decentralization and privacy than these regions .

Half of the top ten TVL projects are from Europe. This is partly due to the extension of the engineering culture, and partly due to Europeans' willingness to support new things and new fields, even if they don't see particularly large returns in the short term.

“In the past, the test of whether a project was good or not was whether it could be listed on Binance. But now things have changed. We will examine whether the project has positive cash flow and whether people will use the product. In Europe, once a project finds its target audience, the competition is not as fierce as in the United States and Asia. Europeans will treat it as a good business and will not engage in a ‘get rich quick’ situation.”

Ah Feng said, "In addition, although Europeans don't have a strong foundation in mathematics, they are very willing to spend time researching, which leads to the emergence of many small but excellent teams that earn a lot of money."

In terms of overall penetration, Web3 remains a niche industry in Europe. Here, the industry share is only about 6%, meaning that only 6 out of 100 people use cryptocurrency. This percentage is significantly lower than in the US and Asia, and the user age group is concentrated between 25 and 40 years old.

Unlike the high-frequency, high-leverage trading habits in South Korea and some other Asian markets, most Europeans do not stake their entire fortune on the cryptocurrency market. For them, cryptocurrency is more like an option in asset allocation than a high-stakes gamble.

This is related to Europe's historical experience and wealth structure. Many Europeans have already experienced different forms of speculation and are not so eager for overnight riches.

Among wealthy individuals, much of their wealth comes from long-term family accumulation. They are more likely to accept stories like "saving a Bitcoin to leave to future generations" rather than believing in achieving upward social mobility by All In everything on a cryptocurrency that could yield hundreds or thousands of times the return.

Another objective constraint is that in Europe, most compliant exchanges do not offer high leverage, and their contract and leverage-related businesses are very limited. This system design itself reduces the possibility of All In all in.

Of course, this doesn't mean Europeans lack the desire to trade. On the contrary, some interesting behavioral patterns emerge during cyclical shifts: when the market is down, they work and earn money locally in Europe; when the market improves, they travel to countries with lower living costs to trade cryptocurrencies full-time.

“Last year I met an Italian in Switzerland. He works in a restaurant in Switzerland for four months every year, and then flies to Thailand and the Philippines for the remaining eight months, living in each country for four months, trading cryptocurrencies full-time,” A-Feng said.

Stablecoin Craze

As in other parts of the world, stablecoins are widely considered one of the most promising directions in Europe, with almost all European banks researching related solutions. However, the underlying logic for their popularity differs from that in Asia and emerging markets.

The primary reason lies in the payment infrastructure.

The European Union still lacks a truly unified and independent payment and settlement system, relying heavily on US-based systems like Visa and Mastercard on a daily basis. For many Europeans, this means their economic lifeline is permanently connected to networks built by other countries. Therefore, both policymakers and the banking sector are eager to explore a settlement system of their own, and stablecoins and their underlying on-chain clearing networks have naturally become a frequently discussed option.

The second driving force comes from geopolitics and industrial relocation.

Following the outbreak of the Russia-Ukraine war, energy prices and overall manufacturing costs soared, putting immense pressure on traditional European manufacturing industries, leading many factories to relocate to the Asia-Pacific region. In the process of globalization, cross-border trade settlements have become more frequent and complex, making efficient settlements across different currencies and regulatory systems a pressing issue.

Compared with traditional cross-border remittances, on-chain settlement using stablecoins has significant advantages in both speed and cost.

The third change stems from long-term behavioral shifts on the consumer side.

Since the pandemic, many Europeans have become accustomed to online shopping, and sellers on e-commerce platforms often come from all over the world. For such a cross-border, cross-time zone, and cross-currency system to operate smoothly, lighter, lower-fee, and faster payment methods are naturally more popular, thus giving stablecoins an additional layer of practical legitimacy.

However, progress in reality is not easy.

The European banking system is very traditional, with many banks having histories spanning over a century. Neither their internal governance nor their risk appetite are adept at quickly embracing new technologies. Before Trump took office, the entire European financial system held a relatively hostile or indifferent attitude towards cryptocurrencies.

The real shift began after they realized that American capital and large institutions had already invested heavily in the crypto space.

The problem is that many traditional finance professionals have no prior experience in the crypto and know almost nothing about wallets, on-chain interactions, or DeFi protocols. Therefore, when they begin to learn, they often have to seek advice from consulting firms, many of which are themselves traditional.

“Although I see a huge market, I think it might take these traditional Europeans quite a long time to figure it out, depending on whether there will be any external forces pushing it forward,” said Vanessa, a Web3 practitioner who has lived in Europe for many years.

According to Vanessa, metaverse and NFTs, which were very popular in Europe before, have since disappeared. Furthermore, Europeans used to love BTCFi and would spend a lot of time and money supporting BTCFi projects, but later found that these projects didn't generate good cash flow. Collateralizing Bitcoin for a few percent annualized return could lead to many problems, making it safer to hold Bitcoin directly. Therefore, most BTCFi projects lost their popularity.

When asked where the real opportunities for Web3 lie in Europe, Afeng gave a simple answer: "I think Europe has two major advantages. First, it has a population of nearly 600 million, and second, most of these people live in developed countries."

In developing countries, people's average monthly income may only be a few hundred US dollars, while European users' income levels are often 5 to 8 times higher. Similarly, when undertaking projects, the higher the net worth of the target customers, the greater the probability that they are willing to pay for products and services, and the higher the potential returns.

How are taxes collected?

On April 20, 2023, the European Parliament passed the EU's Crypto Asset Market Regulation Act (MiCA) with 517 votes in favor. This is one of the most comprehensive digital asset regulatory frameworks to date, covering the 27 EU member states, as well as Norway, Iceland, and Liechtenstein in the European Economic Area (EEA).

Article 98 of the MiCA, together with the EU's Eighth Directive on Cooperation in Tax Administration (DAC8) and the unique characteristics of each country, constitute a relatively complex but increasingly clear tax system. One common principle is that cryptocurrency transactions are exempt from VAT.

Despite these unified principles, each country retains its own unique tax system. Germany and France are particularly representative in their cryptocurrency compliance processes, making them two of the most discussed cases within the industry.

Germany was the first country in the world to officially recognize the legality of cryptocurrency transactions such as Bitcoin, and its number of Bitcoin and Ethereum nodes is second only to the United States.

In Germany, cryptocurrencies are considered "private property," and taxes are mainly levied on income tax, value-added tax, and specific activity tax.

If you hold cryptocurrency for more than a year before selling it, the profit is exempt from income tax; if you sell it within a year, you will be subject to income tax of up to 45%.

When paying for goods or services with cryptocurrency, if the price of the cryptocurrency increases compared to when it was held, this increase will be considered income and subject to taxation; however, if the holding period exceeds one year, this income may be tax-free.

For activities such as pledging, lending, and airdrops, the German tax authorities require declaration and payment of income tax; while mining is defined as a commercial activity and is subject to business tax.

In France, cryptocurrencies are considered movable property and are subject to high taxes; long-term holding is not tax-exempt.

France's VAT regulations are consistent with Germany's, but a 30% capital gains tax is levied on profits from transactions. If trading cryptocurrencies is considered a professional activity, a business profits tax is applicable, potentially at a higher rate. However, tax liability is only triggered when cryptocurrencies are sold in fiat currency, with profits not exceeding €305 exempt from taxation.

In France, cryptocurrency mining companies are subject to BNC (non-commercial profits) tax at a rate of 45%. Non-commercial miners with annual income below €70,000 may be eligible for certain BNC tax reliefs, but individuals or companies deemed to be engaged in commercial activities are not eligible for such reliefs.

In addition to tax policies, other corresponding policies are also being implemented gradually. In Vanessa's words, this is the best of times: with the advancement of compliance, more people will think about long-term operations and building businesses with stable income, rather than projects that are mainly focused on issuing tokens.

In many people's eyes, the Web3 world in Europe always seems less exciting, lacking the stories of 100x coin miracles and the dramatic emotional fluctuations of price increases and decreases.

However, from another perspective, this land where idealism and institutionalism intertwine is giving birth to a different type of crypto company and participant. They care more about whether people use the product, whether the project can survive, and whether a sustainable business model can be found in a strictly compliant environment.

We may have reason to believe that on this fertile ground of idealism, more unique new crypto species will emerge in the future.

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