Why the biggest emerging markets are turning to crypto

With the US mired in political stasis while other regions build crypto frameworks, it’s worth looking at the evolution of, and prospects for, on-the-ground demand for crypto assets. This is becoming increasingly relevant as many major countries struggle with high inflation, unstable currencies and autocratic control over financial access, and as populations become increasingly crypto-aware and a lack of trust in centralized institutions grows.

Noelle Acheson is the former head of research at CoinDesk and Genesis Trading. This article is excerpted from her Crypto Is Macro Now newsletter, which focuses on the overlap between the shifting crypto and macro landscapes. These opinions are hers, and nothing she writes should be taken as investment advice.

On the face of it, this may sound like an overreaction to FATF’s crypto stance – last Thursday, the organization’s president published a letter titled “An end to the lawless crypto space” urging crypto regulation rather than an outright ban .

Pakistan once again has a somewhat strained relationship with the FATF, having just last October been removed from its “grey list” (which labels certain countries as having “deficiencies” in their AML controls, which in turn can lead to limited participation in global finance).

It is also not difficult to see the hand of the International Monetary Fund. Pakistan is currently in talks with the organization over a bailout package, although negotiations appear to have stalled and concerns over the country’s political and economic issues are beginning to affect neighboring countries. The IMF has not been shy about its discomfort with crypto markets, and a few months ago reports surfaced that it had applied crypto-suppression conditions to negotiations with Argentina.

Yet, crypto usage in Pakistan is nevertheless active, as people reportedly convert their salaries into stablecoins to prevent currency erosion. The rupee has fallen more than 20% year-to-date against the US dollar, more than 30% over the past year. Meanwhile, BTC is up 103% in rupee terms so far in 2023 (versus 63% in US dollar terms). It’s probably no coincidence that a 2022 report from forensics company Chainalysis ranked Pakistan 6th in terms of global crypto adoption.

There is also Nigeria (the sixth largest country in the world, with more than 218 million people), which is likely to devalue its currency once the new president is sworn in, in an attempt to ease trade imbalances and dollar shortages. The sub-Saharan nation is ranked 11th in Chainalysis’ global crypto adoption rankings, and according to Google Trends, looking back over the past 90 days, Nigeria is the highest ranked country in terms of searches for the term “crypto” and second in terms of searches for the term “bitcoin.”

Turkey is the 18th largest country in the world in terms of population, with more than 85 million inhabitants. Last week, its currency hit a new record low as markets braced for Erdogan’s likely re-election in the May 28 runoff. A recent chart by crypto market data firm Kaiko shows the rise in lira-based crypto activity, now notably higher than euro-based activity. Turkey was 12th in Chainalysis’ 2022 crypto adoption ranking – currency woes and the urgent need to hedge and diversify will likely push it up the list.

An unexpected entry to my “watch the adoption” list is Japan – the 11th largest country with over 124 million people, and the third richest in terms of nominal GDP. James Butterfill, head of research at CoinShares, shared a chart last week detailing growth in spot volumes on crypto exchanges. The leader? Japan, with the second highest average daily volume (after the US) and easily the highest percentage growth (around 55% year-to-date).

This may be largely for speculation, as Japan has low inflation and its currency is relatively stable. Or, it could be a sign of investors bracing for higher inflation and currency instability. However, higher inflation will most likely trigger interest rate hikes, which should strengthen the yen, so it’s not clear what bitcoin will be a hedge for in Japan.

There are many other examples of citizens around the world turning to crypto to hedge against the volatility and devaluation of local currencies – Ukraine, Argentina and Lebanon are just a few that come to mind. Many struggle with the absence of reliable ramps and with the difficulty of conservation. But few are even remotely concerned about US regulatory hostility.

All of this serves as a reminder that the US may have the largest financial market in the world, but crypto’s purpose goes far beyond the speculation that financial markets serve. What’s more, many developing economies are used to regulators overstepping their bounds in terms of restricting financial freedom, and so their citizens find the decentralized nature of many crypto-assets easier to understand and appreciate than individuals are used to. are to more open regimes.

Throw in the increasing likelihood of significant currency turmoil ahead in emerging economies, inflationary pressures and a strong dollar, and in turn the likelihood of political turmoil, and you can see how the “insurance” and “hedging” properties of crypto assets like BTC and stablecoins become even more compelling. Monetary liquidity headwinds can be significant, but that’s not the whole crypto market story.