East Asia Rises to Become the Sixth Largest Cryptocurrency Economy Globally, Chainalysis: South Korea and Hong Kong Institutions are Key Drivers

The cryptocurrency analysis firm Chainalysis recently released a research report titled "Eastern Asia: Institutional Driving Adoption in South Korea and Hong Kong," indicating that Eastern Asia has become the sixth largest cryptocurrency economy in the world by 2024. The report highlights that the participation of institutions and professional investors has been a key factor driving this achievement. It also notes that South Korea remains the leader in the Eastern Asia market, while Hong Kong has a unique legal and regulatory framework that may open the door to the closed Chinese cryptocurrency market.

The Sixth Largest Cryptocurrency Economy in East Asia, Accounting for 8.9% of Global Revenue

A report shows that East Asia is set to become the sixth-largest cryptocurrency economy globally by 2024. Among the top 50 countries with the highest cryptocurrency adoption rates, East Asia includes five countries: South Korea, China, Hong Kong, Japan, and Taiwan. Based on statistics from July 2023 to June 2024, East Asia accounts for 8.9% of global revenue, with on-chain value exceeding $400 billion.

Stable Trading in East Asia, Centralized Exchanges Account for Over 60% of Cryptocurrency Trading Volume

East Asia has maintained stable trading in the cryptocurrency market without significant fluctuations. Particularly, centralized exchanges (CEX) are the most popular in East Asia, representing 64.7% of cryptocurrency trading volume.

Institutions and Professional Investors Drive the Market, DEX and DeFi Preferred by Institutions

The report indicates that large transfers by institutions and professional investors are propelling the cryptocurrency market, with East Asia leading in high-volume professional transfers compared to other regions in the report.

However, these two groups use different types of exchanges, with professional investors primarily using centralized exchanges (CEX) and institutions favoring decentralized exchanges (DEX) and decentralized finance platforms (DeFi). The research speculates that institutions prefer DEX due to its wider range of asset coverage compared to CEX, providing more arbitrage opportunities.

South Korea Leads the Cryptocurrency Market in East Asia

South Korea currently leads the cryptocurrency market in East Asia, with a total value of approximately $130 billion. The report reveals that South Korea is mainly driven by "distrust of traditional finance," leading many investors to view cryptocurrencies as alternative assets. As prominent companies like "Samsung and other well-known enterprises gradually adopt blockchain technology" to enhance transparency and operational efficiency, the public also sees cryptocurrencies as a viable investment option.

Bitcoin Surpasses $70,000, Surge in Altcoin Usage

The report adds that South Korea is renowned for its IT sector, making digital asset trading via mobile apps and computers quite accessible. Particularly, after Bitcoin surpassed $70,000 in January 2024, public interest in cryptocurrencies increased. Trading activities in altcoins and stablecoins notably surged. South Koreans mainly use altcoins for transactions paired with the Korean Won (KRW), a ratio higher than other cryptocurrencies.

The outflow of stablecoins began to increase from December 2023, coinciding with the listing of USDT on exchanges like Coinone and Bithumb in South Korea. Bitcoin (BTC) is the second-largest cryptocurrency traded against the Korean Won, following altcoins.

XRP Popular in South Korea, Bitcoin Drives Korean Premium Index

The report states that since 2017, Ripple (XRP) has gained popularity in South Korea for its potential to replace the cross-border payment system SWIFT.

The primary reasons include fast transactions of about 2 seconds and relatively lower fees compared to BTC and ETH. In terms of actual trading strategies, South Korean investors often transfer funds from local exchanges to global exchanges to access more asset classes and arbitrage opportunities.

The volume of these transfers is closely related to the Kimchi Premium in South Korea. This is mainly because the volatility of Kimchi Premium reflects market conditions and regulatory changes in South Korea, leading many investors to use it as a benchmark. Particularly, when Bitcoin hit an all-time high in March 2024, Kimchi Premium also surged simultaneously.

Hong Kong Poised to Open the Door to China

As a cryptocurrency center in the Greater China region, Hong Kong has always maintained an open stance towards cryptocurrencies with a clear regulatory framework, attracting many institutions to enter the market. Due to its unique political status, laws, and regulatory framework, Hong Kong provides greater flexibility for financial innovation. Research indicates that Hong Kong has the highest year-on-year growth rate in East Asia, reaching 85.6%.

While China was once a hub for cryptocurrency trading and mining, crackdowns on fraud and capital outflows have led to stricter regulations and restrictions on cryptocurrency, including commercial activities. Research shows a significant decrease in traffic to cryptocurrency trading websites in China starting from mid-2020.

Chinese Users Shift to OTC and P2P Platforms

After China ordered the termination of cryptocurrency exchanges in 2021, many users turned to over-the-counter (OTC) and P2P trading platforms, leading to significant growth in these platforms starting from mid-2023. Given the continued interest of many Chinese users in cryptocurrencies, some platforms are finding ways to accommodate these users while complying with regulations.

The report notes that due to public skepticism about the Chinese economy, more people are moving funds out of the country. Previously, Chinese individuals would transfer funds through institutions like Swiss banks, but this method is no longer viable. Consequently, they resort to using methods like mules to smuggle funds out of the country to evade regulations, which can incur high fees of 25% to 30%. As a result, they turn to OTC for cryptocurrency trading.

"Three Red Lines" Suppress Property Market, Driving More Funds into the Cryptocurrency Market

In the post-pandemic era, China's issuance of the "Three Red Lines" policy in 2023 to curb real estate has led to a decline in the property market. This has prompted many wealthy individuals to purchase luxury goods and cryptocurrencies to protect their assets. As a result, funds have flowed into the cryptocurrency market. The relationship between the stock price fluctuations of real estate developer Vanke, the influx of off-exchange cryptocurrency trading, and the decline in the Shanghai Composite Index can be seen in the trend illustrated below.

Robust Regulatory Framework in Hong Kong Facilitates Institutional Entry into the Cryptocurrency Market

In June 2023, the Securities and Futures Commission of Hong Kong implemented regulations for Virtual Asset Trading Platforms (VATP), providing a legal channel for retail investors to enter the cryptocurrency market and establishing strict standards for review, anti-money laundering, and counter-terrorism financing (AML/CFT). With the end of the regulatory transition period on May 31, 2024, many unlicensed exchanges have ceased to provide trading services to Hong Kong residents, leading trading activities to gradually shift to licensed exchanges.

Stablecoins Account for Over 40%, Bitcoin and Ethereum Spot ETFs Drive Institutional Participation

Stablecoins represent over 40% of trading in Hong Kong, and with the regulatory oversight by the Hong Kong Monetary Authority (HKMA), regulated stablecoins are allowed for retail issuance, with this ratio expected to further increase. Additionally, the Securities and Futures Commission of Hong Kong approved the public trading of three Bitcoin and three Ethereum spot ETFs on April 30, 2024, prompting a significant inflow of institutional funds into the Bitcoin and Ethereum markets. Particularly, in the month leading up to the ETFs' launch, institutional Bitcoin transfers saw a substantial increase. These ETFs not only provide a legitimate digital asset investment channel for institutional investors but also spark interest in holding Bitcoin and Ethereum.