Chainalysis Report Overview of the Cryptocurrency Market in North America and the State of Stablecoins

Comprehensive Analysis North American Cryptocurrency Market and the Current State of Stablecoins - A Chainalysis Report Overview

Author: Chainalysis Team; Translation: Song Xue, LianGuai

North America is the largest cryptocurrency market we have researched, with an estimated value of $12 trillion received on-chain from July 2022 to June 2023. This total accounts for 24.4% of global transaction activity during the research period.

Compared to other regions in the world, the value of cryptocurrency received in North America from July 2022 to June 2023

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Percentage of total cryptocurrency transaction volume in different regions, Q3 2021 to Q2 2023

Most of the activity in North America is driven by the United States, which ranks first globally. Canada also contributes significantly to the transaction volume, ranking seventh globally.

North America: Value of cryptocurrency received by countries, July 2022 to June 2023

The cryptocurrency market in North America is driven by institutional activity more than any other region, with 76.9% of the trading volume being driven by transactions of $1 million or more. The on-chain activity in the region is relatively evenly distributed between DeFi and centralized exchanges.

Transaction volume in different regions from July 2022 to June 2023 (by transfer size)

Total value received by service type, divided by region, from July 2022 to June 2023

As we have seen in other regions, on-chain data indicates that cryptocurrency activity in North America declined last year following negative events such as the FTX collapse in November 2022. Interestingly, cryptocurrency activity contracted even further in the following months – following the banking crisis in March, which led to the closure of Silicon Valley Bank as well as cryptocurrency-friendly banks Signature and Silvergate, and the subsequent temporary decline in the value of USDC on the secondary market. However, on-chain activity started to recover from June onwards. As shown in the chart below, transaction volume data suggests that the withdrawal of institutional investors was the main driver of the overall decline in activity, as retail and sub-institutional professional traders’ expected activity remained consistent.

2022 July-2023 June North American monthly trading volume (by transaction size)

Consistent with the global trend, we also observed a relative decline in the use of stablecoins in the North American region compared to other digital assets, starting from February 2023. From that time until June 2023, the on-chain trading volume of stablecoins in the North American region decreased from 70.3% to 48.8%.

2023 July-2022 June North American trading volume by asset type proportion

Although people had already started moving away from stablecoins before the banking collapse in March, concerns about stablecoins from investors may have played a role in this ongoing transformation. In relation to this, the market value of stablecoins hit a two-year low last summer.

The United States may be losing regulatory control over the stablecoin market

Despite the aforementioned decline, stablecoins still remain the most widely used type of cryptocurrency asset – according to Chainalysis data, during the period from June 2023 to July 2022, more than half of all on-chain transaction volume of centralized services consisted of stablecoins – and over 90% of stablecoin activity occurred in stablecoins pegged to the US dollar. Given the core role of dollar-denominated reserves for these assets, regulatory agencies in the United States have a keen interest in exercising some regulatory oversight over stablecoins. Firstly, cryptocurrencies have been used in criminal activities, including unique and harmful forms of crime that affect national security, such as theft by hackers associated with North Korea. If US regulators can make efforts to limit the role of stablecoins in such activities, given the significant share of stablecoins in overall cryptocurrency activity, this would have a huge positive impact on cryptocurrency-related crimes. Stablecoin regulation also provides an opportunity for regulators to help ensure that the United States becomes a hub for cryptocurrency businesses, which will play a crucial role in expanding the use of the US dollar globally as the digital economy continues to grow. However, data shows that an increasing amount of stablecoin activity is being conducted through unlicensed entities.

We can observe this trend from the services provided by stablecoin transactions. Since spring 2023, the majority of stablecoin inflows among the top 50 cryptocurrency services have shifted from US licensed services to non-US licensed services, negating the opposite trend that occurred at the end of 2022 and the beginning of 2023. As of June, 54.6% of stablecoins flowing into the top 50 service companies went to non-US licensed exchanges.

Proportions of stable coin inflow from US authorized exchanges and non-US authorized exchanges from July 2022 to June 2023

We can see a similar trend in the volume of stable coin transactions on the blockchain based on whether the issuer is a US-licensed entity.

Stable coin transaction volume divided by the licensing status of the issuer, January 2023 to October 2023

Although initially US entities helped legalize and launch the stable coin market, more and more cryptocurrency users are engaging in stable coin-related activities with exchanges and issuers based overseas. Unfortunately, this means that the US government is losing the ability to regulate stable coins, and US consumers are missing out on the opportunity to participate in stable coins with the protection provided by the US regulatory system.

Although Congress has recently shown interest in stable coin legislation, comprehensive regulations have not yet been passed. Here is a summary of proposed stable coin bills currently being implemented:

• The “Clarity for Payment Stablecoin Act,” scheduled to be launched in July 2023, aims to provide a clear regulatory framework for the issuance of payment stablecoins, protect consumers, and promote innovation.

• The “Responsible Financial Innovation Act,” introduced in June 2022 and reintroduced in July 2023, although not specifically targeting stable coins, will subject stable coin issuers to new prudential financial regulation.

Regardless of which bill stands out, the challenge for policymakers in stable coin legislation will be striking the right balance between protecting consumer safety and creating a framework that allows the crypto market to continue to grow and foster innovation. Time is also crucial.

Jason Somensatto, Head of Public Policy for Chainalysis North America, agrees. “There are still significant debates around the regulation of stable coins, such as the appropriate role of national regulatory agencies in registering and supervising stable coin issuers. These debates can be resolved, and should be resolved as soon as possible for global competition and necessary regulation,” he told us.

Somensatto also discussed the clear advantages demonstrated by stable coins (and all cryptocurrencies) compared to fiat currencies. He said, “The inherent transparency of blockchain technology enables global regulatory agencies, including the US, to effectively investigate and combat illegal activities.” “This transparency can also strengthen sanction enforcement, allowing participants in the entire crypto ecosystem to screen and detect activities involving sanctioned entities.”

Decline in overall DeFi adoption

North America has historically been a significant adopter of DeFi. However, despite still leading the world in terms of raw trading volume, the region’s share of cryptocurrency activities in DeFi saw a significant decline last year.

July 2022 – July 2023 North American service received value

The most likely explanation is the market turbulence experienced last year. As CoinDesk recently reported, many DeFi protocols catered to highly speculative trading of newly created assets that centralized exchanges couldn’t offer, and these assets were often the first to be withdrawn by investors during market downturns. Another potential driving factor behind the decline of North American DeFi is the regulatory uncertainty it faces in the US market.

Despite the challenges, formulating such regulations is imperative as DeFi has many practical applications such as trading, asset management, lending, and payments. Coinbase CEO Brian Armstrong shared some DeFi use cases that he finds interesting. Aside from the benefits brought by lending, payments, and staking, Armstrong also remains optimistic about web3 innovations like decentralized identity frameworks that allow users, as opposed to large tech companies, to own their digital identifiers.

Regulation will be key to sustained growth of cryptocurrency in the region

The decline in cryptocurrency activities in North America last year is not surprising, considering the decrease in global trading volume and grassroots adoption rates. However, despite the decline in trading volume, North America still ranks fourth in the 2023 global cryptocurrency adoption index. As the region recovers from the crypto winter, regulation will play a crucial role in its revival. The US Congress is actively working on advancing promising crypto legislation, and prominent regulatory bodies are committed to safely developing the ecosystem. CFTC Commissioner Caroline Pham recently stated that her organization can pilot a program “supporting the development of compliant digital asset markets and tokenization.” Initiatives like this bring hope for cryptocurrency growth in North America and beyond.

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