Chainalysis Cryptocurrency Market Research Report: Large-scale Adoption of Cryptocurrency in India, the Philippines, and Pakistan

Original Title: 《Is Central \& Southern Asia the Future of Crypto? Here's What Drives Crypto Usage in the Region Leading the Way in Grassroots Adoption.》

Author: Chainalysis

Central Asia, South Asia, and Oceania (CSAO) have some of 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 markets in our study, following North America and Central, Northern, and Western Europe (CNWE), accounting for less than 20% of global transaction volume.

India leads by a wide margin in transaction volume, receiving approximately $268.9 billion in crypto assets during the study period.

However, raw transaction volume 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 the Global Cryptocurrency Adoption Index, where six of the top ten countries are located in this region: India (1), Vietnam (3), the Philippines (6), Indonesia (7), Pakistan (8), and Thailand (10). Additionally, 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 same period the previous year. The region's institutional adoption rate also seems to have increased, with 68.8% of total transaction volume coming from transfers valued at $1 million or more, up from 57.6% in the prior period.

Importantly, CSAO is not a monolith when it comes to cryptocurrency adoption. The factors driving cryptocurrency adoption vary across different CSAO countries, leading to different usage rates of various types of cryptocurrency services. We can see this in the chart below, which shows the breakdown of network traffic for different types of cryptocurrency platforms in the CSAO countries with the highest adoption index.

In all these countries, centralized exchanges dominate the majority of network traffic, which is also the case globally. However, we see significant differences elsewhere. For example, a large portion of cryptocurrency-related network traffic in the Philippines flows to gaming and gambling platforms, accounting for 19.9%, followed closely by Vietnam at just 10.8%. Meanwhile, countries like Pakistan and Vietnam have a higher share of activity on P2P exchanges, which are more commonly used in emerging markets or countries with stricter capital controls.

Next, we will explore the different application drivers in the Philippines and Pakistan and examine how these differences lead to varying usage patterns. Then, we will look at some recent trends in India, a country that is leading the world in grassroots cryptocurrency adoption.

The craze for Axie Infinity marked the beginning of cryptocurrency adoption in the Philippines, but what comes next?

For a long time, cryptocurrency enthusiasts have viewed the $217 billion video game industry as a field where cryptocurrency could have a positive impact, such as allowing players to earn, buy, and sell in-game items. We have seen some ambitious projects start to tackle this issue with varying degrees of success, and no country has welcomed these projects like the Philippines, especially the play-to-earn game Axie Infinity, which has captured the attention of Filipinos. To learn more, we interviewed Donald Lim, a veteran in the advertising and marketing field in the Philippines, who has worked across various industries and has now entered the cryptocurrency world as the first chairman of the Philippine Blockchain Council and a key organizer of Philippine Blockchain Week.

"Lim said, "I think Axie Infinity was the moment cryptocurrency truly landed in the Philippines. While this game is most popular among the younger generation, Lim sees people from all walks of life playing it. "You get into a tricycle, and you see the driver with his phone on the dashboard playing Axie --- there are so many stories like this. In fact, the Philippines accounts for the largest share of Axie Infinity's total network traffic at 28.3%, and on-chain data shows that the growth in cryptocurrency transaction volume in the country coincided with the rise of Axie in the summer of 2021.

What makes the Philippines so receptive to "play-to-earn" games like Axie Infinity? Lim has several reasons. First, the Philippines has a tech-savvy young population that has already adopted fiat digital wallets like GCash. When Axie Infinity launched and gained 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 entertain themselves and earn extra cash. It also offered a social outlet. "Filipinos are used to trying to connect online and through social media because, as an archipelago, we are naturally isolated from the outside world. We are also the largest exporter of human capital in the world, and Filipinos abroad want to connect with those back home," Lim explained. According to him, the high usage rate of social media in the Philippines made it easier for the game to go viral through influencer marketing and reach users.

Since then, the overall usage rate and token price of Axie Infinity have seen a significant decline, and many who abandoned the game in the Philippines and elsewhere are not much better off economically. However, the success of this game has laid the groundwork for further cryptocurrency adoption, as many Filipinos who played the game now have wallets that can be used for other purposes.

Lim believes that the best way to convert the initial momentum into beneficial cryptocurrency applications is for regulators and large networks to step up. "Cryptocurrency adoption cannot just be bottom-up. The government needs to set the rules, and the biggest companies need to integrate cryptocurrency into their products." Positive developments are already underway on both fronts. The Philippine government has designated an economic zone in Bataan where cryptocurrency companies can enjoy tax incentives and operate in a regulatory sandbox aimed at fostering innovation. In the private sector, Philippine Airlines recently launched a utility-driven NFT series that offers users special perks, while the financial services company Cebuana Lhuillier announced an integration with the Stellar blockchain to provide faster and cheaper remittance services --- which is crucial for a country like the Philippines that receives a large amount of funds from abroad.

Lim firmly believes that the Philippines has the potential to become a leader in the cryptocurrency space. "We can become the blockchain capital of Asia. Look at the developer talent, look at all the online groups dedicated to trading and NFTs --- it's just a matter of time."

In Pakistan, demand drives the adoption of cryptocurrency (especially stablecoins). Although Pakistan has a lower overall transaction volume, it is among the world leaders in grassroots cryptocurrency adoption, closely trailing the Philippines. However, the adoption patterns in the two countries are vastly different. Social connections and speculative behavior drive many Filipinos into the cryptocurrency space through "play-to-earn" games, while the need to preserve wealth in the face of high inflation and currency devaluation seems to be the reason many Pakistanis are turning to cryptocurrency. We interviewed Zeeshan Ahmed, the regional manager of the well-known cryptocurrency exchange Rain, to learn more. Rain operates in several countries in the region, and due to current laws prohibiting cryptocurrency trading in Pakistan, Rain is not currently conducting any business in the country but is working towards obtaining regulatory approval one day.

When we asked Ahmed what drives cryptocurrency adoption 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 it's actually much higher. The major spike occurred over the past 16 months, with the value of the rupee dropping from 178 Pakistani rupees to 1 dollar in January 2022 to 320 Pakistani rupees in August." Unfortunately, Pakistan's dire economic situation means that savings are quickly eroded. Furthermore, there are not many good investment options for the average person in the current environment. "The stock market and securities exchange have been stagnant. Any gains you make can be wiped out by inflation," Ahmed explained. "Pakistani citizens are also prohibited from holding physical foreign currency --- foreign currency must be deposited in banks. For many, this makes cryptocurrency, especially stablecoins, a necessity." It's our only hedge.

Equally important, on-chain data does not capture the full picture of cryptocurrency adoption in countries like Pakistan. Most of the 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 know exactly how many people hold or acquire cryptocurrency at any given time. Additionally, experts speculate that businesses in Pakistan use stablecoins like USDT to import goods from abroad to hedge against inflation and currency devaluation, but this is hard to verify.

Although Pakistan officially prohibits cryptocurrency trading, Ahmed believes that a clear regulatory framework would help make the cryptocurrency market more productive for Pakistani citizens. While the official stance has not changed, Ahmed says he senses some recent progress in this area. "Eight months ago, our regulators didn't even want to talk about cryptocurrency. But recently, in July of this year, we submitted a white paper to them on how to regulate cryptocurrency, and they seem to be moving forward." For example, future regulations might allow Pakistanis to transfer funds from bank accounts to exchanges, making it easier and more cost-effective for them to acquire the digital assets they need, paving the way for further growth.

Despite Tax Law Challenges, India Remains a Top Cryptocurrency Market

While other vibrant markets in the region help us understand the unique drivers of cryptocurrency adoption, the largest CSAO cryptocurrency market to date is India. According to our Global Crypto Adoption Index, India ranks first in grassroots adoption worldwide, but even more impressively, India has become the second-largest cryptocurrency market in the world by raw estimated transaction volume, surpassing several wealthier countries.

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

Perhaps most impressively, despite the challenging regulatory and tax environment for the industry, India has still become a top cryptocurrency market. Last year, regulators provided clearer guidelines on many issues, such as formally stating that its anti-money laundering rules would apply to cryptocurrency transactions. However, the tax rates imposed on cryptocurrency activities in India are much higher than in most other countries, with a 30% tax on profits --- a tax rate unique to cryptocurrency, higher than the rates for other investments like stocks --- and a 1% tax on all transactions, known as the Tax Deducted at Source (TDS), meaning that cryptocurrency platforms must deduct the corresponding amount from users' balances at the time of the transaction to complete it.

Recent reports further confirm that industry insiders have told us that the uneven implementation of TDS may increase the competitive difficulty for domestic exchanges in India. While every exchange operating in India must charge TDS tax to Indian users, many international exchanges do not effectively do so, which may attract Indian users away from exchanges primarily based in India. We can see some evidence of this in the chart below, which shows a sharp increase in network traffic from India to international exchanges immediately after the implementation of TDS in July 2022.

This trend highlights the importance of all exchanges operating in specific countries strictly enforcing local rules like TDS. Otherwise, it could create an environment for regulatory arbitrage, harming the domestic cryptocurrency industry.

However, despite the significance of these issues, they do not seem to dampen the enormous demand for cryptocurrency in India --- as long as demand exists, cryptocurrency will have a place in the world's second-largest country.

CSAO Shows Cryptocurrency Can Adapt to Local Conditions

No region has more reason to believe that cryptocurrency is the future than CSAO, not only because so many CSAO countries are at the forefront of grassroots applications. It is also because these countries have diverse 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, and "play-to-earn" games have taken root there. These games serve as an 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 dire --- considering that Pakistan's per capita purchasing power parity is $5,680, while the Philippines' is $9,210, along with the currency devaluation we described --- stablecoins are providing economic relief. If the Pakistani government implements reasonable cryptocurrency regulations, its existing users will form the foundation for a thriving cryptocurrency market, as we have seen in India. CSAO demonstrates that regardless of a country's circumstances, cryptocurrency can play a valuable role.