The Node Ahead 55: Reasons behind global crypto adoption & the WSJ gets it wrong

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By Brett Munster

The world is adopting crypto for its inherent attributes

For the last four years, crypto forensics firm Chainalysis has released an annual study looking at global crypto adoption using on-chain data. The study isn’t simply a measure of which countries have the highest crypto transaction volumes, but instead aims to highlight the countries where everyday citizens are embracing crypto the most. The report segments crypto adoption by region and country and aims to reveal how people in various regions are using crypto. The report is always long, dense, and chalk full of great insights into the real-world use of crypto. This year’s version is no different, but if you don’t want to spend your weekend reading 97 pages of crypto data (yes, I realize it’s weird I find that to be an enjoyable way to spend a Sunday), we have you covered with some of the key highlights below.

A long running theme throughout the Node Ahead newsletter has been an attempt to show that while crypto is mostly viewed as a speculative financial asset in the U.S., crypto is used for very different purposes in other countries. It turns out the 2023 Chainalysis crypto adoption report has the data to back that claim up. To understand why different regions are using crypto, we have to understand who is using crypto in the first place. The World Bank classifies countries by wealth level based on gross national income (GNI) per capita and then groups countries into four categories as follows:

Source: Chainalysis, The 2023 Geography of Cryptocurrency Report

According to Chainalysis’s examination of the transactional data taken from the Bitcoin blockchain, the segment of countries where bottom-up adoption is by far the strongest is in Lower Middle Income (LMI) countries. 8 of the top 10 countries with the greatest crypto penetration are LMI countries. The U.S. and Brazil are the only two countries in the top ten that aren’t in the LMI classification.

The reason adoption by LMI countries is integral for the future growth of crypto is because 40% of the world’s population lives in LMI countries, more than any other income category. That’s over 3.2 billion people where crypto’s value proposition resonates the most and penetration is the strongest. This trend has been growing over the last several years and assuming it continues, crypto is likely to become a bigger and bigger part of this segment’s future economic development. Anyone who dismisses crypto because they can’t currently buy a Starbucks coffee with bitcoin in the U.S. is missing the bigger picture.

And not only is LMI the largest segment by population, it’s also the segment for whom crypto’s inherent properties are most valuable.

In Argentina, citizens struggle to save money due to the value of the Argentinian peso having fallen approximately 52% through the first seven months of 2023. During that same period, Argentina led all Latin America in raw crypto transaction volume. In fact, Chainalysis put together a chart comparing the value of the Argentinian peso with the volume of crypto purchased using the Argentinian peso over time. As the Argentinian peso steadily lost value, crypto purchasing trended up, then really spiked in mid-April, around the time Argentina’s inflation crossed 100% for the first time in three decades. In face of extreme inflation, ordinary citizens are turning to bitcoin and stablecoins as an economic lifeline.

Source: Chainalysis, The 2023 Geography of Cryptocurrency Report

A similar story is playing out in Pakistan where a need for wealth preservation in the face of high inflation and currency devaluation has vaulted Pakistan into a world leader of grassroots cryptocurrency adoption. The country comes in at number 8 on Chainalysis Global Adoption Index. And that is despite the fact that crypto trading is formally banned in Pakistan (more evidence that any time governments try to ban crypto, usage inevitably increases because tight capital controls only highlight the need for censorship resistant money). Pakistani citizens are also barred from holding physical foreign currency which makes crypto the only option many citizens have to preserve any wealth outside their failing economic system.

Turkey trails only the US, India and the UK for total crypto transaction volume over the last year. Turkey has a young, tech savvy population. It also is facing rising inflation which reached  more than 55% in August 2023. That’s in addition to the Turkish Lira crash in 2021. According to Chainalysis’s report, the volume of crypto transactions in Turkish Lira across several exchanges picked up just as the Lira started falling in value earlier this year providing further support to the idea that currency devaluation is driving interest in crypto in the country.

Sub-Saharan Africa has recently become a hotbed of crypto activity, specifically bitcoin. In Ghana, inflation reached 30% last year, the highest level in over twenty years. Many Ghanaians have since turned to bitcoin as a solution. Kenya and South Africa have also faced similar problems in recent years, and both ranked high in Chainalysis’s index of grassroots crypto adoption. But the poster child for crypto adoption in Africa is Nigeria. Nigeria boasts the largest population and economy in Sub-Saharan Africa, and one of the fastest crypto adoption growth rates in the world. The biggest driver of the growth has been the recent Naira crisis which placed enormous pressure on the country’s unbanked population and resulted in record high inflation of over 20%. Difficult financial and economic conditions are making cryptocurrency an attractive means of storing value, preserving savings, and attaining greater financial freedom for those living in Sub-Saharan Africa.

Bitcoin’s inability to be debased and therefore be a store of value (aka digital gold) is not the only inherent trait it has for citizens living in LMI countries. Crypto is also helping citizens who live under authoritarian governments.

Not only are Venezuelans facing high inflation, but under Nicolás Maduro’s regime, the country has experienced significant human rights abuses and government corruption including embezzlement from the country’s state-owned oil company. Crypto’s ability to send fast, cheap, and secure cross border payments has played an important role in enabling remittances to Venezuela. According to Chainaylsis’s report, “since 2014, there’s been a mass exodus due to the complex humanitarian emergency. Over the past ten years, about 25% of the population has left the country.” That exodus has turned remittances into a huge part of Venezuela’s economy, and many have turned to crypto and stablecoins as a way of sending money back home to their families without the government, which has control of the banks and financial system, taking a significant cut. “Crypto has provided an alternative to democracy activists, NGOs, and freedom fighters to overcome censorship and the closing of the civic space.”

Over the last two years, crypto usage has skyrocketed in Ukraine for two reasons. First, due to the war, citizens have lost access to the traditional banking system. The fact that crypto can be sent and received by anyone with internet access and without the need of a middleman such as a bank, has allowed Ukrainian citizens and the Ukrainian government to receive humanitarian aid when it would have been difficult to do so using traditional financial rails. Second, because crypto can be self-custodied, refugees fleeing the war zone have been able to take their life savings with them. In an interview with Bitcoin Magazine, an Ukrainian refugee tells the story how he was able to escape the country hours before the government closed the borders.  At the time, all ATMs were blocked so he was not able to take any of his savings with him.  However, he did have bitcoin stored on a hardware wallet and was able to cross the border with enough money to sustain him and his girlfriend. “With Bitcoin, [this refugee] was able to flee to a foreign country with the wealth that he was able to save from his job, with multiple options to be able to convert that to the local currency, if necessary, as opposed to fleeing with nothing but the clothes on his back and counting entirely on the charity of the people around him when he arrived.” This refugee isn’t the only one, several Ukrainian citizens have shared how crypto is providing a lifeline. 

What the Chainalysis report highlights is that the majority of countries with the greatest grassroots adoption of crypto are countries plagued with devaluing fiat currencies, corrupt governments, or in need of humanitarian aid. In other words, most of the world is adopting crypto for its inherent attributes, not as a speculative financial instrument. That bodes well for the future growth of crypto.

WSJ and Elizabeth Warren get it wrong

On October 10th, the Wall Street Journal published an article claiming that Hamas, Palestinian Islamic Jihad, and Hezbollah raised over a hundred million dollars in crypto between August 2021 and June 2023 that funded terrorist activities. A few days later, Senator Elizabeth Warren and other lawmakers cited that WSJ report when they called on the Biden administration to crack down on the crypto industry for “national security reasons.” Just one small problem, none of the figures in the WSJ article are even remotely close to being true.

The genesis of this story centers around Elliptic, a blockchain forensics company that tracks illegal uses of crypto by monitoring various wallets on the blockchain and providing anti-money laundering (AML) services to exchanges. Elliptic’s software has also been used to alert exchanges when terrorists attempt to raise money via bitcoin or other cryptoassets.

In July of this year, Elliptic published a report on the National Bureau for Counter Terror Financing (NBCTF) seizure of 26 crypto wallets and 67 accounts at crypto exchanges. The collection of wallets and accounts contained over $93.7 million dollars in stablecoins. At the time, some (but not all) of those wallets were known to be connected to the Palestinian Islamic Jihad (PIJ), a terrorist group operating in the Gaza Strip and has direct ties to Hamas. Elliptic’s report showed that the PIJ’s crypto activity was non-existent until early 2022, peaked in March 2022 and a year later was basically zero again. By the end of April of 2023, PIJ was done with crypto.

Why did this terrorist group use crypto for a short period of time and then stop? For the same reason every other criminal has stopped using bitcoin and crypto for their illicit activities, its easily trackable. Blockchains are an immutable record of transactions that the public has full access to. The last thing you want as a criminal is to have your illegal transactions permanently recorded for everyone, including law enforcement, to see and trace. Hence, in April of 2023, the PIJ announced it was suspending all bitcoin donations because they recognized the ability to trace funds on the blockchain left them vulnerable to counter-terrorist efforts. For example, that same report by Elliptic was able to identify and graph specific PIJ affiliated wallets that executed transactions with wallets affiliated with Hezbollah and Hamas which goes to show exactly how easy it is to trace on-chain transactions. It’s also worth highlighting that these wallets were not only identified but seized through collaboration with various crypto exchanges. Ask any law enforcement agency (including the DOJ and CIA): they would prefer criminals transacted using crypto rather than cash every time.

As Elliptic’s July report showed, PIJ and Hamas had used crypto to raise funds for a short period of time but by April 2023, had called it quits on the use of crypto. Furthermore, the report also highlighted that while there was $93m in total across all the wallets and accounts, because a significant portion of the money was held at exchanges, it “wasn’t clear exactly how much of these funds belonged directly to the PIJ.” In other words, because the wallets and accounts could be identified, exchanges could freeze those accounts thus never letting the owners withdraw the funds from the exchanges. There might have been $93m in those wallets, but that doesn’t mean PIJ or Hamas could access that money.

Fast forward three months later to October 10th. The WSJ publishes an article claiming Hamas’s main source of funding has been crypto. The article cites the Elliptic article referenced above as evidence that Hamas had received more than a hundred million dollars in funding through crypto. However, the WSJ article never bothered to mention that most of that money never made it to Hamas, that the terrorist organizations had decided to stop using crypto more than 6 months prior to the article being written or that the authorities could track the transactions on the blockchain. In fact, the tagline to the WSJ article was “Digital currency transactions highlight how U.S. and Israel have struggled to sever the access of Hamas, Palestinian Islamic Jihad and Hezbollah to foreign funding.” Apparently, the WSJ just decided to skip over the fact that the crypto wallets were identified, tracked, and seized.

But you don’t have to believe me, just look at Elliptic’s own response to the WSJ article. Shortly after the WSJ article came out, Elliptic published a pretty damning response. In it, Elliptic very clearly lays out the fact that “there is no evidence to suggest that crypto fundraising has raised anything close to $130 million, and data provided by Elliptic and others has been misinterpreted.” It goes on to highlight that the crypto had been seized by authorities, Hamas stopped using crypto because of its traceability, and the “weakness of crypto as a terrorism fundraising tool.” The company even gave specific examples of Hamas wallets unable to cash out at exchanges because they had been frozen.

“Over the past two weeks, politicians and journalists have portrayed public crypto fundraising as a significant source of funds for Hamas and other terrorist groups, but the data simply does not support this. No public crypto fundraising campaign by a terrorist group has received significant levels of donations, relative to other funding sources.”

So how much money did Hamas actually receive? Chainalysis decided to take the investigation one step further to see if they could come up with an actual amount. After digging deeper into the on-chain transactional data, Chainalysis estimated the actual amount that made it to Hamas, PIJ and others to be $450,000. That’s 0.3% of the amount the WSJ claimed made it to terrorists! The reason the number is so small is that the majority of the volume through those accounts were facilitated by exchanges. Once identified, those accounts were frozen and only a tiny fraction of the overall amount actually made it to terrorist organizations.

Despite a mounting body of evidence against the WSJ, including the very company the authors based their investigation on publicly claiming that the WSJ’s reporting was grossly inaccurate, the WSJ spent two weeks on social media defending their reporting and refusing to retract their article. Eventually, the WSJ did issue a partial correction on October 27 admitting their original reporting was wildly overstated.

Unfortunately, during that two-week period before the WSJ finally admitted their reporting was indeed highly overstated, the article created a groundswell in Congress to crack down on crypto. Just one week after the WSJ article came out, known anti-crypto politician Elizabeth Warren authored a letter to the White House based solely on the WSJ’s reporting. The senator also used the wildly inaccurate article to convince over a hundred US lawmakers on both sides of the aisle to sign the letter.

Now you would think that as evidence came out regarding the one source her letter to the White House was entirely based upon was proven to be totally false, the honorable Senator Warren would have withdrawn said letter. Or when Elliptic, the source data for all of this, reached out and spoke directly with representatives of Senator Warren to clarify the misconception, she might have issued a statement admitting her claims were based on erroneous reporting. Or when multiple members of congress called into question the WSJ article and Warren’s claim during a senate hearing (here and here), she might decide to back down.

Nope. Despite being fully aware of the inaccuracies of the data, Warren has yet to acknowledge the flawed methodology on which her claims are based. Rather than drop this crusade, she doubled down. She and Senator Sherrod Brown, who heads the Senate Banking Committee, called for additional action against financing of terrorism via cryptoassets. I guess never let the facts get in the way of a good story.

Any funds that make their way to terrorist organizations is a bad thing. However, Hamas reportedly runs on a $300m per year budget meaning that over the past year, 0.15% of that money came from cryptoassets. And that’s before taking into account that these terrorist organizations have stopped using crypto because they are afraid of being tracked through it. It’s very likely that over the next year, crypto funding to PIJ and Hamas will be close to $0.

It’s frustrating that media outlets and politicians continue to perpetuate this myth when any level of diligence or investigation would quickly show the data simply doesn’t support it. Crypto is far more transparent than cash and a far better tool for humanitarian aid than terrorist financing. While Hamas may have received $450,000 in the last year, Ukrainian Humanitarian efforts have raised more than $225 million despite a failing banking system. This stark contrast between politically manipulated narratives and the transparent reality a public blockchain provides highlights exactly why we should be embracing publicly verifiable monetary units such as bitcoin, stablecoins, and other cryptoassets.

In Other News

Hamas just learned a brutal lesson about bitcoin. Can senators also learn it?

Bitcoin, terrorism, and a $130 million misunderstanding.

The Director of Global Macro at Fidelity calls bitcoin “exponential gold.”

Bitcoin sees the lion’s share of investment amid spot ETF hype.

Institutions race for bitcoin, sending CME open interest to record highs.

Bitcoin is up 100% this year and not just because of hype for a spot BTC ETF.

Galaxy Digital projects inflows of $14 billion in first year for a spot ETF.

Executives representing more than 40 mining operations went to Capitol Hill to explain how their businesses can help stabilize the power grid, tie into renewable resources and foster domestic technology.

DeFi volume reaches highest point since last March.

Coinbase released a report on tokenization and the new market cycle.

Sam Bankman-Fried found guilty on all 7 counts.

Disclaimer:  This is not investment advice. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction. All Content is information of a general nature and does not address the circumstances of any particular individual or entity. Opinions expressed are solely my own and do not express the views or opinions of Blockforce Capital or Onramp Invest.

Disclaimer: This is not investment advice. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction. All Content is information of a general nature and does not address the circumstances of any particular individual or entity. Opinions expressed are solely my own and do not express the views or opinions of Blockforce Capital or Onramp Invest.


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