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This summer, athletes from around the world will meet in Paris for the Olympic Games. One competition is the pentathlon, in which athletes compete in four distinct contests: swimming, fencing, riding and running and shooting. It’s a test of strength, agility and speed.
Matthew Homer is a VC investor and adviser to founders in the crypto space. He was formerly the first-ever executive deputy superintendent for research and innovation at the New York State Department of Financial Services.
Among financial jurisdictions there’s a similar sort of multidisciplinary competition already underway. In this race, however, jurisdictions are competing for the prize of becoming capital to the next generation of financial services: tokenized finance operating in open and decentralized systems. Like the pentathlon, the winners will demonstrate an ideal blend of strength, agility and speed.
Contestants include established financial hubs like London, New York and Hong Kong, which dominated the pre-digital era. But hungry challengers — E.U. member states, the United Arab Emirates (UAE), Singapore, Bermuda and California — are also in the race.
It’s a remarkable shift from 18 months ago when some doubted crypto’s future. With Team USA (largely) boycotting this financial olympiad, a fresh set of champions has a rare chance to emerge.
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In this competition, there are four distinct contests: regulatory effectiveness, founder depth, market size and capital market strength. As a former crypto regulator responsible for enhancing New York’s regulatory system and now a venture capital investor, I understand how difficult it is to win in all four of these categories, especially those outside of your direct control.
Here’s what to look for in each contest and how participants are currently performing.
Regulatory effectiveness
Regulatory effectiveness is evaluated based on two key factors: credibility (being tough but fair) and accessibility (clear and navigable for both existing players and newcomers). Striking the right balance between these aspects is challenging. If regulations are unworkable to comply with, markets find ways to circumvent them.
Conversely, if entry is too easy, it leads to a low-quality ecosystem. An effective regulator sets high standards but collaborates with regulated entities to help them meet those standards. Transparency and accountability are crucial.
Two regulators leading the way in this area are Dubai’s Virtual Asset Regulatory Authority (VARA) and the Bermuda Monetary Authority (BMA). VARA, in its two-year existence, has already granted 17 licenses and taken at least a similar number of enforcement actions — a remarkable achievement for a new entity.
Pool of founders
The second contest evaluates a jurisdiction’s ability to cultivate or attract a robust pool of high-quality founders. Unlike regulatory effectiveness, which can be swiftly influenced by government actions, becoming a magnet for founder talent occurs over generations and involves factors beyond direct government control.
The factors that contribute to founder talent have been extensively studied and include existing entrepreneurial networks, cultural practices, quality of life and access to customers, partners and resources.
While California, New York and London maintain clear leadership in these rankings, places like Dubai and Singapore are emerging as clear scale-up destinations. These cities attract more mature companies and founders who may have started elsewhere but find these locations better suited for the growth phase for their companies. As these companies relocate, they will eventually foster a new generation of early-stage founders within those regions as their employees and networks go on to establish their own ventures.
Market size
Market size is the third contest in this competition. Even if your regulatory environment is flawless, it won’t attract future financial giants unless there’s a substantial customer base to serve your jurisdiction. Large markets, such as the U.S. (with a population of over 335 million) and the E.U. (with over 445 million people), have an advantage.
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However, smaller jurisdictions can still be competitive, especially for companies serving institutional clients or retail customers in other countries where permitted.
Capital market strength
The final category is capital market strength. Startups and scaleups both need investment to grow. Capital chases opportunities in locations with effective regulation, strong founders and large markets. However, other factors also play a crucial role, such as the physical proximity of founders to funding sources, investor-friendly legal frameworks and favorable exit conditions (such as robust M&A and IPO opportunities).
Research conducted by Galaxy reveals that although U.S.-based companies still receive the majority of venture capital in the blockchain sector (both in terms of deal count and capital share), their share has significantly declined. If we consider macro rankings of capital availability as an indicator of where capital may be shifting, then the UAE, Qatar, China and Singapore are noteworthy contenders to watch.
Unlike the Olympic pentathlon, this competition won’t necessarily have a single “winner” right away, or possibly ever. Instead, winners are likely to emerge in various categories. For instance, Bermuda could become the leading hub for stablecoin issuance while Dubai might excel in offshore institutional trading.
There will be regional capitals too. What matters is that the financial services map could be redrawn in a way that looks markedly different from today. The United States is likely to rejoin the race eventually, making this a time bound opportunity for new jurisdictions to establish and solidify their leadership positions before it’s too late.