An evaluation of the German blockchain startup environment
This paper analyzes factors that are crucial for satisfying German
blockchain startups and identifies areas in which the German
blockchain environment could be improved. The paper aims to
give decision-makers guidance on issues that need to be addressed
to position Germany as a blockchain leader. — Author: Hendrik Petersen
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Introduction
According to the World Economic Forum, blockchain-related services could account for ten percent of global gross domestic product (GDP) by 2027 (1). Some experts even draw a parallel to the development of the World Wide Web and the accompanying revolution of media usage. These comparisons demonstrate the technology’s tremendous potential. Therefore, the question is raised how much the German economy will contribute to this digital revolution. So far, Germany and also Europe only play a minor role in the digital age and mainly missed previous revolutions like the platform economy. This revolution is predominantly shaped by US-based “” companies, comprising of Google, Amazon, Facebook, Apple, and the Chinese companies “BAT”, Baidu, Alibaba, and Tencent. Nevertheless, the digital age has just begun, and Germany — one of the world’s most innovative economies (2) — still has the chance to take a leading role in the field of blockchain.
Since startups play an essential role in implementing innovative ideas and fostering growth, progress, and competitiveness, it is essential to provide an attractive startup environment (3). A thriving environment incentivizes blockchain startups to found their business in Germany and thus develop innovations in Germany. However, by the end of 2020, about 177 German blockchain startups (4) have to deal with a lack of blockchain knowledge of decision-makers, a missing regulatory framework, and a negative public reputation. The German government has recognized these issues and announced a blockchain strategy in September 2019. Whether this strategy addresses the central issues of the blockchain community will also be discussed in this paper. A state-of-the-art strategy is crucial for Germany, as other countries like Switzerland or Malta are currently perceived as more ‘blockchainfriendly’ (5). As a result, many startups have their headquarters in Switzerland, the UK, or Gibraltar (6).Therefore, this paper analyzes the following research question: Which factors are crucial and which requirements have to be met to satisfy the needs of German blockchain startups and what are the highest potentials in the German blockchain environment?
With semi-structured interview guidelines, 20 different stakeholders were
interviewed in order to provide a holistic picture of the current German
blockchain ecosystem. The interviewees consisted of representatives of
startups, news agencies, consultancies, universities, lawyers, venture
capitalists (VCs), politicians, a representative of an established company and
a bank.
Blockchain — the new Internet and its application fields
In recent years, the Internet has primarily served to exchange information.
Blockchain technology now also makes it possible to transfer value securely
and privately in a digital way, without the involvement of an intermediary (7). As a result of this disintermediation and improved record-keeping,
blockchain’s main benefit will initially lie in cost reductions by increasing
operational efficiencies. This improvement, in turn, creates new
opportunities for many industries. According to McKinsey, industries such as
the public sector, technology, media, and telecom, as well as the financial sector, will be heavily impacted by the technology. In addition, the feasibility
of implementing blockchain in these industries is considered high (8).
In this context, it is crucial to understand that blockchain is perceived as a
base/infrastructure technology (9), and its primary functions are recordkeeping and transacting. Record-keeping refers to storing static information like identities and transacting to register information, e.g., related to crossborder payments (10).The first and most popular application of blockchain is the decentralized electronic payment system ‘Bitcoin’. The special aspect of Bitcoin is that it is the first system that solved the double-spending problem in a digital world by utilizing blockchain technology (11). Double-spending means that the same money is spent twice. This problem does not occur with physical cash. According to the Harvard Business Review, blockchain is expected to have the same effect on the financial sector as the Internet has had on the media sector (12). Another use case of blockchain technology is the exchange of public data between government agencies and citizens, which is often not transparent (13). Using the blockchain data-structure, interactions can be simplified, data integrity improved, and efficiency and reliability increased (14).
Challenges and future potential of blockchain
However, critics also point out the limitations of blockchain technology (15). In fact, McKinsey (2018) estimates that it will take another three to five years for blockchain to scale (16). This can also be seen at the Gartner Hype Cycle:
Blockchain passed the peak of the hype between 2016 (17) and 2017 (18). In 2018, blockchain was close to the phase ‘trough of disillusionment’ (19). In this phase, the technology faces declining expectations and interest as the desired success has so far failed to materialize. However, as blockchain technology has many facets, it is essential to note that some use cases, such as
cryptocurrencies, are further developed than other use cases (20).
Comparison to the Internet. To better situate the development of blockchain
technology, a brief comparison with the Internet can be drawn. When the
Internet was created in 1969, the first messages were sent from the University
of California to the Stanford Research Institute (21). However, it was not until
1993 that the World Wide Web became publicly available. First applications were introduced in 1994 with the invention of Netscape, followed by Amazon
in 1994, eBay in 1995, and Google in 1998 (22). The current stage of blockchain compared to the Internet revolution can be placed around 1994 (23). Like blockchain, the Internet faced uncertainties about its future potential between 1994 and 1998, and it took several years to overcome these doubts. As a result, experts believe that the development of blockchain is likely to be analogous, if not nearly identical, to the development and history of the Internet (24).
Challenges. One of the main challenges of blockchain technology is the
absence of mature blockchain applications (25). Another challenge of blockchain is its limited scalability. Scalability, in this context, refers to the ability to conduct large amounts of transactions in a short time. This issue can be understood by looking at the Bitcoin blockchain that has a maximum processing capacity of only seven transactions per second. In contrast, Visa
claims to have a capacity of around 24,000 transactions per second (26).
Another issue is related to insufficient interoperability, i.e., referring to
communication and data exchange between various blockchains and even
with off-chain projects (27). Scalability and interoperability challenges also
result from lacking standards that currently exist in the blockchain space (28). Standards, in turn, improve network effects resulting in lower costs. Besides, due to the immaturity of the technology and its complexity, regulators lack experience resulting in missing regulations (29).
German blockchain startup ecosystem
To gain a better understanding of the status quo of the German blockchain
startup ecosystem, this chapter provides a brief overview of the German
blockchain landscape. By the end of 2020, the German blockchain ecosystem
consists of approximately 177 German blockchain startups. The majority of
German blockchain startups are involved in Investing, followed by Public
Chain Infrastructure and Enterprise Infrastructure (see Figure 1) (30) (31).
By looking at the distribution of blockchain startups in Germany (see Figure
2), it becomes clear that the majority of German blockchain startups are
located in Berlin (77), followed by Munich (22) and Frankfurt am Main (18) (32).
It becomes apparent that the German blockchain landscape is relatively
heterogeneous. For example, Berlin is highlighted as an outstanding startup
ecosystem, especially in terms of the quality of the community (developers
and diversity) and projects (building the Web 3.0 infrastructure). Cities like
Frankfurt, Stuttgart, and Munich are also regarded as predominantly
positive, whereas smaller cities and rural areas do not play a major role.
Compared to other countries, Germany is not seen as a frontrunner when it
comes to blockchain, while Switzerland in particular is seen as ambitious. The
United Kingdom (UK) is also viewed very positively. Nevertheless, Berlin
attracts many talents across Europe and investors from the UK, China, and
the United States (US) due to its large community of blockchain experts.
Therefore, the question can be posed whether Germany should focus its primary efforts on Berlin and a few other cities to further increase and accelerate the currently existing benefits of these regional ecosystems. This
question will also be analyzed in the next chapter.
Factors for the success of German blockchain startups
Based on the results of the interviews conducted with representatives from
startups, news agencies, consultancies, universities, lawyers, VCs, politicians,
a representative of an established company and a bank, the most important
factors that can contribute to the satisfaction of German blockchain startups
are explained. The order of the factors listed does not reflect priority.
- Fast and efficient exchange with regulators to increase regulatory security. This is the most important factor and is a composition of the two sub-factors ‘clear and blockchain-friendly regulatory framework’ and ‘experimental environment for technologies’ (33). The first sub-factor is essential to create regulatory certainty not only for startups but also for investors and corporates. The second sub-factor aims to create a so-called regulatory sandbox where startups can initially develop their blockchain solutions and innovative business models in a guided process, facilitated by regulatory requirements and in close cooperation with the relevant supervisory authorities. In this sense, it is of utmost importance that startups can easily exchange information with regulators. This subfactor was mentioned by three out of seven startups. However, this was the most crucial factor, according to the non-startup interview partners. These two sub-factors have a high relevance as otherwise, startups have to pay vast amounts of legal cost to be compliant, slowing down their development drastically. Legal uncertainty was the reason for two interviewed blockchain startups to found their startup in Switzerland and the UK instead of Germany. It is therefore urgently necessary on the part of the government and jurisdiction to develop suitable concepts in a timely manner and, above all, to integrate them into practice as quickly as possible in order to prevent further founders with their ideas favoring other countries to start up their businesses. A lot can be achieved with a more innovation-friendly and pragmatic approach in order to attract and retain as much technology and innovation as possible in Germany. A strategically important factor.
- Strongly cohesive and interconnected community with political influence. This factor combines the sub-factors ‘strong and connected community’, ‘independent and influential associations’, and ‘sufficient contact points to industry’. A strong community is essential for startups to mutually support each other and to gain visibility and relevance. An association should represent the interests of the entire community to the relevant stakeholders, especially politicians. Startups also request sufficient networking events to get in contact with the established industry to speed up decision-making processes.
- Blockchain enlightened companies with the willingness to implement blockchain solutions. This factor contains the two subfactors ‘blockchain educated corporates’, and ‘sufficient corporate budgets for blockchain solutions’. As many blockchain startups target the B2B market with their solutions, startups have to explain various dimensions of the technology and its benefits. Due to the lack of knowledge, corporates often do not provide sufficient budgets or are very hesitant. Even though corporates are willing to experiment quickly, it is very time-consuming to go beyond prototyping. This is a tedious and expensive process for blockchain startups.
- Competitive political blockchain strategy and comprehensive support measures. This aspect aims to enable the implementation and use of blockchain technology to support the public sector and politics. Politics strongly influences the public sector, and, therefore, both subfactors are summarized. Startups, for example, demand a decentralized identity infrastructure provided by the public sector. In this regard, it is highly demanded that the government provides a vision regarding their perspective about blockchain and their approach to improving the current environment. Especially the political passivity was criticized by blockchain startups.
- Blockchain enlightened and risk-seeking investors providing sufficient venture capital. This is a demand that results from blockchain startups struggling to find investors who are willing to invest in their projects. Blockchain projects are typically long-term projects, making short-term returns difficult. As the technology is still immature, startups have to invest significant amounts in research and development (R&D) without generating short-term revenue. This is aggravated by the tendency of German investors to avoid risk and the partial lack of blockchain knowledge. All startup-interviewees were unsatisfied with the current funding situation. There is a need for investors who are willing to forego short-term profits and support a startup in the blockchain space for the longer term with the prospect of profiting from the emergence and further development of this rising technology. With a better understanding of the technology, it is likely that more investors will recognize the great growth opportunities and accordingly the funding situation could change rapidly. It should also be noted that there are also prospects for short to medium-term profits in the fast-growing blockchain sector.
- Educating society about technology (blockchain). This factor can
be divided into the three parts: ‘positive public perception of blockchain’, ‘educated institutions’, and ‘educated society’. The first sub-factor, in particular, is a challenge for startups due to scams in the past, which led to a partly negative connotation. Due to missing blockchain knowledge, politicians, institutions, and the broader public are skeptical about blockchain projects, and they cannot decide between fake and promising projects. This is at the expense of the development speed of the ecosystem and, thus, also of the success of blockchain startups.
Potential of the German blockchain startup environment
Based on these factors, further results of the interviews, and desk research,
this paper identified the following areas as most necessary for the German
blockchain ecosystem.
- Fast and efficient exchange with regulators to create regulatory
security - Strongly cohesive and interconnected community with political
influence - Competitive political blockchain strategy and comprehensive
support measures
These factors are divided into measures for the demand side and the supply
side. As this paper focused on the startup perspective, the demand side is
represented by blockchain startups and their ‘close’ community (34). The supply side is represented by those who are responsible for setting the framework.
Strongly cohesive and interconnected community with political influence
The following four measures address the first factor of the demand side.
Especially the measure regarding associations shows great potential.
1. Community. The results suggest that one advantage in Germany is the already existing strong blockchain community (Berlin). The community attracts talents from across Europe and beyond. Inside the community, it is easy to get in contact with different players as the community is characterized
by helpfulness and cohesion. However, according to one non-startup interview partner, German blockchain projects could be more open to
learning from other projects and different countries. Therefore, it can be
questioned if more transparency is needed as getting in touch with associations, like the Bundesverband Blockchain, or with startups working in
other fields. However, for people outside the ecosystem, it is rather difficult
to understand the developments — a finding supported by Voshmgir (2016)
(hereinafter called study one) (35). However, creating more transparency
through research is a problem due to a lack of funding, as creating platforms
that have more information about the ecosystem is expensive.
2. Associations. Regarding the previous paragraph, the well-known
Bundesverband Blockchain struggles to provide more transparency as they
have neither substantial funding (low membership fee) nor sufficient human
resources. Besides, their work is primarily pro-bono, which is why they
struggle to provide detailed research for example for the government’s
blockchain strategy without receiving any budget. Moreover, the role of the
association is controversial. On the one hand, they publish proper documents
such as the position paper or the paper on token regulation. On the other
hand, there is too little exchange between the individual stakeholders
(politicians, startups, lawyers, industry experts). As a result, the interests of
the members are not sufficiently represented.
Other initiatives, like Blockchainhub, also have their raison d’être, however,
they are too small to represent the whole blockchain community accurately,
and their activities are not aligned. Therefore, an association with more
capital and resources is needed. Such an association could increase
transparency by providing education and sharing use cases as well as best
practices. To create such a strong association and to accelerate the
professionalization of the Bundesverband Blockchain, an integration in the
association Bitkom could be reasonable. A merger would have many
advantages for the blockchain ecosystem, as Bitkom, founded in Berlin in
1999, is already a professionalized association with over 2,700 members and
many industry contacts (36). Therefore, it can be assumed that it enjoys greater recognition in the German industry and also has more influence in the
political arena. As Bitkom is also getting more involved in blockchain,
acquired knowledge and future approaches could be merged.
Moreover, smaller initiatives like Blockchainhub could join to form an even
stronger association and to improve lobbying. It would also make it easier for
both policymakers and industry to work together, as they would have to deal
with fewer different associations. In this regard, the ‘new’ blockchain
department at Bitkom should connect different stakeholders from politics,
regulators, lawyers, academia, industry, and startups to accelerate the
development of the ecosystem. Also, the matchmaking between startups and
the established industry would be simplified due to a rapidly expanding
network. Startups would also benefit since blockchain is a cross-sectional
technology, and Bitkom also represents other technologies like the Internet
of Things or Artificial Intelligence, whereby more exchange possibilities and
possible synergies with other startups can be achieved.
3. Blockchain training. According to the interviewees and the existing
literature, many stakeholders like politicians, regulators, investors,
companies, and society lack knowledge about blockchain. For example, study
one demands more German non-technical literature about blockchain for the
professional public but also tailored to the general public. For this reason, the
provision of educational opportunities to inspire relevant stakeholders in the
blockchain vision, such as professors, politicians, and Chief Executive
Officers (CEOs), should be supported by Bitkom. Besides, group-specific
online training should be offered to reach as many people as possible. In this
sense, the study by the Bundesverband Blockchain (2017) (hereinafter called
study two) suggests implementing a program ‘introduction to blockchain’ for
secondary schools, universities, and vocational education (37).
A training program for public authorities would also be relevant in teaching
blockchain basic knowledge to foster understanding and extend skills. For
this purpose, the association could develop these concepts together with the
community and universities, financially supported by the government. Study
two further demanded the influence of regional politics on educational
institutions’ curricula to be better prepared for future economic realities. The
authors justify these demands by arguing that education has a decisive
influence on the development of society, the economy, and the state. Futureoriented technologies such as blockchain should, therefore, be taught at an early stage. However, politics do not intervene in academia. Nevertheless, they can incentivize blockchain research projects and training concepts by providing research funds. These training concepts can then be used in universities and schools as well as for the public sector and corporates. A standard training concept was developed by a blockchain startup and a
professor of a university. However, it has never been implemented as it
approximately costs 100,000 Euro, and it was not possible to obtain funding.
4. Promotion. As a last aspect of the demand side, further attention could be
achieved by having well-known blockchain experts publicly promote
successful blockchain applications. These, for instance, interviews could be
published on YouTube and linked to the Bitkom website. To further increase
awareness, the spotlight should be more on successful use cases.
As an interim conclusion, it can be stated that there are several blockchain
associations in Germany, but they are not able to represent the blockchain
startups properly due to lacking financial resources. A concentration of the
association landscape in one large association with the corresponding
financial resources could provide a stronger representation of blockchain
startups’ needs and smart training concepts. Also, successful use cases of
startups could be better promoted, and thus more attention could be
generated.
Fast and efficient exchange with regulators to create regulatory security
The following measures should be driven forward by the supply side. In
general, there is currently a lack of blockchain know-how in decision-making
positions.
Besides, it is very challenging to regulate the ecosystem without hindering motivation, mainly because of the immaturity of the technology and the paradigm shift blockchain requires.
However, two interviewees founded their startup in Switzerland and the UK
due to more regulatory security and more natural exchange with regulatory
authorities. This raises the question of what Germany needs to improve.
Regulatory sandboxes. Not only startups but also nine non-startup
interviewees and Reetz (2019) (hereinafter called study three) call for the
introduction of regulatory sandboxes as in other European countries (38). Due to the immaturity of the technology and the high regulatory uncertainty, a sandbox would be very helpful and strongly recommended in Germany. This would not even require implementing special laws. The experience of one startup interviewee in the UK emphasized the advantage of sandboxes. Even though the regulatory authorities cannot bend the rules, they were very competent, committed, and provided guidance to walk through the egulatory process.
In the end, the largest advantage was a fast and efficient communication channel with regulatory authorities.
This process is also beneficial for regulatory authorities due to the constant
exchange with startups and the resulting experience. This allows the UK
authorities to quickly create legal certainty, according to a startup
representative. A starting point could be a sandbox on a municipality layer to
gain experience. However, in Hamburg, such an approach was rejected. Also,
the Federal Ministry of Finance (BMF), the Federal Financial Supervisory
Authority (BaFin), and the Bundesbank voted against regulatory sandboxes
due to competition distortion. Established companies do not support
sandboxes either. Nevertheless, there is a strong need for better exchange
opportunities.
BaFin. In general, national regulatory authorities, as for example, the BaFin,
were often criticized for their inertia and the lack of public guidelines.
However, according to a non-startup interviewee, it was the right decision to
let the German ecosystem develop and not to implement any harsh regulation
so far. Another non-startup interviewee added that startups misunderstand
the role of BaFin as they should support financial stability and not to foster a
‘hype-driven startup economy’. BaFin should, therefore, not publish regulations when they do not know what and how to regulate. The BaFin has
made mostly the right decisions in terms of the requests they have received,
according to a non-startup interviewee. Also, the BaFin participates in
conferences where stakeholders can get in contact with them. However, they
do not have sufficient human resources to keep up with the pace of ecosystem
development. Consequently, this leads to a slowdown in processes, which
could be solved by increasing BaFin’s staff dealing with issues related to
(blockchain) technology.
In this regard, a technology-focused BaFin office in Berlin is recommended to get closer to the community, for example, by attending meetups.
Berlin is not only the largest German startup ecosystem but also the city
where all relevant stakeholders like politicians, associations, and many
startups are located. Such a technology-focused office could facilitate the
exchange between stakeholders and enable the joint development of
regulations and standardization more quickly. In turn, this would be
beneficial for all startups across Germany as it would provide faster
regulatory security. ISO should certify the achieved standardizations to
establish international standards and thus create security for companies and
investors. This standardization would provide Germany with the opportunity
to play a leading role by setting international standards. All four studies also
support the call for more regulatory security. Study one, for example, states
that the goal should be to create legal certainty without sacrificing innovation.
It can be concluded that there is a need for structured and fast communication channels to regulatory authorities, especially to the BaFin. Besides, improved framework conditions are desired in which startups can test technologies without tremendous legal costs. Regulatory security is essential for startups, established companies and investors and should, therefore, be created as fast as possible.
Competitive political blockchain strategy and comprehensive support measures
The next aspect on the supply side mainly concerns the role of politics. A total
of seven measures were identified whereby the measure ‘blockchain strategy’
is considered separately in the following chapter.
Public speaking. Politicians have been criticized for their passive attitude
and lack of knowledge regarding blockchain. Even politicians criticized the
role of politics and said that politicians need to wake up. As mentioned previously, politicians from other countries like Switzerland or Singapore are
more involved in the community and have better knowledge. This is also
highly demanded by German blockchain startups. In Singapore, politicians
speak positively about blockchain in public, thereby helping to create
awareness and a positive public perception. Therefore, Germany should learn
from these countries, for example, with the help of blockchain dialogues
between Switzerland and Germany.
Dorothee Bär — Minister of State in the Federal Chancellery for Digitization –
should drive this forward. Bär claimed to be the face of digital policy and the
enthusiasm for the digital future (39), however, not yet satisfactory according to the results.
Ministry for Digitization. A further issue is the unclear responsibilities
between ministries, leading to requests being pushed back and forth. Study
three agrees and highlights the importance of coordinating the activities of
the Federal Ministry for Economic Affairs and Energy (BMWi) and BMF.
Therefore, a central coordinating body at a high level is demanded, for
example, the BMF or the Federal Chancellery. As the technology touches
different ministries, central coordination seems reasonable. However, one
ministry taking the lead seems questionable due to the involvement of
different parties. In the short-term, an interdisciplinary and independent
working group consisting of representatives of BMF and BMWi, which meet
regularly and coordinate their activities, could improve the situation.
The issue becomes even more visible by looking at digitization in general since seven different ministries have their share in this topic. Although several
bodies such as the Digital Cabinet and the Digital Council already exist today,
many activities are not coordinated (40). In order to have a real impact, a
Ministry for Digitization is necessary, as many stakeholders demand it (41).
Other countries like France or the UK already have a specialized Ministry for
Digitization, and according to Chancellor Merkel, the prosperity of the country depends on digitization.
Lighthouse project. It is crucial that the government also sets up a
lighthouse project. In general, the interviewees demanded a more
experimental character of the public sector. In this regard, a frequently
mentioned project, also by study two, was the development of self-sovereign digital identities on a blockchain by the public sector. Such a project would
allow the public sector to gain experience and to create public awareness.
Also, study one, study three and the study by Bitkom (2019) (hereinafter
called study four) demanded a more entrepreneurial mindset of the public
sector (42). In this context, the Cyber Innovation Hub of the Bundeswehr could be an interesting blueprint representing the interface between startups and the Bundeswehr intending to push digital innovation (43). Further approaches could be paying tax with Bitcoin, putting the Euro or voting on a blockchain. Elections are an excellent example to draw attention to the issue. It could be tested on a small scale, for example, in a municipality, and then, if successful, be expanded.
Research funds. Politics should also provide research funds for universities
to increase the incentives for professors to engage with the topic. This budget
can have a large effect since professors are multipliers by passing on their
acquired knowledge to many students. In turn, this could inspire students
and, therefore, minimize the shortage of skilled blockchain employees. Also,
study three recommended providing more financial means for academic
research to develop the infrastructure layer as this area struggles to raise
money. In addition, study four suggested giving blockchain a higher value in
the research landscape and increasing cooperation between academia and the
industry.
Public funding programs. With reference to the previous aspect, especially
small and medium-sized enterprises (SMEs) and startups need public research funding due to the R&D character of blockchain projects. In general,
due to the long-term perspective of these projects, it is not attractive for many
investors. As public funding programs also aim at closing funding gaps, they
should be used to a greater extent. Therefore, especially the BMWi needs to
verify whether or not public funding programs are also designed for supporting blockchain projects. Furthermore, there are many different
national (e.g., EXIST) and regional (e.g., Transfer Bonus) public funding
programs. However, due to their decentralized nature, many startups lack a
good overview. Therefore, a stronger promotion of these programs is necessary. However, on the website of BMWi, different funding programs are
offered, which also support in the form of guidelines, online training, and a
hotline. This raises the question of whether more promotion is needed, or
startups need to increase their efforts in this regard. For example, one interviewee went through such a support program and was satisfied, although the process was lengthy. It should thus be examined whether more support during the application process is needed.
Blockchain de:hub. Moreover, blockchain should be integrated into the
Digital Hubs Initiative (de:hub). These hubs aim to connect various
stakeholders to collaborate on digital and technological projects. There are
twelve different hubs in Germany, focusing on different technologies and
branches. They are either operated by individuals, by research institutions, or
even municipalities. Since it was only possible to apply for the creation of a
technology-focused hub at the BMWi until 2017, it should be revised whether
the expansion by a blockchain hub is reasonable (44). Two non-startup
interviewees demanded to integrate blockchain into different de:hubs as it is
a cross-sectoral technology. However, this paper recommends opening a
blockchain hub in Berlin to create a place where the German blockchain
ecosystem can evolve. This place should foster the exchange between
politicians, regulators, startups, established companies, science, and further
stakeholders. One central hub simplifies the involvement of politicians and
regulators as they know that crucial activities are bundled there. Different
workshops could be organized to develop regulations and use cases between
startups and established companies. Also, information about public funding
programs could be more easily promoted. This information could then be
made available to the whole community through the association. In this
context, blockchain could also be integrated into already existing hubs in
order to foster the combination of blockchain with other technologies.
Studies one, three, and four actively support the idea of creating a central
place for blockchain technology. The goal should be to bring companies,
educational and research institutions, and private individuals together in
order to develop new ideas and solutions around blockchain.
In summary, blockchain startups demand a clear political direction and a
comprehensive support strategy from the government. In this regard, the
German government has a wide range of possibilities. A clear transparent
allocation of responsibilities and better coordination of blockchain activities
between the ministries could create clarity and accelerate startup requests’
processing speed. This would also simplify creating a blockchain lighthouse
project by the public sector, for example, self-sovereign digital identities on a
blockchain. Such a project would be a strong sign not only for the German
ecosystem but also in the international context. In terms of support measures,
the government is also well-advised to open the de:hub initiative for blockchain to create a place where the technology’s development speed could
be enhanced by bringing relevant stakeholders together. In addition, improved access to research funds and public funding programs for R&D
projects either by academia or industry could further manifest the political
will.
With the publication of the blockchain strategy (September 2019), an attempt
was made to consider these demands. However, to assign more importance
to blockchain and technologies in general, the implementation of a Ministry
for Digitization seems overdue to bundle and better coordinate the German
government’s activities.
Evaluating the German blockchain strategy
A further reason for the high level of dissatisfaction of the interview partners
was the missing political direction until September 2019. The demand for a
blockchain strategy was also supported by studies three and four. In the first
step, the publication of the blockchain strategy does not allow for any
conclusions of the quality of the work. Therefore, the content of the strategy
is compared and evaluated with those of this paper.
In general, it can be said that the government’s blockchain strategy addresses
many issues raised by the community. This is not surprising since the process
of developing the strategy has allowed every stakeholder to express their
perspectives and needs. During this process, the government received over
1,000 pages of feedback, which confirms the need for such a strategy (45).
A positive aspect is the abundance of measures that have been defined, such
as the abolition of the paper certificate requirement for securities making
digital securities on blockchain possible. Furthermore, the government
intends to use real laboratories as economic and innovation policy instruments, which can be understood as a kind of regulatory sandbox. It is
questionable whether only companies in a specific industry, such as energy, will experience an improvement or whether every blockchain startup will be entitled to use a real laboratory in the future.
Moreover, it is positive that the government intends to create a technologyneutral legal framework and wants to play an active role in developing standards at an international level. However, in some cases, the strategy has been kept rather superficial and, therefore, often only addresses testing and monitoring.
The government further examines how blockchain technology can help the
state to provide digital identities. The government will pilot blockchain-based
applications in this area. Besides, the government seeks to promote the use of
blockchain in public administration and publicize lighthouse projects. These
points were also demanded by the interviewees and can, therefore, be assessed positively. However, a timeline is missing.
The strategy foresees a continuation of a series of dialogues on blockchain
technology initiated to clarify specific questions about the technology. Also,
networking between startups, medium-sized, and large companies should be
continued within the Digital Hub Initiative framework and the SME 4.0
Competence Centers. The government must understand the increased need
for exchange. However, the intentions are kept again very general, and
nothing is said about the frequency of such meetings.
Furthermore, the lack of blockchain knowledge was addressed only very
superficially in the strategy. It states that the educational initiative ‘education
in the digitalized world’ of the federal states is welcomed and that the digital
qualification of educational staff is being promoted. Concrete measures, for
example, providing funds for developing educational concepts, are missing.
Besides, the strategy does not sufficiently address the issue of financing.
Although it is said that sustainability, accessibility, and transparency of
technological solutions are crucial for receiving state funding, quantitative
criteria are not yet available. Due to the importance of public funding for
startups and the relatively late publication of the strategy, the timeline is not
satisfactory (46). Moreover, compared to the Artificial Intelligence strategy of
the government, which initially planned to provide a budget of three billion until 2025, this concrete financial assurance is completely missing at this point (47). Overall, the strategy is likely to have a positive impact on the
development of the German blockchain ecosystem. Nevertheless, the question remains if the measures are implemented fast enough.
Conclusion
Germany is a laggard in the field of digitization, especially compared to the
US and China, where the platform economy emerged and prospered. Blockchain technology, however, offers Germany the opportunity to become
a forerunner. As startups play a crucial role in developing and deploying new
technologies, Germany needs to provide a competitive startup environment
in which blockchain startups can evolve.
Looking at the international stage, countries such as Switzerland or the UK
offer more convincing framework conditions for blockchain startups than
Germany. The resulting question is which set screws have to be turned to
improve the German blockchain ecosystem’s attractiveness. The analysis has
shown that the blockchain community is broadly in line with the changes that
need to be conducted to develop Germany into a leading blockchain nation.
The most significant potential for improvement lies in the following three
factors:
- Fast and efficient exchange with regulators to create regulatory certainty
- Strongly cohesive and connected community with political influence
- Competitive political blockchain strategy and comprehensive support measures
Regarding the first factor, a fast and efficient communication channel with
regulatory authorities is of utmost importance for startups. In this sense, the
BaFin plays a decisive role in the ecosystem. Therefore, a specialized
technology office of BaFin in Berlin could improve the dialogue between
BaFin and blockchain startups. Besides, the implementation of regulatory
sandboxes — like in the UK — is highly recommended to accelerate technology
development, especially building the infrastructure for Web 3.0. The
respective measure of the second factor is to create a strong association by merging the Bundesverband Blockchain and Bitkom, as Bitkom is more
professionalized and influential due to its size and over 20 years’ existence.
Representing the demands of the community towards politics with one strong
voice is more effective.
In terms of the third factor, the German government is well-advised to
implement a Ministry for Digitization to finally give the topic the priority it
needs so that Germany does not miss the leap into the next digital future.
Short-term measures should be the extension of the de:hub initiative for
blockchain to create a focal point for all blockchain stakeholders. The aim
should be to intensify the exchange between stakeholders to accelerate the
evolution of the German blockchain ecosystem. Further measures are
providing more research funds and public funding programs for academia
and the industry due to the R&D character of blockchain projects.
With the publication of the German blockchain strategy, Germany has taken
an essential step towards improving the attractiveness of the German
blockchain startup environment. Nevertheless, the effectiveness of the
strategy also depends on how quickly these measures will be implemented.
As clear timelines were only partially set and topics like a blockchain hub, the
lack of blockchain knowledge, and insufficient public funding programs were
not sufficiently addressed, there is still room for improvement. In conclusion,
it can be stated that Germany needs to increase its speed if it wants to be
competitive in the next digital race. Steadiness and reliability are important
values of German society. However, in an even faster spinning world, there
must be an environment and an attitude that welcomes and supports change
and innovation. In this regard, not only startups but also the German
government needs more courage to move faster in untested territories. With
a view to the history of the Internet, there were also doubts about its future
viability; and the same applies to blockchain. The technology is still in its
infancy and requires the trust and belief that it has the potential — despite all
the current challenges — to change the world. Like the Internet, blockchain is
an infrastructure technology that cannot be built on an existing foundation
and thus requires time and persistence. If Germany wants to be a forerunner
in blockchain technology, it has to take risks and a vote of confidence.
Nevertheless, also blockchain startups have to do their part. Without
successful use cases with relevant impact, the topic will not receive the
attention in politics and at the C-level of established companies. Being worldleading requires an extraordinary effort of a whole ecosystem, and Germany should focus on creating an even stronger blockchain ecosystem.
Remarks
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About the Author
Hendrik Petersen completed his part-time master’s degree (MSc) at the HSBA
Hamburg School of Business Administration in Global Management and
Governance. He works as an Executive Assistant to the Management Board at GHD GesundHeits GmbH Deutschland. You can contact him via mail (hendrik.petersen@tonline.de) or via LinkedIn (https://www.linkedin.com/in/hendrik-petersen-02976394/)
Endnotes
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(25) Ebd.
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(30) It is unknown which criteria have been used to determine a German blockchain startup.
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(32) Ebd.
(33 During the evaluation of the interviews, various factors were created from the answers of the interview partners in order to structure the results.
(34 E.g. associations representing blockchain startups.
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(40) Ebd.
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