Washington must act now to save the American crypto industry—time is running out.
The global battle for crypto talent and investment is shifting away from the U.S., favoring more welcoming shores. Fortunately, it’s not too late—though it will be soon—for the U.S. to regain its footing, find a way to embrace crypto, and retake the lead in the race for developer talent and venture capital investment.
Right now, the U.S. is struggling to create a legal regime that can foster crypto innovation, while also safeguarding consumers and financial stability. Since the collapse of FTX, the Securities and Exchange Commission has taken an antagonistic view of the crypto industry, doubling down on enforcement actions and threatening the existence of publicly traded companies. The Biden administration is also targeting crypto, singling out the industry for a proposed 30% tax on energy use by crypto-mining operations. The mood is souring in the U.S., and many crypto entrepreneurs are hoping for a change in political winds following the 2024 elections.
In contrast, the EU has taken a more proactive approach, seeking to create a regulatory environment that fosters growth and technological advancements. The recently ratified Markets in Crypto Assets, or MiCA, gives the European crypto industry a workable licensing regime. It’s not perfect, and it doesn’t address NFTs or DeFi, but it’s at least a batch of laws that spells out the rules of the road so EU companies and entrepreneurs don’t need to guess how the bloc intends to deal with their industry.
The U.S. is now seeing a migration of developer talent to more crypto-friendly jurisdictions. According to the venture capital firm Electric Capital, the U.S. has lost 2% of its share of the blockchain developer market per year for the last five years—sinking to 29% market share. The share of developers in the EU is now also 29%—parity for the first time. Part of this reflects the increasingly global nature of the crypto industry, which permits talented developers to live wherever they like. But it’s also undeniable that the regulatory situation in the U.S. is driving this shift.
The perceived regulatory advantages in the EU have also attracted a surge of VC investment in the region’s crypto startups. Venture capitalists are actively seeking opportunities in countries with settled regulatory frameworks. In the first quarter of 2023, the EU and the U.K. surged past the U.S. in terms of total VC investment in crypto. This shift coincides with the passage of the MiCA framework, giving the EU two feathers in its crypto cap. VC funding is, of course, trend-driven, and this recent shift is not necessarily a marker of a permanent change in investment thesis.
But while the state of affairs in the U.S. is grim right now, all is not lost.
The next 12 to 18 months will determine if the EU can cement its lead in crypto VC investment and in the battle for developer talent. During this period, EU bureaucrats will work out how to implement the MiCA reforms, and research will continue on how to regulate NFTs and DeFi.
That time period also coincides with the run up to the 2024 elections in the U.S., a time when many regulatory agency heads step down or are reshuffled within the government.
It’s possible that these and other political developments in the U.S. will lead the federal government to view crypto in a more enlightened fashion. What is clear now is that the alarm bells are ringing for crypto’s future in the U.S. Other countries have seized this opportunity as America clamps down, with potential long-term consequences industry across the globe.
Kristin Smith is executive director of the Blockchain Association. The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.