Is the cryptocurrency epicenter moving away from East Asia?

by John Stapel

It probably came as little surprise last year when crypto intelligence firm Chainalysis declared East Asia “the world’s largest cryptocurrency market,” accounting for 31% of all cryptocurrency transacted during the previous 12 months. The region has a broad base of retail users along with a solid foundation of crypto traders and institutions, and China alone was at the time mining around two-thirds of all the Bitcoin in the world. 

In July 2021, Fidelity Digital Assets surveyed 1,100 institutional investors in the United States (408), Europe (393) and Asia (299) between December 2, 2020 and April 2, 2021. The study reinforced this idea, with the firm reporting that digital asset adoption rates are substantially higher in Asia (71%) than in Europe (56%) and the United States (33%). In March 2021, a Statista consumer survey of 74 countries on cryptocurrency ownership and usage determined that the Asian nations of Vietnam and the Philippines are ranked second and third globally, respectively.

But the past is not always a prelude to the future, and there is no guarantee that East Asia will remain the world’s center of gravity for crypto adoption. China’s attachment to crypto is tenuous at best, and Beijing’s rollout of its digital yuan could cause reverberations throughout the region. 

When asked about the crypto prospects of East Asia, Kim Grauer, head of research at Chainalysis, tells Magazine that the region has recently experienced “a major decline in cryptocurrency adoption compared with other regions globally,” further adding: 

“This drop-off is driven by a decline in Chinese activity beginning 6 months ago, which coincided with various crackdowns there including the mining ban and the halting of derivatives trading by major exchanges. We hypothesize that much of this activity has migrated to DeFi, but that hasn’t picked up enough that it makes up for the losses in the derivatives market yet.”

China’s dominance in Bitcoin mining made it “a natural marketplace for crypto,” says Lennard Neo, head of research at Stack Funds. But as reported, many rigs are moving elsewhere , including to Canada, Kazakhstan, Russia and the United States. 

Asked if Asia is likely to maintain its crypto dominance, Eloisa Cadenas, CEO of Mexico-based financial services firm CryptoFintech, tells Magazine: “It is a difficult question to answer because, when we think of Asia, we automatically focus our attention on China which, as we know, has taken quite restrictive measures in relation to Bitcoin, crypto assets and of course, mining.” 

China’s digital yuan is likely to have a big impact on the region, Cadenas says. Indeed, she anticipates that other Asian countries will try to replicate the digital yuan model, and “It is likely that there is also an intention to block or restrict the market for crypto assets in such a way that only the CBDCs of each country can proliferate.”

If that happens, the mass center of crypto adoption could move elsewhere — to Latin America or Africa, opines Cadenas. These are two regions where, according to her, there is “a greater possibility of adoption, since the economic, social and political context is different.” 

Asia’s crypto crown could indeed be in play now, as Latin America and Africa aren’t the only contenders. Here’s who could potentially fill the void if and when Asia falters:

North America

Traditional “reticence” on the matter of digital assets is the result of three principal factors, according to another report by Fidelity Digital Assets: price volatility, concerns around market manipulation, and the lack of fundamentals to gauge appropriate value. But U.S. respondents appear to be coming to grips with digital assets, despite these shortcomings.

“The strength of concerns [in the U.S.] decreased notably vs. last year across most factors,” reported Fidelity Digital Assets. “Price volatility concern fell 13 points, concerns around market manipulation fell 6 points and lack of fundamentals fell 8 points.”

Elsewhere, some of the United States’ top legacy banks — including State Street, BNY Mellon , JPMorgan Chase , Citigroup and Goldman Sachs — have been making forays into the crypto space .

On the mining front, the U.S. was already the number-two mining nation before China’s May crackdown on crypto mining , albeit a distant second. Back in September 2019, China contributed 75.53% of the global Bitcoin hash rate . But more recently, China’s portion of the hash rate has ebbed to 46.04%, while the U.S. has broadened its share to 16.85% globally. Henri Arslanian, crypto leader and partner at advisory firm PwC, tells Magazine: 

“The United States is probably the one country that has a lot of momentum now. The regulations are becoming clearer, there are numerous large crypto companies and there is a lot of capital flowing into crypto both from institutional investors and retail.” 

Meanwhile, north of the U.S. border, Canada has been innovating on the crypto front. The Purpose Bitcoin ETF, North America’s first crypto-based exchange-traded fund, launched in February and has been a big hit by most accounts. It was followed in April by an Ether ETF, with strong volumes reported. 

Many believe that it’s only a matter of time before Canada, with its vast hydroelectric resources, becomes a major player in crypto mining, particularly as more miners seek out renewable energy sources to power their rigs.

Latin America

The Latin American region could become a crypto adoption hotspot, and not only because El Salvador declared Bitcoin legal tender in June when it issued its Bitcoin Law — a historic move in the view of some.

Many regional economies are sustained by remittances — i.e., money sent home from workers abroad. They account for 23% of El Salvador’s gross domestic product, for instance. In Honduras, remittances also exceeded 20% of the gross national product in 2019, according to Pew Research Center. By comparison, Mexico saw only a 3% share of its GDP driven by remittances, but its gross numbers are high — $42.9 billion in 2020, according to the World Bank, which is a number behind only China and India. Crypto and blockchain technology potentially offer a more efficient way to transfer overseas payments.

The trend in Latin America “is toward retailers and unbanked users because with cryptocurrencies you can create cheaper financial products that, eventually, could promote greater financial inclusion,” CryptoFintech’s Cadenas tells Magazine.

There is also evidence that El Salvador’s dramatic action may be encouraging other countries in the region to devise their own crypto strategies. Paraguayan legislators introduced a cryptocurrency bill to the nation’s Congress in July, for instance.

“Where El Salvador has led, we can expect other developing countries to follow,” said Nigel Green , CEO and founder of financial service company deVere Group. “This is because low-income countries have long suffered because their currencies are weak and extremely vulnerable to market changes and that triggers rampant inflation,”

There isn’t much CBDC fervor in the region either, which means that Latin American countries are less likely to clamp down on crypto for competing with a government’s digital currency. “What I do see [in Latin America] is financial institutions creating alliances with crypto-asset companies to facilitate operations through crypto-assets, mainly with stablecoins,” Cadenas says.

Stack Funds’ Neo perceives some similarities between Latin America and Asia. The latter was historically home to a number of “restricted” currencies that were subject to government controls — such as the Chinese yuan, Indian rupee, Indonesian rupiah, Malaysian ringgit and Philippine peso — making them difficult to convert. These restrictions encouraged investors to turn to crypto “as a hedge against these limitations,” explains Neo. Similar tendencies may be emerging in Latin America where citizens increasingly appear to “prefer crypto over fiat [currencies], which are exacerbated by political turmoil.”

In its “2020 Geography of Cryptocurrency Report,” Chainalysis cites Venezuela — which ranked third globally out of 154 countries in its Global Crypto Adoption Index — as a stellar example “of what drives cryptocurrency adoption in developing countries and how citizens use it to mitigate economic instability,” adding that “Venezuelans use cryptocurrency more when the country’s native fiat currency is losing value to inflation, suggesting that Venezuelans turn to cryptocurrency to preserve savings they may otherwise lose.” Chainalysis saw the same pattern in other Latin American countries, as well as those in Africa and East Asia. 

Cryptocurrency adoption in the region may not all go according to plan, of course. Eric Anziani, chief operating officer of cryptocurrency exchange Crypto.com, tells Magazine that “El Salvador officially accepted Bitcoin as legal tender, but this news is a two-edged sword. If the experiment is successful, then it will promote crypto in the region; otherwise, it could make local governments look at cryptocurrencies with greater skepticism.”

Europe

As in North America, institutional interest in crypto is growing in Europe. Today, nearly 80% of institutional investors “believe digital assets should be part of a portfolio,” according to Fidelity Digital Asset’s July report. And while “this belief is strongest in Asia,” it is also strong and growing in Europe: “More than three-quarters (77%) of European investors share this belief, up from two-thirds the prior year.”

The European Commission’s proposed Markets in Crypto Assets (MiCA) regulation, undergoing its first reading in the European Parliament, is expected to create a harmonized European crypto-asset market that “will definitely attract more and more large institutional investors — hedge funds, pension funds etc. — that have been wary of investing in this asset class due to regulatory concerns,” says Patrick Hansen, head of blockchain at Bitkom, an association of German companies in the digital economy. 

When MiCA is implemented, a crypto firm receiving authorization from any one of the 27 European Union countries will be able to share its services across all the other EU states. Hansen also foresees greater mainstream adoption in the region and among its 450 million residents.

On the flip side, the European Central Bank is moving ahead with plans to introduce a digital euro that could be used by the 19 countries in the eurozone as “an alternative to third-party payment services and cryptocurrencies like Bitcoin,” reported Deutsche Welle, mainly because “Central bankers fear the widespread use of foreign or unregulated currencies could destabilize the economy.” 

In other words, Europe’s crypto-wary central bankers could still have something to say about crypto adoption in the region.  

Africa

When focusing on retail adoption, regions in the developing world such as Africa can’t be overlooked, Monica Singer, ConsenSys’ South Africa lead, tells Magazine. “Nigeria has one of the highest numbers of retail users of Bitcoin,” for instance — at least on a per capita basis. It ranks first among 74 countries in Statista’s March consumer adoption survey. She further adds:

“In countries where there is no trust in the fiat currency, and the population is young and mostly all have access to the internet, it is a natural progression that they will use cryptocurrencies to transact, in particular for remittances.”

Three African nations — Kenya, Nigeria and South Africa — made the top 10 in Chainalysis’ 2020 global crypto adoption index. “Remittances are an early use case for this developing cryptocurrency economy,” notes the report, adding that many of the region’s countries are also plagued by severe currency devaluation and instability, making them ripe for Bitcoin and its fixed, anti-inflationary supply.

Still, many African countries have restrictive policies with regard to currencies not backed by central banks, which could impede adoption, Singer tells Magazine. In early 2021, Nigeria’s central bank effectively banned commercial banks from providing account services to crypto exchanges .

The dominant mood is optimism, though, as epitomized by Cardano founder Charles Hoskinson’s keynote address at Blockchain Africa in which he compared Africa’s emerging economy to China in the 1980s — both offering case studies of new technologies leapfrogging legacy systems. Indeed, Hoskinson predicted : “There’s a great potential for that to be African nations — not Germany, not France, not England, not the United States, not China or Japan.”

East Asia 

Of course, there are good reasons that nothing much may change at all — and East Asia remains crypto’s adoption epicenter. Asian countries have embraced digitalization, while their appetite for crypto was whetted by their early exposure to pioneering crypto firms. Indeed, by the end of 2020, six of the 10 largest crypto “unicorns” were Asia-based — including Bitmain, Binance, OKEx, Huobi, BitMEX and FTX. 

Moreover, many East Asian nations that have embraced e-payments are used to public market investing and encourage STEM subjects in their school systems. Charles d’Haussy, managing director of the Asia-Pacific region at ConsenSys, tells Magazine that Asia’s “new wealth,” as well, is keener to embrace new asset classes, compared with “established wealth in the Western World which is more drawn to traditional asset classes.” For these reasons, he concludes that “Asia has a head start and will remain a leader [in crypto] for the decades to come.”

Even without China, Asia may be deep enough with regard to crypto adoption that it won’t lose its leadership position. Winston Ma, adjunct professor at New York University School of Law and author of The Digital War: How China’s Tech Power Shapes the Future of AI, Blockchain and Cyberspace , tells Magazine:

“Asian investors are used to inflation risk in their economies and high volatility in trading markets, and they embraced digital assets to hedge against the fiat money printing across the globe.”

“The lead may shift from China to Southeast Asian countries, as well as other countries with less restrictive regulations and laws with regard to crypto,” Yu Xiong, international associate dean at Surrey University and chair of business analytics at Surrey Business School, tells Magazine. In addition, Hansen notes that crypto-favorable regulatory frameworks have emerged in Singapore, Hong Kong and Japan.

Meanwhile, on the institutional front, “Regulatory clarity and tax treatment of crypto markets relative to their other options — stocks, derivatives, etc. — will matter a great deal more than it does for retail investors,” says Gina Pieters, assistant instructional professor in the Department of Economics at the University of Chicago. Here again, East Asia often seems further advanced than other regions. Pieters adds:

“Japan’s tax treatment of gains from crypto investment is much simpler than USA tax treatment, and so all else equal it would not be surprising to see higher adoption in Japan by institutional investors compared to the USA.”

Overall, if one were to categorize the competition, it would be the history, culture, professional traders, exchanges and first-mover advantage of Asia pitted against the youth and economic needs of Latin America and Africa, the investment capital and entrepreneurial vitality of North America, and the wealth, size and regulatory harmonization of Europe. 

Who will prevail? 

The case could be for Latin America or Africa, where the need is the greatest and a clear solution seems at hand. But, of course, it’s really anyone’s guess.