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Chainalysis 2023 Report Review
Focus on the Asian market
Countries across Asia are undergoing rapid changes in their crypto regulatory environment, showing a more open stance than their Western counterparts.
Driven by economic conditions and financial infrastructure penetration, Asia is actively promoting the adoption of central bank digital currencies (CBDCs) and the use of stablecoins and is emerging as a leader in digital financial innovation.
Each Asian country has a unique pattern of cryptocurrency trading, with a variety of usage patterns regarding the preference of centralized exchanges (CEXs), decentralized exchanges (DEXs), and peer-to-peer trading.
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2023 Regional Crypto Market Report
Chainalysis is a global blockchain data platform that provides data to organizations in 70 countries. Each year, Chainalysis publishes a report that includes a country-by-country Global Crypto Adoption Index, which has become an important and respected metric for assessing the market in each region. As we've covered in our previous report, the index can be disputable due to its weighting toward lower-income countries. Still, it is currently one of the most reliable ways to get a sense of the current state of the market in each country.
Chainalysis has recently released "The 2023 Geography of Cryptocurrency Report". Tiger Research will highlight four key takeaways from the Chainalysis report and provide our own insights into the Asian market. You can use this link to learn more about Chainalysis' insights and to read the full report.
The fast movement of the Asian market
The cryptocurrency market in Asia is unique compared to other parts of the world, and there are differences in each country as well. However, one thing in common across all countries is a drive to develop cryptocurrencies, motivated by a variety of factors such as economic aspirations, a commitment to technological advancement, and a recognition of financial system needs.
For example, gamers in the Philippines have embraced the first generation of peer-to-peer gaming, and India is building a practical case for CBDCs. While the Web3 market is still in its infancy, the trend of integration with traditional finance is spreading faster in Asia than anywhere else. High net-worth individuals and institutional investors in the region are also exploring crypto investment opportunities.
1. Rapid regulatory change
The regulatory landscape for cryptocurrencies in Asia has been undergoing rapid change in recent years. Although there are discrepancies between countries, the general stance of the Asian markets is more open than those of Western countries. In particular, the regulatory changes resulting from the relationship between China and Hong Kong are noteworthy. While China had banned virtually all cryptocurrencies, Hong Kong has become relatively open to cryptocurrencies.
However, China and Hong Kong have a close one-country, two-systems relationship, and the degree to which the crypto market takes hold in Hong Kong will likely determine potential future changes in China. Hong Kong has been making efforts to attract web3 companies by formalizing the approval of crypto trading businesses and fostering an active crypto market. Hong Kong has shown a growth in trading volume to a total of USD 64 billion over a period of 12 months from July 2022 to June 2023. In comparison, China’s trading volume is USD 86.4 billion and Hong Kong has 0.5% of China's population.
Japan, Indonesia, and India have also recently been at the center of regulatory change. Indonesia is planning changes such as transferring the authority of its existing crypto regulator, BAPPEBTI, to the OJK. It also introduced a state-owned cryptocurrency trading system similar to the existing securities trading model in July 2023.
Japan is taking an open approach towards cryptocurrencies with the Liberal Democratic Party's release of the "Japan 2023 Web3 Whitepaper". This emphasizes Japan’s intent on a regulatory overhaul to revitalize the crypto and Web3 industries, with a focus on tax reform and improved regulation of NFTs.
India is also moving in a progressive direction, moving from considering an outright ban in 2021 to emphasizing the need for global regulation of crypto assets at the G20 summit in 2023.
However, most countries in Asia have yet to recognize cryptocurrencies as a widely accepted form of payment. The main reason is that it could lead to further instability in the value of the local fiat currency. Vietnam, for example, has experienced high inflation and a sharp decline in the value of its currency over the past several years. If cryptocurrencies are accepted as a form of currency or money, it could undermine the value of existing currencies. As a result, Vietnam does not have an official stance on cryptocurrencies, and many other Asian countries have left them in a gray zone at the national level despite active levels of private cryptocurrency activity.
2. Digitalization of central bank currencies
In the midst of digital transformation, Asian countries are actively promoting the introduction of central bank digital currencies (CBDCs), creating a real-world example of digital transformation. In particular, Asian countries such as the Philippines, Pakistan, and India are leading the innovation of digital finance by exploring the utilization of stablecoins and CBDCs in state economies. In particular, India is piloting a digital rupee program in major cities to reduce cash dependency and create a new paradigm for effective currency management.
The U.S., on the other hand, has been relatively conservative in adopting CBDC technology. The delay is due to a variety of factors, including political issues and personal privacy. In fact, the U.S. has even halted its CBDC research with MIT, adding to the uncertainty of when a U.S. digital dollar will be realized. In contrast, the European Union has been thoroughly preparing for the issuance of a CBDC by exploring legal regulations for a digital euro, but there are no practical examples of its use yet.
This disparity in the pace of digital transformation between Asia and other developed economies such as the U.S. is largely due to differences in economic and financial infrastructure. The U.S. and other developed countries have deeply entrenched financial systems and robust infrastructure, raising the transition costs of integrating blockchain technology into their existing systems.
However, some countries in Asia with less developed financial infrastructure, are better positioned to embrace and adapt to new digital infrastructure. The lack of existing financial infrastructure makes it less burdensome to adopt a new system right away. Furthermore, for countries that experience rapid fluctuations in the value of their currencies, the adoption of stablecoins or CBDCs can be a viable option for financial stability. This backdrop suggests that the situation in Asia is ripe for the accumulation of pragmatic digital transformation attempts, and we believe that it is when these attempts accumulate that real innovation will begin.
3. Different transaction types for different countries
Each Asian country shows a unique pattern in cryptocurrency trading. Globally, there is an even split between trading on centralized exchanges (CEXs) and decentralized exchanges (DEXs), with Japan showing a similar pattern. This trend is linked to the decline in trust in Japan's CEX platforms after the Mt. Gox scandal, and many users seem to have moved to DEXs.
South Korea and China stand out for their use of CEXs. South Korea has seen a significant increase in the use of local CEXs like Upbit, which are more trusted and regulated than global CEXs, following the Terra and FTX incidents. China continues to favor global CEXs like Binance via VPN despite the 2017 and 2021 exchange bans.
In Hong Kong and Taiwan, DEX usage is relatively high. OTC and peer-to-peer trading is very active especially in Hong Kong, although not reflected in official statistics. This is likely related to regulatory measures in China and the changing financial landscape in Hong Kong.
In our research on Asian countries, we found local/global CEX usage and peer-to-peer trading to be higher than that of DEXs and DeFi. Also, there is a high trading volume relative to income, indicating a huge interest in crypto.
The Asian market continues to evolve. While other parts of the world struggle with regulation, Asia continues to drive change and innovation. While the U.S. has been a leader in blockchain technology so far, it's likely that the real and practical changes in the future will be found in Asia.
However, each country in Asia has its own history and cultural characteristics, resulting in different conditions for each market. Thinking of Asia as a single market can be misleading, and lead to poor understanding of each market. The Asian market will continue to evolve and be at the center of change at an even faster pace. It is important to stay ahead of the curve and understand the specifics of each region.
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