By: Andjela Radmilac
Compiled by: Saoirse, Foresight News
In 2017, a few developers could launch a token and start a crypto company within just a few days, armed with only a whitepaper and a GitHub repository. Back then, the capital barrier was extremely low, and licensing and regulation were either non-existent or trivial afterthoughts. With a sufficiently compelling idea, even a product that hadn't materialized could attract tens of thousands of retail investors through an Initial Coin Offering (ICO).
But by 2026, crypto firms operating in compliant markets in Europe, America, and Asia must assemble legal and compliance teams, secure banking partnerships, establish full anti-money laundering systems, and allocate substantial funds to meet licensing and operational requirements before they can serve customers at scale.
The crypto industry, originally built by anonymous founders coding in their bedrooms, is now dominated by large enterprises with full balance sheets, regulatory licenses, and institutional sales teams. Crypto startups haven't vanished entirely, but the barriers to entry for launching a company have become comparable to those in the traditional financial sector, which has long been insulated from new entrants.
The Crypto Startup Ecosystem of Yesteryear
The first decade of crypto entrepreneurship was characterized by low capital requirements, minimal regulatory friction, and open collaboration among numerous anonymous developers worldwide. Exchanges, wallets, and blockchain protocols could be built by small, globally distributed teams primarily coordinating via Discord and GitHub.
Ethereum itself was born in 2015 through a public crowdsale, raising about $18 million from thousands of ordinary individuals, not venture capital syndicates. The ICO boom of 2017-2018 pushed this lightweight startup model to its extreme: any team with a website, a token contract, and a Telegram community could fundraise directly from the public, bypassing venture capital due diligence and equity lock-up periods.
Among these startups, some grew into foundational industry infrastructure, but many more failed or were exposed as fraudulent. This resulted in massive investor losses, providing the core justification for stringent regulatory scrutiny worldwide.
There were no institutional gatekeepers back then: developers didn't need to partner with banks, as all transactions could be conducted using cryptocurrency; they didn't need to apply for state money transmitter licenses, as regulators often didn't understand the tokens they issued; and they didn't need to actively acquire customers, as early users found them through social media rather than corporate procurement channels.
The barriers to entry, both in terms of capital and compliance costs, were almost zero. While this led to significant industry chaos, it also gave rise to a multitude of highly innovative experiments in finance and social organization.
The New Industry Reality
Today, the industry's operating logic has fundamentally changed. A crypto company serving clients in the US, EU, or Asia must adhere to a licensing and regulatory framework strikingly similar to that of traditional banks.
Industry licensing guide data shows that if a startup aims to operate comprehensively across multiple US states, total compliance-related expenditures in the first three years can reach $750,000 to $1.2 million. As the company scales, ongoing annual compliance costs can exceed $2 million.
The New York BitLicense is widely regarded as the most stringent state-level crypto license in the US. Licensing consultants typically advise applicants to allocate over a year for preparation and budget for substantial legal, compliance, and operational expenses.
The EU's Markets in Crypto-Assets (MiCA) regulation sets tiered minimum capital requirements: €50,000 for advisory services and €150,000 for trading platforms. However, these figures represent only the foundational costs. The real major expenditures lie in the mandated governance structures, dedicated compliance personnel, and continuous high-frequency reporting mechanisms. Analysts note that this compliance framework has significantly increased the operational costs of European crypto businesses compared to 18 months ago.
US regulatory rules are gradually becoming clearer, but at a cost: The GENIUS Act establishes a federal framework for regulating payment stablecoins, but its implementation details and effective timeline still require accompanying regulatory guidance, which must be finalized no later than 18 months after the Act's passage. Meanwhile, the CLARITY Act, which aims to standardize market structure, is still under Senate review and has not yet been enacted into law.
While regulatory standardization benefits the industry's long-term development, it also significantly raises the hard barriers to legal operation. Licensing practitioners state that these high compliance costs create a natural moat, protecting early entrants from low-cost new competitors.
The collapse of Terra and the implosion of FTX fundamentally altered venture capital's investment logic in the crypto space. Gate Ventures data shows that annual VC investment in crypto plummeted from a peak of over $44 billion in 2022 to around $9 billion in 2024, before recovering to over $20 billion in 2025.
According to Galaxy Digital, in Q1 2026, venture firms completed 355 crypto-related investments, deploying approximately $4 billion in total. The median deal size exceeded $4.5 million, hitting a record high. Later-stage, mature companies captured 57% of all invested capital, while the proportion of pre-seed deals shrank to 19%.
Concurrent analysis by CryptoRank shows an even more extreme concentration of capital: just 9 Series C and later deals, surging 1020% year-over-year, accounted for 28.4% of all venture funding. Combined, seed and pre-seed rounds represented only 5.2% of total funding raised. Analysts term this a "barbell market": substantial capital at the very early and very late stages, with a sustained contraction in mid-stage growth funding—the very stage that traditionally supported companies in expanding their institutional client base and scaling operations.
Funding for early-stage startups continues to shrink: in Q1 2026, investors committed just under $1.1 billion to 8 new crypto-focused venture funds, the lowest quarterly fundraising figure since 2020.
Today, funding is highly concentrated in the hands of a few, unprecedentedly large institutions. Andreessen Horowitz announced in January 2026 the closing of several multi-strategy venture funds totaling over $15 billion. The firm stated this sum represented more than 18% of all VC capital deployed in the US in 2025.
Dragonfly completed fundraising for its fourth fund of $650 million in February. Its managing partner, Robbie Hadick, bluntly stated that the entire crypto venture ecosystem is undergoing a "mass extinction event."
VC preferences have also shifted. Galaxy data shows that nearly 60% of Q1 2026 funding flowed into trading platforms and lending infrastructure. Payments and prediction markets—infrastructure projects serving institutional clients—secured the quarter's single largest funding rounds, with Kalshi raising approximately $1 billion.
Merger and acquisition (M&A) activity is filling the market gap left by native startups and VC incubation. PitchBook data indicates 267 disclosed crypto M&A deals in 2025, totaling $8.6 billion, nearly four times the 2024 total. The pace is accelerating: from $272 million deployed in crypto M&A in Q4 2025, the figure skyrocketed to $7.23 billion in Q2 2026—a more than 26-fold increase in six months. Coinbase's $2.9 billion acquisition of Deribit remains the largest crypto M&A deal in history. Ripple spent $1.25 billion acquiring prime broker Hidden Road, choosing to build its institutional service capabilities through acquisition rather than in-house development.
Distribution Channels as Corporate Moat
Technological innovation is no longer the decisive factor for crypto companies. In 2026, the winning companies succeed not through protocol-level innovation, but through banking partnerships, enterprise client relationships, multi-jurisdictional licenses, and the brand trust that allows institutional partners to operate with confidence.
This is why acquisitions have become the optimal path for rapid market entry—theoretically, a company could build all these capabilities internally, but the process is lengthy. The core value of Coinbase's acquisition of Deribit was gaining a compliant derivatives license and years of accumulated institutional trust. Onboarding institutional clients to a new trading platform often requires months of due diligence; the value of that license and client base far exceeds that of Deribit's codebase.
The same logic applies to Ripple's acquisition of Hidden Road. The industry calls such deals "bridge acquisitions": established giants directly acquiring compliance credentials and distribution channels, bypassing the cost of building from scratch.
Banking partnerships are a core bottleneck that cannot be overcome by technology alone. Even if a startup's product is technically flawless, without a willing banking partner to custody fiat reserves, the project cannot launch. For businesses dependent on fiat on/off-ramps, this hurdle can be fatal.
Companies with established banking channels possess a massive competitive advantage unrelated to technical prowess. The logic applies similarly to licensing: companies that already hold BitLicenses or MiCA licenses have crossed the time and capital thresholds that new entrants still face. Regulators also favor applicants with proven compliant operational records overseas, amplifying the first-mover advantage. The industry trust accumulated over years of regulatory scrutiny is an intangible asset that cannot be bought with a single funding round.
While industry maturation brings obvious benefits, it comes at a cost, and opinions on the future trajectory diverge significantly. The optimistic view is clear: higher barriers to entry make it difficult for underfunded, unaudited, and low-quality projects to launch, potentially preventing disasters like vaporware ICOs or the collapse of Terra's algorithmic stablecoin.
A clear regulatory framework attracts institutional capital. Licensed exchanges, compliant custodians, and audited stablecoin issuers form a standardized system, giving pension funds and traditional banks the confidence to participate. This regulated system reduces the flow of underfunded projects into compliant distribution channels, and regulators gain clearer tools to police misconduct.
However, significant concerns persist. Founders lacking capital, industry connections, and institutional resources face far greater challenges compared to five years ago. Even engineers with groundbreaking on-chain infrastructure ideas must first raise substantial funds, partner with licensed entities, or limit their scope to avoid regulated consumer-facing businesses, scaling later.
Venture capital's increasing preference for mature infrastructure reduces funding for frontier exploratory projects. Experimental fields like decentralized social media, novel governance mechanisms, and innovative wallets are seeing dwindling research and development funds.
Industry influence is increasingly concentrated in the hands of a few companies with capital, licenses, and distribution power. Latecomers can only compete for existing market share within the framework established by the incumbents.
This trajectory has played out in other industries before: post-2008 financial crisis, banking consolidation continued, with only large institutions able to bear high compliance costs; the payments industry consolidated around providers with scale advantages in risk management and cross-border settlement; social media giants leveraged ample capital to build safety and trust systems that smaller platforms couldn't match.
Each of these sectors experienced a freewheeling, innovative early stage, until regulation and capital requirements rose to levels only resource-rich incumbents could sustain.
The very purpose behind the crypto industry's creation was to escape the monopolistic structures of traditional finance. Yet, as the data and current reality demonstrate, the crypto industry is replicating the maturation curve of other sectors. Entrepreneurs without capital, licenses, or backing from giants must now assess for themselves: within this development curve, does any space remain to create something entirely new from the ground up?
