Chainalysis North America Report: DeFi Usage Declines, U.S. Losing Control of Stablecoin Dominance

The data research firm Chainalysis released its eighth cryptocurrency adoption report yesterday, excerpted from its 2023 Geography of Cryptocurrency report. This report focuses on North America, a region leading in technological advancements, highlighting that local institutions are exiting the market, DeFi usage is declining, and even the United States is losing its regulatory control over stablecoin liquidity domestically.

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Market Overview and Analysis

US Dominates Trading Volume

Firstly, as the largest cryptocurrency market globally, North America has seen a trading volume of $1.2 trillion from July last year to June this year, accounting for 24.4% of global trading activity.

The US contributed over a trillion dollars, ranking first globally; followed by Canada, ranking seventh globally.

The above chart indicates that the cryptocurrency market in the CSAO region, comprising North America, Western Europe, Central and South Asia, and Oceania, is significantly leading.

Institutional Influence in Local Markets

Furthermore, compared to other regions, it is evident that the cryptocurrency market in North America is heavily influenced by large institutions, almost being primarily driven by major investors.

Decline in Institutional Trading Volume

However, as seen in the chart of trading volumes, institutional investors, represented by the orange portion, have gradually withdrawn since the collapse of the FTX exchange last year, and the closures of institutions like Signature and Silvergate, directly impacting institutional participation significantly.

Nevertheless, overall trading activity has gradually picked up since June.

The chart above shows that activities of retail and other professional traders, represented by blue and yellow, have remained stable; therefore, the withdrawal of funds by large institutional investors can be inferred as a primary reason for the decline in trading activity.

Flow of Funds into Major Coins

Consistent with data from around the world, North America is also experiencing a flow of funds into major coins, a common occurrence during bear markets.

According to CoinGecko data, Bitcoin's current market dominance has risen to a new high since April 2021, slightly above 51.4%; while Ethereum stands at 16.5%.

However, North American cryptocurrency users are gradually moving away from stablecoins, with the trading volume share related to stablecoins dropping from 70.3% to 48.8%, attributed by Chainalysis to the wave of bank closures in March this year.

US Losing Control Over Stablecoin Regulation

It is worth noting that by tracking stablecoin transfers, it is observed that an increasing amount of stablecoin trading activity is conducted through entities not approved by the US.

The chart above shows that since March 2023, the majority of stablecoins flowing into the top 50 cryptocurrency companies have shifted from being transacted through US-approved companies to entities operating without US approval. As of June this year, 54.6% of stablecoin transactions are conducted through non-US approved entities.

The data indicates that more cryptocurrency users are engaging in transactions with high-risk platforms overseas, while the US government is losing its ability to regulate stablecoins, leaving US investors exposed to risks.

Jason Somensatto, North America Public Policy Officer at Chainalysis, highlighted the proposed stablecoin-related bills being considered in North America and pointed out the advantages of stablecoins over traditional fiat currencies:

Stablecoins, based on the inherent transparency of blockchain technology, can enhance the ability and efficiency of global regulatory agencies to investigate and combat illegal activities.

Decline in DeFi Adoption

As a leader in crypto technology, North America has always been a high-usage area and a significant driver of DeFi technology; however, despite the substantial overall trading volume, data shows a significant decrease in DeFi usage and trading activity compared to before, with more people even resorting to centralized exchanges (CEX).

Chainalysis points out that the reasons may lie in regulatory uncertainties in the US and the general prediction of a bear market by investors. In essence, investors tend to withdraw assets from speculative products like DeFi during market turbulence to reduce risks, leading to a decline in liquidity and contraction in the DeFi market.

Looking at DeFiLlama data, it is evident that the total TVL of current DeFi protocols has dropped by over 60% from the 2021 peak.

Regulation Key to Continued Growth in Cryptocurrency

However, Chainalysis believes that despite declining adoption rates of DeFi worldwide, the technology involves many real-world applications, making the establishment of regulatory frameworks crucial, potentially impacting or driving positive growth in the overall market:

Regulation will play a crucial role in the recovery of the cryptocurrency market, as forward-thinking cryptocurrency regulations are being promoted by the US Congress and regulatory bodies at the state and national levels.