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European founders who hope to raise money for their business in 2025 are not spoiled for their choice. The number of active VCs in Europe has dropped by 30% over the past two years as the exits are slower and startups prioritize profitability over rapid growth. On top of this, the fact that VC funding in Europe is declining has gone from 34 billion euros in 2022 to about 21 billion euros in 2024.
For entrepreneurs around the world, tokenization is a “backdoor” to fundraising. This allows businesses to avoid VCs. For private companies that can't be made public, those keen to avoid adding costs, they also promise to unlock IPO-like funds from a pool of diverse investors, like rocks.
However, there are pitfalls. European regulations are as unprogressive as possible, and this is hindering the entire funding system. Tokenization is not a cryptographic trend. Technology falls under securities regulations. This claims that the stock token is essentially a digital share recorded on the blockchain. That doesn't mean that tokenization is off-table for European founders. As we see, entrepreneurs can take advantage of foreign jurisdictions like the United States, where tokenization is a major trend. However, in any case, the European economy is expected to earn a great deal of time from adjusting regulations to the needs of its founders.
Europe vs. World: Benchmark Battle
Who is leading the way tokenization? The US, Singapore, several Menaian countries, the British Virgin Islands, Switzerland and Liechtenstein are large players. A bigger point to understand is how these countries have strengthened their games compared to most of Europe.
These countries have tacks that are quite different from the continent, so let's check out three main reasons why they will benefit. First: Low barriers to entries for investment. This means that these countries are very well placed in tokenization. Because the small businesses here have the freedom to try their technology and issue equity tokens. This type of token is best suited for most issuers, so the inability to tokenize equity significantly impedes small and medium-sized businesses from adopting tokenization. Local governments also set emissions thresholds to allow entities to operate below established limits without the need for large licensing or brokerage involvement.
Countries also have the advantage of tokenization, as securities provision to foreign investors are exempt from regulations. This means that companies do not need to register prospectuses or obtain a license domestically while operating abroad. Naturally, this is a very attractive opportunity for founders as it unlocks access to a very large pool of investors.
The last reason that allows these countries to take the lead in tokenization is the highly useful corporate law. This law allows the transfer of shares tokens without physically notarizing changes to ownership.
This sheds light on the reasons why the aforementioned countries are strong in tokenization. Against this background, Europe is unfortunately behind. Importantly, European corporate laws raise obstacles and often prohibit private companies from issuing easily transferable stock securities. Companies need to register as public companies, work with securities depository agencies, and provide physical notary certificates (silly given the context of blockchain).
Europe is also restrained by the lack of uniform thresholds on the scale of the problem. For example, countries such as Austria and Belgium operate at a threshold of 5 million euros, while Germany and France set it at 8 million euros. This will greatly fragment the investment environment and cross-border investments across Europe.
European diagnosis
There is no doubt that the prospect of regulation of tokenization in Europe is challenging. It is also set to be more as the new market for Crypto Asset Regulation (MICA) regulations leave RWA asset classes outside of their scope and instead focuses on encryption and steady-state circulation across Europe.
However, despite these challenges, the European market is not invested in most sectors. According to the World Economic Forum, between 2015 and 2022, European companies did not invest 700 billion euros in high-tech each year compared to the US, whilst achieving lower returns in invested capital. This means there are significant investment opportunities on the continent for founders and investors.
However, investment options for Europeans are limited. They cannot fund private companies. There is a lack of aggressive IPO activity in Europe, and traditional stock markets do not match the risk and return profiles of many investors. As a result, many European founders are leaning towards nurturing from foreign investors. Tokenization is more suitable for them. And they would be better off doing it in a foreign jurisdiction. Therefore, many European issuers and investors are hesitant to go abroad, but many come to mind and enjoy the benefits.
It can be seen that Europe is lagging behind tokenization. Clearly, European corporate laws need to be improved in favour of blockchain tokenization and securities. This will allow direct investment in private companies across Europe, and strengthened regulations will launch investment activities across the continent. So, why wait when faced with such a possibility that will boost the European economy?
