The Breakdown - BlackRock SchmackRock: For Emerging Markets, Bitcoin Means More than Gains

Episode Date: June 25, 2023

Today on Long Reads Sunday, NLW reads Noelle Acheson's "Why the Biggest Emerging Markets Are Turning to Crypto."   Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribeto the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Sunday, June 25th, and that means it's time for Long Read Sunday. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Hello, friends, happy Sunday. If you listen to my show on Thursday with Dan Tapiero, you will have heard that one of the things that we talked about was the resurgence of the rest of the world when it

came to a focus for U.S. entrepreneurs, and a reminder throughout all of this acrimony with U.S. regulators to keep in mind just how naturally global and native to the Internet digital assets are. Well, with that in mind, I thought that we would focus today on not the U.S. for Long Read Sunday and catch up on some news from around the world. At the end of May, Noel Atchison wrote a piece called Why the Biggest Emerging Markets are Turning to Crypto, and that is where we will start. With the U.S. mired and political stasis, while other regions build crypto frameworks, it's worth looking at the evolution of and outlook for on-the-ground demand for crypto assets.

This is getting more and more relevant as many large countries struggle with skyrocketing inflation, shaky currencies, and autocratic control over financial access, and as populations become increasingly crypto-aware and a lack of trust in centralized institutions grows. Last week, editors note this would have been around the middle of May, the government of Pakistan, the fifth largest country in the world in terms of population with over 239 million inhabitants, was reported to have said that cryptocurrencies, quote, will never be legalized in Pakistan in order to avoid FATF penalties. This may sound on the surface like an overreaction to FATIF's crypto stands. Last Thursday, the organization's president published a letter titled

An End to the Lawless Crypto Space, which urges crypto regulation rather than a total ban. Then again, Pakistan has a somewhat tense relationship with the FATIF, and just last October was taken off its gray list, which labels certain countries as having deficiencies in their AML controls, which in turn can lead to limited participation in global finance. It's also not hard to see the hand of the International Monetary Fund. Pakistan is currently in talks with the organization regarding a bailout package. Although negotiations seem stalled, and concern about the country's political and economic issues is starting to affect neighboring nations. The IMF has not been shy about its unease with crypto markets, and a few months ago, reports surfaced that it had

applied crypto suppression conditions to negotiations with Argentina. Yet crypto use in Pakistan is nevertheless active, as people are reportedly converting their salaries into stable to prevent currency erosion. The rupee has dropped more than 20% against the U.S. dollar year-to-date, more than 30% over the last year. Meanwhile, Bitcoin in rupee terms is up 103% so far in 2023 versus 63% in U.S. dollar terms. It's probably not a coincidence that a 2022 report from Forensics Company Chainalysis placed Pakistan's sixth in terms of global crypto adoption. There's also Nigeria, the sixth largest country in the world with over 218 million people, which is likely to devalue its currency once the new president is sworn in, in a bid to alleviate

trade imbalances and dollar shortages. The Sub-Saharan nation ranked 11th in Chainalysis's global crypto adoption ranking, and according to Google Trends, looking back over the past 90 days, Nigeria is the top-ranking country in terms of searches for the term crypto, and second in terms of searches for the term Bitcoin. Turkey is the 18th largest country in the world in terms of population, with more than 85 million inhabitants. Last week, its currency hit a new record low for Erdogan's likely re-election in the runoffs on May 28th. A recent chart by crypto market firm Kaiko shows the spike in crypto activity based in lira, now notably higher than euro-based activity. Turkey was 12th in Chainalysis's 2022 crypto adoption ranking. Currency woes and the pressing

need to hedge and diversify are likely to push it up the list. An unexpected entry into my watch the adoption list is Japan, the 11th largest country with over 124 million people, and the third richest in terms of nominal GDP. James Butterfield, head of research at coin shares, shared a chart last week that plotted growth in spot volumes on crypto exchanges. The leader? Japan, with the second highest average daily volume after the U.S., and easily the highest percentage growth, approximately 55% here to date. This could be largely for speculation, since Japan has low inflation and its currency is relatively stable, or it could be a sign of investors bracing for higher inflation and currency instability. Higher inflation would most likely trigger rate hikes, however, which could

strengthen the yen, so it's not clear what Bitcoin would be a hedge for in Japan. There are many other examples of citizens around the world turning to crypto to hedge against local currency volatility and debasement. Ukraine, Argentina, and Lebanon are just a few that come to mind. Many struggle with the absence of reliable onramps and with the difficulty of custody, but few are even remotely concerned about the U.S. regulatory hostility. All this serves as a reminder that the U.S. may have the largest financial market in the world, but crypto's purpose goes well beyond the speculation that financial markets serve. What's more, many developing economies are accustomed to regulators overstepping their bounds in terms of limiting financial freedom. And thus their citizens find the

decentralized nature of many crypto assets easier to understand and appreciate than do individuals used to more open regimes. Throw in the increasing possibility of significant currency turmoil ahead in emerging countries' economies, inflationary pressures in a strong dollar, and, in turn, the likelihood of political turmoil, and you can see how the insurance and hedge qualities of crypto assets, such as Bitcoin and stable coins, become even more compelling. Monetary liquidity headwinds may be significant, but they are not the whole crypto market story. Okay, back to NLW here. One of the things that's quite clear is if you look around the world, when it comes to people who understand crypto-natively, there is basically a direct inverse correlation between how

stable the monetary regime they were born in is, and how much they're likely to get crypto or Bitcoin. This is exactly what Noel is pointing out. There is a privilege of financial stability, in other words, and monetary stability, that not everyone enjoys. And when you don't enjoy it, you're much more likely to be interested in a non-sovereign, hard-to-sease, highly transportable store of value. Now, there is another dimension of this story as well, which is the relative age of different societies around the world. Bitcoin and crypto are internet native products. They weren't created in the pre-internet world and then became digital later, like every fiat that we know. They were born specifically of the internet unbounded by national borders. We're living through a weird

moment of transition, where many people in the world still remember and even lived most of their lives without mobile broadband internet, without streaming, without digital money. However, the societies that tend to have lots of people who that describes are getting older and older. The demographics of places like China and Japan and even the U.S. are slanted much older than the demographics of many of these emerging market countries which skew much younger. Those younger populations have lived in a highly mobile internet-connected world, even in the context of poverty. And so making the leap from doing all of your business already on your mobile phone to having an internet native money, again, is just going to make more sense in other places. Now, there is still

a lot of challenge around infrastructure. If you go listen to my show with Ray Yusuf, formerly of Paxfell on Bitcoin builders, we talk a lot about just how challenging local infrastructure is when it comes to Bitcoin on and off ramps. And so ultimately, it may be that in many of these places, the answer isn't better fiat infrastructure, but just wider Bitcoin adoption, such that it really truly does become an alternative system that sits above and outside of whatever happens on the ground. Now, of course, to the extent that that happens, autocratic governments aren't going to take that lightly, and who knows what sort of repressive measures we might see after that realization. But in any case, I think Noelle's piece is a great reminder to focus, at least some part of our

energy, on where the demand for Bitcoin and Crypto more broadly really is. All right, guys, that is it for today's Long Read Sunday. As you know, I am in Europe right now, and we are about to go dark for a small summer break on the breakdown. But, and this is a big but, there is a special mini-series focusing on a set of very early, newly minted startups coming out of the Bitcoin scene that you can find over on Bitcoin Builders. That'll be running on Tuesday, Wednesday, and Thursday of this upcoming week. So if you are not subscribed to Bitcoin Builders yet, go check it out. You can find the link to that at Breakdown.network. Until next time, be safe.

take care of each other. Peace.