<p><span style="font-weight: 400;">As crypto's last bear market was drawing to a close, 1kx, a crypto fund that’s backed Matter Labs, Gnosis and Qredo, held an invite-only crypto summit as part of 2019’s Berlin Blockchain Week.</span></p> <p><span style="font-weight: 400;">1kx founding partner Lasse Clausen extended an invitation to most of the venture capitalists he knew, aiming to school them on blockchain technology. Only one showed up.</span></p> <p><span style="font-weight: 400;">“European VCs completely slept on blockchain,” says Clausen, “That meant most VCs didn’t have the mandate from their limited partnership agreement to buy tokens”</span></p> <p><span style="font-weight: 400;">Kicked into gear by last year’s bull market, European VCs are finally beginning to roll out crypto funds and taste token exposure as the size of Europe’s blockchain scene continues to swell.</span></p> <p><a href="https://www.theblock.co/post/160243/europe-dominates-blockchain-venture-deals-in-q2-as-growth-drops-in-asia-and-the-us"><span style="font-weight: 400;">Europe surpassed Asia</span></a><span style="font-weight: 400;"> in the global share of blockchain venture funding raised in the second quarter of this year, jumping by 25% as other regions slumped, according to The Block Research.</span></p> <p><span style="font-weight: 400;">And despite having less capital to hand, Dealroom data show that this year European venture firms are </span><a href="https://app.dealroom.co/transactions.rounds/f/growth_stages/not_mature/rounds/not_GRANT_SPAC%20PRIVATE%20PLACEMENT/tags/not_outside%20tech/technologies/anyof_blockchain/years/anyof_2021?chartDataKey=count&amp;showScale=percentage&amp;showStats=YEAR&amp;sort=-amount&amp;statsType=investor-location"><span style="font-weight: 400;">neck-and-neck with the U.S.</span></a><span style="font-weight: 400;"> in terms of the number of blockchain deals successfully completed.</span></p> <p><span style="font-weight: 400;">The region’s web3 native venture firms have been gaining ground too. Late last year, Greenfield One closed </span><a href="https://www.siliconrepublic.com/start-ups/greenfield-one-crytpo-fund-europe"><span style="font-weight: 400;">a $160 million crypto fund</span></a><span style="font-weight: 400;"> with Dutch firm Maven 11’s</span> <a href="https://www.coindesk.com/business/2021/12/02/crypto-investment-firm-maven-11-capital-closes-120m-fund/"><span style="font-weight: 400;">$120 million fund</span></a><span style="font-weight: 400;"> following suit.</span></p> <p><span style="font-weight: 400;">In April, The Block reported that Fabric Ventures is set to</span> <a href="https://www.theblock.co/post/141454/fabric-vc-looks-to-close-two-web3-funds-worth-245-million"><span style="font-weight: 400;">close two web3 funds</span></a><span style="font-weight: 400;"> worth $245 million. And last month, Fasanara Capital, a London-based investment firm that launched a liquid digital asset fund in 2019, </span><span style="font-weight: 400;">closed </span><a href="https://www.finextra.com/pressarticle/94219/fasanara-capital-launches-350m-fintech-and-crypto-vc-fund"><span style="font-weight: 400;">a $350 million</span></a><span style="font-weight: 400;"> fintech and crypto VC fund.</span></p> <p><span style="font-weight: 400;">The advances have come even as Europe’s limited partners — as the backers of venture firms are known — have stuck with their notoriously cautious approach.</span></p> <p><span style="font-weight: 400;">“We talk to family offices and investors [in Europe] and rarely do they have private equity or VC in their portfolio — let alone crypto,” says Nicolas Priem, managing director of Tioga Capital, a Brussels-based web3 venture capital firm that launched its </span><a href="https://tech.eu/2021/12/17/blockchain-focused-vc-firm-tioga-capital-announces-final-close-at-70-million"><span style="font-weight: 400;">first $70 million fund in December</span></a><span style="font-weight: 400;">.</span></p> <p><span style="font-weight: 400;">But LP hesitancy hasn’t stopped Germany’s Cherry Ventures from </span><a href="https://www.theblock.co/post/134525/cherry-crypto"><span style="font-weight: 400;">launching</span><span style="font-weight: 400;"> a $34 million</span></a><span style="font-weight: 400;"> fund in February. And over the summer, Aglaé Ventures, a firm backed by LVMH CEO Bernard Arnault, set up a </span><a href="https://www.theblock.co/post/161177/aglae-ventures-web3-fund"><span style="font-weight: 400;">€100 million ($98 million) web3 fund</span></a><span style="font-weight: 400;"> that aims to invest in tokens and equity, according to people familiar with the matter.</span></p> <p><span style="font-weight: 400;">Successful capital raises from American LPs also allow European firms to bypass anxious Europe-based backers.</span></p> <p><span style="font-weight: 400;">“Our LPs are very interested in crypto as an asset class,” says Ophelia Brown, founding partner of London’s Blossom Capital, which earmarked a third of </span><a href="https://www.theblock.co/post/130454/blossom-capital-third-fund-crypto"><span style="font-weight: 400;">its latest $431 million fund</span></a><span style="font-weight: 400;"> for tokens and NFTs such as Bored Apes and CryptoPunks. “75% of our investors come from the U.S. so most of our LPs already have exposure.”</span></p> <h2><b>A problem as old as gold</b></h2> <p><span style="font-weight: 400;">In some jurisdictions, however, venture firms still face a problem as old as money itself: custody.</span></p> <p><span style="font-weight: 400;">“There are very few solutions not only in France but also in the EU that are in the legal and business capacity to open an account for tokens,” says Kramer Levin lawyer Hubert de Vauplane</span><span style="font-weight: 400;">,</span><span style="font-weight: 400;"> who co-leads the </span><span style="font-weight: 400;">firm’s </span><span style="font-weight: 400;">alternative investment management practice in Paris. </span></p> <p><span style="font-weight: 400;">Most banks refuse "as they consider it too risky in terms of anti-money laundering,” continues de Vauplane. “Not only are they refusing but usually when they see one of their clients doing a [token] capital raising, they close their account.”</span></p> <p><span style="font-weight: 400;">The custody crunch is a particular pain for French VCs, since under European Union legislation for alternative investment funds, they are allowed to have just 20% exposure to tokens.</span></p> <p><span style="font-weight: 400;">It’s a problem that U.S. firms actively looking at European crypto companies don’t face. Previously shackled by their own 20% limit on token allocation, firms such as</span><span style="font-weight: 400;"> Andreessen Horowitz</span><span style="font-weight: 400;"> and Sequoia legally restructured to registered investment advisors. </span></p> <p><span style="font-weight: 400;">Yet there is a regulatory workaround. The </span><a href="https://www.theblock.co/post/150775/ledger-cathay-innovation-crypto-vc-fund-110-million"><span style="font-weight: 400;">€100 million Ledger Cathay Fund</span></a><span style="font-weight: 400;"> was set up as an unregulated special purpose vehicle, meaning they don’t need to have an EU custodian, says de Vauplane.</span></p> <p><span style="font-weight: 400;">France’s issue could also soon be remedied. Societé Generale, the country’s third-largest bank, is still plowing ahead with its</span> <a href="https://www.sgforge.com/metaco-partnership-institutional-digital-assets-capabilities/"><span style="font-weight: 400;">digital asset offering</span></a><span style="font-weight: 400;">. In other jurisdictions such as Germany there are four crypto custodian providers authorized by regulators.</span></p> <p><span style="font-weight: 400;">The UK has had its web3 venture scene hampered by slow approval from regulators wary of crypto, says Tom Grogan, co-lead of the blockchain group at law firm Mischcon De Reya.</span></p> <p><span style="font-weight: 400;">“It hasn’t been viable for a long time to launch any kind of crypto business from the UK,” he says. “That’s why you get some complex structuring around somewhere like Guernsey or Gibraltar.”</span></p> <h2><b>A crypto-friendly culture?</b></h2> <p><span style="font-weight: 400;">Despite these challenges, most of the investors The Block spoke to say the European crypto venture scene is set to flourish in the coming years.</span></p> <p><span style="font-weight: 400;">Blossom’s Brown says that Europe’s crypto scene has “really come alive” in recent years. She claims that there’s no systemic reason why we don’t see billion-dollar crypto funds in Europe</span><span style="font-weight: 400;">.</span> <span style="font-weight: 400;">Indeed, she thinks </span><span style="font-weight: 400;">Europe</span><span style="font-weight: 400;">’s crypto investors are</span><span style="font-weight: 400;"> gradually catching up to </span><span style="font-weight: 400;">the U</span><span style="font-weight: 400;">.</span><span style="font-weight: 400;">S</span><span style="font-weight: 400;">.</span></p> <p><span style="font-weight: 400;">It’s true the lack of LP-approved cash toward token warrants has resulted in mostly exchanges and custodians reaping the big-buck raises and valuations so far.</span></p> <p><span style="font-weight: 400;">But as these startups mature in the region, so will the funds that back them</span><span style="font-weight: 400;">,</span><span style="font-weight: 400;"> says Tioga’s Priem. </span><span style="font-weight: 400;">He believes that soon early-stage web3 startups in Europe will start to raise Series C and D rounds, which will warrant larger dedicated crypto funds.</span></p> <p><span style="font-weight: 400;">Europe’s firms are still continuing to raise amid the downturn and have raised </span><a href="https://dealroom.co/uploaded/2022/08/DealroomSVBUK-H1-2022-European-Pulse-Check.pdf?x84064"><span style="font-weight: 400;">a record $20.1 billion</span></a><span style="font-weight: 400;"> in the first half of this year. </span></p> <p><span style="font-weight: 400;">UK firm Northzone, which raised a</span> <a href="https://www.theblock.co/post/169381/uk-venture-firm-northzone-eyes-web3-startups-with-new-e1-billion-fund"><span style="font-weight: 400;">€1 billion fund</span></a><span style="font-weight: 400;"> fund last month, said in an interview with The Block that it would be open to investing in DAOs and tokens.</span></p> <p><span style="font-weight: 400;">There are also other crypto funds set to be announced. Swisscom Ventures, the venture fund of a partly publicly owned telecommunications company, is set to debut a web3 fund next year, according to an email from the firm’s spokesperson.</span></p> <p><span style="font-weight: 400;">Custody concerns and nervous LPs might hamper the speed of Europe’s venture firms, but Europe out-competes the U.S. in regulatory clarity, says Priem.</span></p> <p><span style="font-weight: 400;">This week, a committee of the European Parliament </span><a href="https://www.theblock.co/post/175842/eus-landmark-digital-asset-legislation-passes-committee-vote-in-european-parliament"><span style="font-weight: 400;">passed</span></a><span style="font-weight: 400;"> its Markets in Crypto-Assets (MiCA) regulation, which will aim to bring digital assets under the wing of institutional regulation across the bloc. Following another vote, this could become law in two years. </span></p> <p><span style="font-weight: 400;">“I think we’re ahead in Europe versus the U</span><span style="font-weight: 400;">.</span><span style="font-weight: 400;">S</span><span style="font-weight: 400;">. </span><span style="font-weight: 400;">with MiCA coming to the market in 2024 but in the U.S., it’s still state-by-state,” he says. “It’s going to provide clarity for investors and in the coming years, that’s going to be our competitive edge.”</span></p><br /><span class="copyright"><p>© 2023 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.</p> </span>