The French Web3 Ecosystem
In partnership with Kamea Labs
The French context — Pioneers and Regulatory Framework
The crypto market may have been at half-mast in recent months, but that hasn’t stopped the year 2022 from seeing the global emergence of Web3 with committed entrepreneurs with solid knowledge around blockchain technology and a willingness to shake up a Web2 world that is reaching its limits on certain verticals. It is in this context, that a decentralized version of the Web is taking shape, based on blockchain technology, which offers total decentralization and places the notion of digital property at the heart of its model.
Although the Web3 ecosystem is still in the early stages of development, France is now one of the most advanced countries in the sector.
In the upper echelons of decision-making, this progress is supported as the French President, Emmanuel Macron, wants to make France and Europe “the leaders of the future generations of the Web”. France and the French abroad are very well positioned in this sector because we have had pioneers, people who have been working for many years on blockchain technology. This history means that today we have European and global leaders such as Ledger, Sorare and The Sandbox, all of which are French start-ups that have become unicorns and are participating in the democratization of Web3 technologies and services.
From crypto-currencies and NFT to the DeFi sector, the Applications enabled by Web3 are numerous and allow to address use cases uses that Web2 could not meet until now. However, for the most part, these use cases are still to be cleared and industrialized for a wider adoption.
In France, Web3 project leaders for the B2B sector seem to have significant potential. According to PwC figures, more than half (56%) of French companies want to increase their blockchain budget in 2023, and this figure has doubled in just one year.
There are positive signs for Web3 project leaders in France. First of all, France, via the AMF and the ACPR, has took the lead on other countries by proposing the PSAN status (Service Provider on Digital Assets), which allows to supervise the conservation and the purchase-sale of digital assets. Nevertheless, the registration process is also experiencing some setbacks with a large influx of submissions, associated with too few “expert” profiles, resulting in a lot of latency in the approval processing. Similarly, the regulatory framework for related businesses (depositories for token funds, crypto derivatives) is still too unclear and pushes some companies to find alternative solutions in other countries.
At the European level, the provisional agreement on MiCA legislation, which focuses on investor protection, is being adopted. Even if this agreement has been coldly welcomed by the community, because by wishing to trace flows, it goes against the very principle of freedom and independence of digital money. Such a step forward remains necessary to allow institutional investors to invest massively in this new asset class.
Regulation remains necessary to foster the development of the sector and to move away from a market state that has often been seen as the “wild west”; nevertheless, the differences in legal treatment between geographies create multi-speed systems.
Buoyed by this positive regulatory framework, announcements have been multiplying in France since the summer, with EDF managing more than 150 Ethereum nodes and Crypto.com making Paris its European headquarters. The ecosystem is also teeming with events that bring together European and international startups, such as ethcc in Paris last July.
The most developed sectors
According to the startups surveyed, ±27% are positioned as infrastructure / protocol solutions. Above these, Fintech/DeFi (29%), NFTs (12%) and Gaming (10%) applications are largely predominant.
DeFi stands out in the lead, and it seems that all areas of traditional finance will have their peers in decentralized finance in the short or medium term: payment, trading, liquidity search, data provision, identity verification. Some French players are very active in this vertical with major players such as Aplo, Flowdesk, Kaiko, Morpho Labs or CrunchDAO. And it is mostly new players that are entering this new ecosystem, rarely the historical banking players.
Retail is one of the sectors that will be able to make full use of the potential of blockchain to enable a stronger link between brands and their customers. Many players in the art, fashion and luxury industries are involved in this innovative technology. Thanks to NFTs, the experience around the brand will be increased thanks to, for example, private content and events and a complete transparency on the real number of a “limited” edition. The notions of community and status will take on a whole new meaning thanks to the power of NFTs in retail and marketing. The acquisition of the french startup RTFKT by Nike is a brilliant example of brands willing to offer a digital value on top of their product. A new wave of companies like Cohort, Arianee or Superfans will spearhead the marketing use of NFTs for brands, retailers and web3 communities who want to offer a different experience to their customers and users.
New use cases are coming out of the woods regarding NFTs and tokenization but it seems that the market is in the process of maturing (proptech, DAOs, LegalTech etc).
Challenges and new promising startups
The inflationary economic environment has had a direct impact on the head of Web3: crypto-assets. Cryptos and tokens have seen their valuations drop considerably since the beginning of the year. However, investors agree that the opportunities arising from Web3 technologies are immense, as we are still in the early stages of their development and by extension their adoption by the general public. For Web3 project owners, more than just a promising idea, it is also important to understand the challenges of today’s market and world in order to continue to attract funding in a less optimistic economic environment.
In France, €1.3 billion has been raised for blockchain projects since 2017. These encouraging results reflect the interest of funds in the sector. However, the sector is still in the process of being built, and it is clear that it is facing real challenges: slowing down the adoption of these new technologies by the majority of people, security and accessibility, environmental and regulatory challenges.
This is a reality for funds which, in the current economic context, are moderating their enthusiasm and adapting their investment strategies to favor the most sustainable and less volatile projects.. Founders must meet a real need in the market, while having a real understanding of the technological and economic issues underlying their project. Last year, a bunch of startuppers tried to enter this market and raise pre-seed rounds with low knowledge on these markets and technologies, and sometimes it was just scams….
However we are convinced that some crypto and Web3 startups currently on the market will emerge as top-notch players in the forthcoming years, that’s why, even if we saw a lot of VC funds forgetting blockchain in 2022, AXC is still on the ball to fund the best players of this industry.
Lots of sectors still need to be addressed by web3 startups, the new economic context and legislation requires new solutions for crypto owners regarding accounting and cash management for example. Some french startups answer the need such as Cryptio with its accounting solution and Request regarding crypto cash management.
Even if we are seeing some leaders emerge in France, we are slightly behind in some areas such as cybersecurity (while the need is becoming more and more pressing with $718 Million Lost to Web 3 Hacks in Q2 2022) or infrastructure. A new round of infrastructure development will be needed to build new application cases in the coming months, and french startups must take the lead on these subjects, as DFNS can do on wallet infrastructure or Starton when it comes to easily integrate blockchain into applications.
Conclusion
Web3 is an open door to many uses, applying to almost all sectors and organizations. It is clear that the field is only at the beginning of its history, for several reasons: Web2 companies have a monopoly and a global power; technologies related to Web3 are not accessible to the largest number of people, which does not facilitate their adoption, and regulation is a rather long process.
To enable the growth of Web3 “made in France” in the coming years and attract more and more capital, the ecosystem must prioritize its projects and, above all, focus on projects that offer real disruptive technologies and are capable of providing services that meet the needs and expectations of companies and individuals alike. Besides, technology is an enabler and UX and UI is now at the center; so startups need to focus on seamless experiences to spread their technologies or applications, and sometimes break away from a “geeky” vision.
This is the condition to meet in order to attract customers, win the confidence of funds and thus be able to develop French champions who will be positioned to shine when Web3 becomes part of everyone’s daily life.
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