Chainalysis has just released its 2023 Geography of Cryptocurrency Report, detailing crypto adoption trends around the world and breaking them down by region and reasons.

I’ve covered reports on certain regions before, such as their report on East Asia.

But the report, now released in its entirety, has some interesting bits of information when taken together. Across the globe, crypto adoption has taken a hit- but there is a light at the end of the tunnel, because in some areas, crypto adoption is actually up despite the bear market.

Why is this important? Because it indicates that crypto has found a possible use case aside from the speculation that the industry has become rather infamous for. And this, in the long term, may prove to be something that helps save the industry from being consigned to the rubbish pile of history.

The Crypto Use Case That Won’t Die

Crypto has been around for more than a decade- and every year, it seems that new use cases are found, promising to bring the industry into the limelight and to new heights, only to die out in a season or two.

Much of the success that these ‘use cases’ have found and attention that they have gained have not exactly proven to be sustainable.

Almost inevitably, the initial excitement builds into hype, and the hype into rabid speculation, only for a reality check to occur and for any progress that has been made to be undone in a matter of days as token prices plummet and project backers write off investments as total losses.

This has given the crypto industry a reputation for having nothing to offer but speculation- and for good reason. When something happens once, one might be justified in suggesting that it is a fluke- a one-off event without precedent and unlikely to repeat itself. But when the same pattern repeats itself in different ways and across different contexts, what grounds are left to stand on when critics argue that the patterns of hype, speculation, and rapid collapse are not the exception, but the norm? And who can blame them for suggesting that much of the industry as a whole is nothing but hot air?

The current bear market is no exception- after a promising start, the Terra-Luna ecosystem collapsed, and several other high profile collapses like 3 Arrows Capital swiftly followed. The collapse of FTX half a year later certainly did not help, with SBF being indicted on fraud charges after seeming to be leading the charge on regulating crypto.

The prolonged bear market has certainly taken its toll- except, as Chainalysis points out, in Lower-Middle Income (LMI) countries.

Ironically, crypto adoption is up in these countries, almost to the levels that were seen during the bull markets of last year.

Chainalysis’ report states that ‘LMI countries have seen the greatest recovery in grassroots crypto adoption over the last year. In fact LMI is the only category of countries whose total grassroots adoption remains above where it was in Q3 2020’.

Pakistan, in particular, has seen high inflation rates over the past year, and citizens have turned to crypto as a way to preserve the real value of their savings.

Venezuela as well has seen an increased use of cryptocurrency, as emigrants fleeing political repression and violence turn to crypto for remittances and activist groups use crypto to send donations to Venezeualans.

It’s clear that during this bear market, one of crypto’s most significant use cases is also one of its oldest and most enduring- its use as a hedge against inflation.

Why Are Lower Middle Income Groups Adopting Crypto?

LMI countries have perhaps the greatest incentive to adopt cryptocurrencies.

In Linz and Stepan’s seminal work ‘Problems of Democratic Transition and Consolidation’, they note that many countries that have failed the transition to democracy may already have functioning state systems or bureaucracies, but that these systems may not always work in the same way that they do in democratic systems. Instead, they may have been perverted or adjusted to suit the narrow needs of those in power.

Theoretically, such countries may be more likely to fall within the LMI group- economic development is present but limited to what is beneficial to those who hold political power, with factors such as corruption or clientelism stymying rapid growth.

Those without a functional system of government could fall within the Low-income group, while those who are already moving towards more democratic systems of government or even those who are already democracies might fall in the Upper- Middle Income group or the High Income group.

After all, modernisation theory posits that as countries modernise, demands for democratic changes become stronger and less possible to ignore. Acemoglu and Robinson’s argument in ‘Why Nations Fail’ centres on this point as well, reasoning that without guarantees of private property protection and democratic freedoms, people see no reason to take entrepreneurial risks and build businesses, since there is no guarantee that the state will not simply expropriate their gains and leave them back at square one.

Therefore, LMI countries are in a way at the ‘sweet spot’ for crypto adoption- citizens have insufficient democratic freedoms to effect real change, including on economic policies, while their governments are either unwilling or unable to create the change that citizens want.

Meanwhile, cryptocurrencies, stablecoins in particular, are presented as a means to evade such problems and solve their problems of inflation and access to foreign currency.

The result is that these cryptocurrencies are used in lieu of the local fiat currencies- not as a means of speculation that these cryptocurrencies will rise in value, but as a way for everyday business to continue operating. It is a dollarisation of the economy in all but name.

How Sustainable Is This Crypto Adoption?

That being said, we should be careful about celebrating too early.

While crypto adoption is indeed on the rise in LMI countries, we should also understand that if the reason for adoption is oppressive governments, then the sustainability of this growth is questionable in the long run.

If we are to believe that all governments eventually become liberal democratic governments, then crypto will lose much of its shine as a hedge against inflation once sensible and proper economic policies are put in place. This is why High Income and Upper-Middle Income countries do not have such strong grassroots adoption- the incentives are simply not there.

As more countries make the transition to democracy, this incentive for crypto adoption will die with it- and the industry will once again have to find another reason for crypto to exist.