The Breakdown - Why Crypto Matters for Emerging Markets

Episode Date: April 22, 2022

  This episode is sponsored by Nexo.io, Arculus and FTX US.    Today on “The Breakdown,” NLW covers two topics. First, he looks at a new Chainalysis report on which countries realized the biggest crypto gains in 2021, and specifically how that list differs from the rank of countries by GDP. Second, he looks at new sanctions on mining firm BitRiver and what it means for the geopolitics of bitcoin mining.  - From cash to crypto in no time with Nexo. Invest in hot coins and swap between exclusive pairs for cash back, earn up to 17% interest on your idle crypto assets and borrow against them for instant liquidity. Simple and secure. Head on to nexo.io and get started now. - Arculus™ is the next-gen cold storage wallet for your crypto. The sleek, metal Arculus Key™ Card authenticates with the Arculus Wallet™ App, providing a simpler, safer and more secure solution to store, send, receive, buy and swap your crypto. Buy now at amazon.com. - FTX US is the safe, regulated way to buy Bitcoin, ETH, SOL and other digital assets. Trade crypto with up to 85% lower fees than top competitors and trade ETH and SOL NFTs with no gas fees and subsidized gas on withdrawals. Sign up at FTX.US today. - Consensus 2022, the industry’s most influential event, is happening June 9–12 in Austin, Texas. If you’re looking to immerse yourself in the fast-moving world of crypto, Web 3 and NFTs, this is the festival experience for you. Use code BREAKDOWN to get 15% off your pass at www.coindesk.com/consensus2022. - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell, research by Scott Hill and additional production support by Eleanor Pahl. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “I Don't Know How To Explain It” by Aaron Sprinkle. Image credit: Vasil Dimitrov/Getty Images, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.   

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. The breakdown is sponsored by nexus.io, Arculus, and FTX, and produced and distributed by CoinDesk. What's going on, guys? It is Thursday, April 21st. And today we are discussing one of the most interesting topics in this entire space to me, which is why crypto matters in emerging market. Before we dig into that, however, a few notes. There are two ways to enjoy the breakdown podcast. You can, of course, listen on the CoinDesk Crypto Podcast Network feed. This is their feed that features not only the breakdown, but other cool Coin desk shows as well. However, if you are just here for the breakdown, you can also listen on the Breakdown-only feed, which, as you might imagine,

has just this show. Both come out each day, the CoinDesk feed coming out earlier in the afternoon with the Breakdown-only feed coming out later in the evening. Whichever feed you are listening on, if you're enjoying the show, please go subscribe to it, give it a rating, leave a nice 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.org, that's LY slash BreakdownPod. Also, a disclosure as always. In addition to them being a sponsor of the show, I also work with FTX.

Now, I want to start today's show with a really interesting report from Chainalysis. Yesterday, Chainalysis published 2021 cryptocurrency gains by country. Ethereum leads as gains skyrocket around the world. And it's a blog post that effectively serves as a report card for how much value was created for people by holding crypto last year. As Chainalysis says, 2021 was another strong year for cryptocurrency, as assets like Bitcoin and Ethereum were able to build on positive momentum gained at the end of 2020 and hit new all-time highs in 2021.

So what they're trying to do here is calculate gains by country. They admit that their methodology isn't perfect, but here's their proxy. They say, first we measure on-chain macro-level flows of all crypto assets, then we estimate the total collective gains made by each asset by measuring the differences between the US dollar value of all withdrawals of the asset and the value of all deposits of the asset. We then distribute those gains or losses by country based on the share of web traffic each country accounts for on each exchange's website. Now, as they admit, they'd rather be calculating gains at the individual or wallet level rather than the service level, but it's still an interesting way to estimate this.

Chainalysis has been doing a lot of interesting research like this. They also do an annual global crypto adoption index, and I appreciate that even if they admit their methodology isn't perfect, they lay it out so you can determine how much of a grain of salt to take with it. In any case, in 2021, Chainalysis says investors around the world realized total gains of 162.7 billion. That's up from 32.5 billion in 2020. As you would expect,

the lion's share of that is in developed Western nations, and frankly, the preponderance of it comes from the U.S. 46.9 billion of that was in the United States, which is more than five times higher than number two, the United Kingdom, at 8.1 billion. rounding out the top five are Germany at 5.8 billion, Japan at 5.5 billion, and China at just over 5 billion. But where this really gets interesting is when chain analysis starts to look at how certain emerging market countries in particular rank relative to their GDP. They say, like last year,

we see many countries whose collective cryptocurrency investment performance seems to be outperforming their rankings in traditional measures of economic prosperity. Here are the five examples they give. Turkey has the 11th largest GDP in the world at 2.7 trillion. However, they were sixth in realized cryptocurrency gains at 5.6 billion, which isn't far behind China, Germany, and Japan. Vietnam, with a GDP of 1.1 trillion, is the 25th largest GDP in the world, but was the 16th largest in terms of realized crypto gains. The gap between Ukraine's GDP, and its realized cryptocurrency gains is even larger. Ukraine's GDP of $576 billion put them 40th in the world,

but they were 13th in realized crypto gains at $2.8 billion. The Czech Republic is 47th at GDP, with $460 billion, but 19th in cryptocurrency gains at $1.9 billion. Finally, they point to Venezuela, which is 78th in GDP at $144 billion, but 33rd in their realized crypto gains at $1.1 billion. There are a few interesting things that this demonstrates or at least suggests. The first is the actual utility of assets in these places.

Certainly one part of that is remittances. The global remittance infrastructure continues to be dominated by high fee intermediaries like Western Union, and so it's not at all surprising to see countries that have high percentages of their GDP in remittances, seeing relatively more crypto adoption and relatively higher crypto gains. Another common thread is these are places that have seen some amount of currency devaluation. Turkey, for example, has had huge struggles around its lira, with turmoil in the central banks, and just a very unsure monetary system characterized by high inflation. And so again, it's not surprising that you're seeing relatively higher crypto adoption. Finally, and more recently,

we're seeing the utility of the portability of this type of wealth in times of strife. There have been many stories of people who have been able to preserve and transport their wealth out of Ukraine during Russia's invasion, thanks to their pre-existing crypto adoption. In this way, although this is a story or a report, at least, of crypto gains, it's actually really a story about crypto's utility in these types of markets. The other interesting thing about this is what it says about the opportunity that crypto creates to outperform the default economic state of one's country. Since I have been in cryptocurrency, the thing that has made it so exciting to me is the alternative it represents to a sovereign type of money, a sovereign type of store of value.

It does not take an all-fayat-must-die position to see just how out of the historical norm it is for citizens of nations, no different than U.R.I, except for accidents of birth, to be able to opt out of local currency regimes and opt into something that is dictated by different global forces. That's not to say that Bitcoin or crypto are exclusively and in every way better than those local currency regimes. But what they give people is choice and more choice net net is better. The idea that a smart, savvy Ukrainian or Turkish kid could have been doing better than his average countrymen simply by investing in this alternative asset that they knew about by virtue of their participation in a global economic network is, to me, a pretty inspiring thing.

Now, the last interesting note about this report is, as Chainalysis puts it, quote, how much activity in China has declined relative to other countries. So between 2020 and 2021, China's total estimated realized cryptocurrency gains were up. They were up to $5.1 billion from $1.7 billion in 2020, which is an overall year-to-year growth rate of 194%. This is significantly lower, however, than the growth rates in other countries. Germany's gains grew by 423%, the UK saw a 431% increase, and the United States saw a 476% increase. Of course, this likely reflects the fact that the second half of last year was China running crypto and Bitcoin out of the country. Either way, this was a super interesting report. I'll drop a link in the show.

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One of the largest exchanges in the U.S. FDXUS is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTX, you pay no gas fees. Download the FTX app today and use referral code breakdown to support the show. On the second half of this show, I do want to point out that crypto's role as a way to work around accidents of birth is not universally considered a good thing. And of course, here I'm referring to questions around sanctions evasion. Yesterday, the U.S. Treasury sanctioned BitRiver, a mining operation technically based in Switzerland but which was started in Russia. Many are seeing it as something of a preemptive strike.

From the Treasury's statement, Treasury is also taking action against companies in Russia's virtual currency mining industry. By operating vast server farms that sell virtual currency mining capacity internationally, these companies help Russia monetize its natural resources. Russia has a comparative advantage in crypto mining due to energy resources in a cold climate. However, mining companies rely on imported computer equipment and fiat payments, which makes them vulnerable to sanctions. The United States is committed to ensuring that no asset, no matter how complex, becomes a mechanism

for the Putin regime to offset the impact of sanctions. Virtual currency mining company BitRiver was founded in Russia in 2017 and currently operates out of three offices across Russia. In 2021, BitRiver shifted legal ownership of its assets to a Switzerland-based holding company. OFAC designated this holding company, BitRiver AG, pursuant to E.O1424 for operating or having operated in the technology sector of the Russian Federation. Now, this comes a day after an IMF report that we discussed that warned about crypto mining as a tool for state-level actors to put natural resources that they can't export to productive economic use. Bloomberg discussed how this could be relevant for mining operations beyond just

Russia. Specifically, if this knocks a big part of the hash power offline in Russia, it could be a boon to mining in other places, including in North America. Remember, the U.S. was the single biggest beneficiary of China's mining ban in terms of where hash power flowed after. Indeed, this is the theme of follow-up comments from BitRiver. Igor Runetz, who's the company's CEO and founder, had this to say to CoinDesk. BitRiver's parent company is based in Switzerland and, quote, has never provided services to Russian government institutions. Quote, these U.S. actions should obviously be viewed as interference in the crypto mining

industry, unfair competition, and an attempt to change the global balance of power in favor of American companies. End quote. David Carlyle, who's the vice president of policy and regulatory affairs at Elliptic, which is another blockchain analytics firm, said, as Western sanctions tighten on Russia's energy sector, Russia will be increasingly incentivized to monetize its energy resources through mining, end quote. He called the sanctions, quote, an unprecedented action by OFAC, and quote, a preemptive

strike to prevent Russia from leveraging its energy resources for crypto-enabled sanctions evasion. Now, there is some interesting nuance here. This is targeting Bitcoin mining, but it's not really a condemnation of mining per se. It's a recognition of mining's capacity to help monetize natural resources and attempt to cut that off. What's more, it's connected seemingly to at least one specific actor who is involved with River. Colon Post from the Block says it's critical to note here that BitRiver's Irkutzk operation runs on electricity from Oleg Deripaska's Russell Brotzk.

Deripaska has been under sanctioned since 2018. Now, this is a fascinating turn of events, and there are a lot of dimensions to this. Another one is what to do if you're an American who has equity in BitRiver or who hosts mining equipment with them. Marty Bent wrote about this in his daily newsletter yesterday. Quote, there are many American citizens and companies who are now scrambling to figure out what to do with their miners after the Treasury Department made their order today. Will BitRiver give them their machines back?

Will the U.S. government let these people receive their machines if BitRiver is an ethical business and attempts to do so? These are questions I don't know the answer to at the moment, but are questions miners should ask themselves before loading up their operations with third-party risk. As Bitcoin continues to grow, and with it, the target on its back, Bitcoin miners should be hyper-aware of these third-party risks, and attempt to mitigate them to the best of their ability. This is why your uncle Marty is very bullish on vertically integrated off-grid mining operations that are more distributed, housed in states that respect freedom and property rights, and significantly harder to identify

and shut down when the government inevitably decides to focus the ire of their mission. manic anti-human insanity on the Bitcoin mining industry. I'm a big fan of the incredible work large-scale miners are doing here in the U.S. and Canada, but I do worry that the federal governments in the U.S. and Canada will find them to be easy political targets to pick on in the future. Now, back to NLW here. I'm still wrapping my head around all of this, but it's very clear that this move has ratcheted up the political game theory around Bitcoin mining. It's not as simple as the easy conversations about banning it or not. It's much more complex, and to it's clear that we've definitely entered a new phase in this liminal era of crypto. I will continue to

watch this mining story with interest and bring you more details as they emerge. For now, I want to say thanks again to my sponsors, nexus.io, Arculus and FTX. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace. Hey, breakdown listeners, come join CoinDesk's Consensus 2020, the festival for the decentralized world this June 9th. 9th through the 12th in Austin, Texas. This is the only festival showcasing and celebrating all sides of blockchain, crypto ecosystems, Web 3, and the Metaverse, and is designed for crypto-newbies, investors, entrepreneurs, developers, and creators.

Don't miss speakers like Kathy Wood, SBF, CZ, Punk 6529, and Joe Lubin to name just a few. Use code breakdown to get 15% off your pass at coindesk.com slash consensus 2022.