Despite global financial headwinds and significant falls in the value of cryptocurrencies this year, emerging markets are adopting the technology at a rapid pace. The global adoption of cryptocurrencies in the first two quarters of this year surpassed 2019 and 2020, according to the Global Crypto Adoption Index published by US blockchain analytics firm Chainanalysis.
Emerging markets dominated the supply chain analysis index, with Vietnam, the Philippines, Ukraine and India ranked as the top four users, while Pakistan ranked sixth, Brazil seventh and Thailand eighth.
The data suggests that despite weaker public sentiment on cryptocurrencies in developed countries amid the current bear market, demand has remained robust in emerging markets.
Adoption drivers
With rising US interest rates and inflation weakening many fiat currencies around the world, cryptocurrencies and the decentralized exchanges on which they are traded allow users in emerging markets to limit exposure to macroeconomic pressures and ease transaction flows.
Long touted as a hedge against inflation, cryptocurrencies as an asset class have seen one of the biggest declines since the second half of 2021, as inflation rose globally, prompting many banks and financial institutions to question this premise.
The Covid-19 pandemic spurred the growth and adoption of new e-commerce solutions as many citizens sought innovative ways to access financial services.
The number of unbanked citizens – those without access to checking or savings accounts, credit cards, loans, mortgages or other traditional financial products – fell from 1.7 billion in 2017 to 1.4 billion in 2021, according to the World Bank.
In Morocco, Vietnam, Egypt and the Philippines, more than 65% of the population is unbanked, according to data from British research platform Merchant Machine. Three of these countries were among the top 15 on the chain analysis index.
Regionally, 50% of citizens in the Middle East and Africa are unbanked, while South and Central America averages 38%, Eastern Europe 33% and Asia Pacific 24%. Meanwhile, 94% of the inhabitants of Western and Central Europe are considered bankable.
Given these disparities in financial inclusion, it is not surprising that residents of emerging markets are driving the use of cryptocurrencies and decentralized exchanges, which Chainanalysis argues are more important than the total volume of holdings, trades or even the price.
Weighs risk and reward
Last year, El Salvador became the first country to accept Bitcoin as legal tender; President Nayib Bukele promised to build a “Bitcoin City” as a tax haven for crypto investors, including an airport and residential and commercial areas.
However, Bitcoin’s subsequent price crash — it fell from $47,000 to less than $20,000 in the 12 months after El Salvador adopted it as legal tender — has raised questions about those plans and El Salvador’s ability to cover government bonds worth 1, $6 billion due in 2023 and 2025.
Nevertheless, several African nations continue to encourage the use of cryptocurrencies to drive financial inclusion.
The Central African Republic adopted Bitcoin as legal tender in April, and the continent’s four largest economies – Egypt, Kenya, Nigeria and South Africa – also have the largest number of cryptocurrency owners in Africa.
For its part, Zimbabwe has installed a Bitcoin ATM managed by Golix, the country’s first and largest cryptocurrency exchange, and the only place in the country where citizens can buy or sell US dollars for Bitcoin.
Citizens skirt public bans
A major risk to the long-term viability of cryptocurrencies is the potential for governments to restrict trade due to their use for illicit payments.
Last year, China introduced a ban on cryptocurrency mining and trading. Eight other countries, including Egypt and Morocco, have similar bans in place, while 42 countries have implicit bans on these activities.
Still, China was the 10th largest user of crypto and Morocco the 14th, according to the Chainanalysis index. In the case of China, there are many citizens who violate the ban and the authorities reportedly do not strictly enforce it.
However, the country has encouraged the use of non-fungible tokens (NFTs) that leverage blockchain technologies, as long as they are traded on regulated exchanges.
Most NFTs are bought and sold with cryptocurrencies, leading to adoption in Central and South Asia as well as Oceania.
NFT marketplaces were cited as a major reason for India’s big jump in the chain analytics rankings, including FanCraze, a platform that sells cricket NFTs and has financial backing from US venture capital firm Sequoia Capital.
Blockchain-backed, play-to-earn (P2E) gaming is another big draw for new cryptocurrency users, especially in top-rated Vietnam.
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Despite the high-profile hacking and subsequent collapse earlier this year of the NFT online game Axie Infinity, which was created by Vietnamese studio Sky Mavis, many in Southeast Asia are turning to new, locally developed P2E alternatives.
More sustainable mining
Another fundamental concern for cryptocurrencies – the energy costs of mining – has become more acute in light of recent energy shortages and supply chain disruptions due to Russia’s ongoing invasion of Ukraine.
The energy required to run the Bitcoin network varies according to the volume of mining and transactions, but at the time of writing, its annual electricity consumption was estimated at 92.7 TWh, according to the Cambridge Bitcoin Electricity Consumption Index, which is roughly equal to the annual electricity consumption. electricity consumption in Pakistan.
However, development is underway to make cryptocurrency mining more sustainable by using renewable energy. These have coalesced this year around the so-called regenerative finance movement, an attempt to merge the growth of Web3 technologies such as blockchain with measures that address the climate crisis.
In September, the White House Office of Science and Technology Policy released a report on the climate and energy implications of cryptocurrency in the United States, which identifies Web3’s capacity to support technologies that monitor or reduce climate impacts.
Cryptocurrency miners themselves are also innovating to reduce the environmental impact of their activities. For example, while Norway is already able to mine cryptocurrency using renewable energy due to its excess hydropower generation, the Norwegian company Kryptovault recovers excess heat from Bitcoin mining rigs into dry chopped timber.
By Oxford Business Group
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