Chainalysis Research Mass Adoption of Cryptocurrencies in India, the Philippines, and Pakistan

Chainalysis Research Cryptocurrency Mass Adoption in India, the Philippines, and Pakistan

Author | Chainalysis

Central Asia, South Asia, and Oceania (CSAO) have the most vibrant and attractive cryptocurrency markets in the world. In terms of raw transaction volume, Central Asia and Oceania are the third-largest cryptocurrency market we studied, behind only North America and Central Europe, Northern Europe, and Western Europe (CNWE), accounting for less than 20% of global transaction volume.

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India leads in terms of transaction volume, receiving about $268.9 billion in cryptocurrency assets during the study period.

However, raw transaction volume alone does not tell the whole story. When we consider purchasing power and population to measure grassroots adoption, CSAO takes the lead. We see this in our Global Cryptocurrency Adoption Index, with six of the top ten countries located in the region: India (1), Vietnam (3), the Philippines (6), Indonesia (7), Pakistan (8), and Thailand (10). In addition, DeFi played a more significant role in CSAO last year, accounting for an estimated 55.8% of the region’s transaction volume from July 2022 to June 2023, compared to 35.2% in the previous year. The institutional adoption rate in the region also appears to be increasing, with 68.8% of total transaction volume coming from transfers worth $1 million or more, compared to 57.6% in the previous period.

However, it is important to note that CSAO is not a homogeneous region when it comes to cryptocurrency adoption. Different factors drive the adoption of cryptocurrencies in different CSAO countries, leading to varying rates of usage of different types of cryptocurrency services. We can see this in the following chart, which shows the breakdown of network traffic for different types of cryptocurrency platforms in CSAO countries with the highest adoption index.

Centralized exchanges dominate network traffic in all of these countries, as is the case globally. However, we also see significant differences elsewhere. For example, a significant portion of cryptocurrency-related network traffic in the Philippines goes to gaming and gambling platforms, accounting for 19.9%, with Vietnam following closely behind at only 10.8%. At the same time, countries like Pakistan and Vietnam have a higher share of activity in P2P exchanges, which are more commonly used in emerging markets or countries with stricter capital controls.

Next, we will explore the different application-driven factors in the Philippines and Pakistan, two CSAO countries, and examine how these differences lead to different usage patterns. Then, we will take a look at some of the latest trends in India, a country that is at the forefront of grassroots cryptocurrency adoption.

The Axie Infinity craze in the Philippines has kicked off the adoption of cryptocurrencies, but what will happen next?

For a long time, cryptocurrency enthusiasts have viewed the $217 billion video game industry as a sector where cryptocurrencies can have a positive impact, such as allowing players to earn, buy, and sell in-game items. We have seen ambitious projects start to tackle this problem and achieve varying degrees of success, and no country has embraced these projects quite like the Philippines, especially with the gaming and money-making game Axie Infinity capturing the attention of Filipinos. To learn more, we interviewed Donald Lim, a senior figure in the Philippine advertising and marketing field who has ventured into the world of cryptocurrencies and now serves as the inaugural chairman of the Philippine Blockchain Committee and the main organizer of the Philippine Blockchain Week.

“Lim said: ‘I believe Axie Infinity is the moment when cryptocurrencies truly land in the Philippines. Although this game is most popular among the younger generation, Lim sees people from all walks of life playing it.’ If you hop on a tricycle, you will see the driver with their phone placed at the top of the windshield, playing Axie – stories like this are abundant. In fact, the Philippines accounts for the largest share of Axie Infinity’s network traffic, reaching 28.3%. On-chain data shows that the growth of cryptocurrency trading volume in the country coincides with the growth of Axie in the summer of 2021.”

What makes the Philippines so receptive to “play-to-earn” games like Axie Infinity? Lim cites several reasons. First, the Philippines has a group of tech-savvy young people who have already embraced fiat digital wallets like GCash. When Axie Infinity was launched and started gaining popularity, the world was in the midst of the COVID pandemic, and many people were stuck at home without work – Axie provided a way for people to have entertainment and earn extra cash. It also provided a social channel. “Filipinos are accustomed to building connections through the internet and social media because as a country composed of many islands, we are naturally isolated from the outside world. We are also the world’s largest exporter of human capital, and Filipinos abroad want to connect with people back home,” Lim explained. According to him, the usage rate of social media in the Philippines is high, making it easier for this game to spread virally through influencer marketing and reach users.

Since then, the overall usage rate and token price of Axie Infinity have seen significant declines, and the economic conditions of many Filipinos who have abandoned the game have not improved much compared to before. However, the success of this game has laid the foundation for further cryptocurrency adoption, as many Filipinos who have played this game now have wallets that can be used for other purposes.

Lim believes that in order to transform the initial momentum into beneficial cryptocurrency applications, the best way is for regulatory agencies and large internet companies to step forward. “The adoption of cryptocurrencies cannot be only bottom-up. Governments need to establish rules, and the largest companies need to incorporate cryptocurrencies into their products.” Positive developments have already emerged in both of these areas. The Philippine government has designated an economic zone in Batan where cryptocurrency companies that set up shop there can enjoy tax incentives and operate within a regulatory sandbox aimed at nurturing innovation. In the private sector, Philippine Airlines recently launched a utility-driven NFT series that allows users to enjoy special treatment, and Cebuana Lhuillier, a Philippine financial services company, announced its integration with the Stellar blockchain to provide faster and cheaper remittance services – which is crucial for countries like the Philippines that receive a large amount of funds from abroad.

Lim firmly believes that the Philippines has the ability to become a leader in the field of cryptocurrencies. “We can become the blockchain capital of Asia. Look at the developer talent, look at all the online communities dedicated to trading and NFTs – it’s only a matter of time.”

In Pakistan, demand is driving the adoption of cryptocurrencies (especially stablecoins)

Although Pakistan has a relatively low overall trading volume, it is at the forefront of grassroots cryptocurrency adoption, not far behind the Philippines. However, the adoption patterns in the two countries are quite different. Social relationships and speculative behavior have led many Filipinos to enter the cryptocurrency field through “play and earn” games, while the need for wealth preservation seems to be the reason why many Pakistanis are turning to cryptocurrencies in the face of high inflation and currency devaluation. We interviewed Zeeshan Ahmed, the regional manager for the famous cryptocurrency exchange Rain in Pakistan, to learn more. Rain operates in multiple countries in the region, but due to the current ban on cryptocurrency trading in Pakistan, it is currently not conducting any commercial activities in the country, but it is working hard to obtain regulatory approval one day.

When we asked Ahmed what is driving the adoption of cryptocurrencies in Pakistan, he provided some thought-provoking data. “Five years ago, Pakistan’s inflation rate was 10.6%. Now, the officially reported inflation rate is 29.4%, but in reality, it is much higher. The major surge has occurred in the past 16 months, with the value of the rupee dropping from 1 US dollar to 178 Pakistani rupees in January 2022 to 320 Pakistani rupees in August.” Unfortunately, Pakistan’s dire economic situation means that savings will be rapidly eroded. In addition, in the current environment, there are not many good investment options for the average person. “The stock market and securities exchanges have been struggling. Any gains you make can be wiped out by inflation. Pakistani citizens are also prohibited from holding physical foreign currency – foreign currency must be deposited in banks. For many people, this makes cryptocurrencies, especially stablecoins, a necessity.” It is our only hedge option.

Equally important, on-chain data does not necessarily reflect the full extent of countries like Pakistan adopting cryptocurrencies. Most of the country’s transaction volume, especially the acquisition of stablecoins, occurs through informal peer-to-peer markets that are not easily identifiable on-chain. Therefore, it is difficult to accurately determine how many people hold or acquire cryptocurrencies at any given time. Additionally, experts speculate that Pakistani businesses use stablecoins like USDT to import goods from abroad as a hedge against inflation and currency devaluation, but this is difficult to confirm.

Although Pakistan officially prohibits cryptocurrency trading, Ahmed believes that a clear regulatory framework would make the cryptocurrency market more effective for Pakistani citizens. While the official stance has not changed, Ahmed says he feels some progress has been made recently. “Eight months ago, our regulatory authority didn’t even want to talk about cryptocurrencies. But recently, in July of this year, we submitted a whitepaper on how to regulate cryptocurrencies to them, and they seem to be moving forward.” For example, future regulations may allow Pakistanis to transfer funds from bank accounts to exchanges, making it easier and more cost-effective for them to acquire the desired digital assets and create conditions for further growth.

Despite difficulties in tax laws, India remains a top cryptocurrency market

While other markets in the region are vibrant and can help us understand the unique driving factors behind cryptocurrency adoption, the largest CSAO cryptocurrency market to date is India. According to our Global Crypto Adoption Index, India ranks first in grassroots adoption rates worldwide, but more impressively, when measured by estimated trading volume, India has become the world’s second-largest cryptocurrency market, surpassing several wealthier countries.

Cryptocurrency usage in India spans several different forms of activities, with India ranking in the top ten in usage across different categories of cryptocurrency services.

Perhaps most impressively, despite challenging regulatory and tax environments for the industry, India remains a top cryptocurrency market. Last year, regulatory authorities provided clearer guidelines on many issues, such as formally mandating that their anti-money laundering rules apply to cryptocurrency transactions. However, India imposes tax rates on cryptocurrency activities that are significantly higher than most other countries, levying a 30% tax on profits – a cryptocurrency-specific rate that is higher than the tax rate for other investments such as stocks – and a 1% tax on all transactions, also known as Tax Deducted at Source (TDS), which means cryptocurrency platforms must deduct the corresponding amount from users’ balances to complete transactions.

Recent reports further confirm that the uneven implementation of TDS may increase the difficulty of competition for local Indian exchanges. While every exchange operating in India must levy TDS tax on Indian users, many international exchanges have not effectively done so, which may attract Indian users instead of being primarily concentrated in Indian exchanges. We can see some evidence from the following figure, which shows that network traffic from India to international exchanges immediately increased after the implementation of TDS in July 2022.

This trend highlights the importance of all exchanges operating in specific countries strictly enforcing local rules such as TDS. Otherwise, it will create an environment for regulatory arbitrage and harm the local cryptocurrency industry.

However, despite these issues, they do not seem to suppress the huge demand for cryptocurrency in India – as long as the demand exists, cryptocurrency will have a place in the world’s second-largest country.

CSAO shows that cryptocurrency can adapt to local conditions

No region has more reason than CSAO to believe that cryptocurrency is the future trend, not only because so many CSAO countries are at the forefront of grassroots applications. This is because these countries have extensive and unique economic needs, and different cryptocurrency platforms and assets have emerged to meet these needs. In the Philippines, many people want to speculate on new assets, earn extra cash, and establish digital connections with others. The “play games to earn cash” game has taken hold there. These games are the entry point into the broader digital asset economy, and now thousands of Filipinos have cryptocurrency wallets that can be used for other purposes. In Pakistan, the economic situation is more severe – considering that Pakistan’s per capita purchasing power parity is $5680, while the Philippines’ per capita purchasing power parity is $9210, plus the currency devaluation we described – stablecoins are providing economic relief. If the Pakistani government implements reasonable cryptocurrency regulations, its existing users will become the foundation for the thriving development of the cryptocurrency market, just as we have seen in India. CSAO shows that cryptocurrency can play a valuable role regardless of a country’s circumstances.

Original article link: https://www.chainalysis.com/blog/central-southern-asia-cryptocurrency-adoption/

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