The cryptocurrency sector is a global community more than any other. The very idea of a decentralised financial system based on blockchain technology means it is hard to pinpoint a global centre of gravity, and the anonymised nature of decentralised digital assets makes data notoriously difficult to harvest.
Furthermore, worldwide cryptocurrency adoption looks quite different from the global pattern of investment in cryptocurrency. Adoption of cryptocurrency as a payment mechanism increased globally by 880% in 2021, according to cryptocurrency analyst and consultancy Chainalysis. Cryptocurrency as a payment rail is being driven by peer-to-peer platforms in countries where access to traditional financial services is either disrupted or not present. The steep increase of adoption in 2021 in emerging economies and those with unstable political regimes is also said to be a response to fiat currency devaluation.
Per capita and per GDP, developing countries are moving faster in the adoption of cryptocurrency, according to Kim Grauer, head of research at Chainalysis. “But that doesn’t discount the size of the crypto hubs around existing financial centres,” she says.
Investment and trading in cryptocurrency as an asset class in 2021 was led by global financial hubs in developed countries. These large investment volumes have more recently included institutional investment. Investment, as opposed to adoption as a payment method, represents a geographic bifurcation.
“The bifurcation is demonstrated by the meaningful changes in the way people are using cryptocurrency in their day-to-day lives, perhaps at a local shop, versus the few hedge funds that are putting a few extra percentage points of their portfolio into crypto,” says Grauer.
Realised cryptocurrency gains
Through a combination of measuring macro-level flows of transaction data and web traffic, Chainalysis calculated an estimate of total gains for cryptocurrency users in a given country, which it calls “realised cryptocurrency gains”. This is not a measure of transaction volumes but instead demonstrates the rate at which returns on cryptocurrency investment are increasing. Overall, global cryptocurrency gains amounted to $162.7bn in 2021, compared with just $32bn in 2020.
In terms of the top global hubs, the geographies with the biggest gains tended to be around existing financial services centres in the US and the UK. Until China’s blanket ban of cryptocurrency mining and trading, the country’s cryptocurrency holdings outpaced the rest of the world by a long way, according to Grauer. In 2021, China’s total estimated realised cryptocurrency gains were $5.1bn, up from $1.7bn in 2020. While this growth rate of 194% may seem significant, the US, for example, saw a 476% growth rate and the UK a 431% growth rate.
“China was by far the biggest player a few years ago, substantially ahead of the US, but now it is a lower-tier player,” says Grauer. “The ban had an impact, but no ban will ever remove the grey market entirely.”
Despite significant realised cryptocurrency gains, according to Chainalysis, in many countries outside traditional crypto investment hubs, including Turkey, Russia, France and Spain, there are certain jurisdictions that have positioned themselves as early adopters in the race to become the world’s leading crypto investment hubs and which continue to be the top global hubs for cryptocurrency investment.
The US (New York/Silicon Valley)
According to Chainalysis, the US saw estimated realised cryptocurrency gains grow by 476%, from $8.1bn in 2020 to $47bn in 2021. This increase demonstrates US cryptocurrency investment hubs have become the beneficiaries of China’s crypto asset demise. According to the latest data from the Cambridge Bitcoin Energy Consumption Index released in May 2022, the US accounts for one-third of all Bitcoin mining, representing a major shift away from China after its June 2021 blanket ban on cryptocurrency mining and trading.
As mining moves west to North America, cryptocurrency investment has also reached mainstream portfolios in the US. Investment banks including JPMorgan, Morgan Stanley and Goldman Sachs have launched their own dedicated cryptocurrency and blockchain groups. Meanwhile, according to CB Insights, New York ranked first among global metros with the highest venture capital (VC) investment in cryptocurrency and blockchain companies, with $2.1bn invested in the first quarter of 2022. Silicon Valley ranked second with $1.6bn invested in the same period. More than half of New York’s funding went to three companies: Fireblocks, ConsenSys and OpenSea.
The UK (London)
The UK’s cryptocurrency ecosystem is not only one of the biggest in the world, but it is also growing. Chainalysis estimated a 431% increase in realised cryptocurrency gains in 2021, when compared with 2020. In April 2022, the UK government announced plans to regulate stablecoins (a cryptocurrency pegged to fiat currency that acts as a bridge between cryptocurrency and central bank digital currencies). The move forms part of a wider plan to make the country a global hub for crypto asset investment. Measures include legislating for a ‘financial market infrastructure sandbox’ to help companies innovate, as well as the formation of crypto asset industry engagement groups.
The UK establishment’s commitment to becoming a crypto asset hub extends to its Royal Mint, which plans to issue its own non-fungible token. There are 206 crypto companies with headquarters in London in 2022, according to Dealroom data for investment promotion agency London & Partners. Meanwhile, VC investment in London’s crypto ecosystem amounted to $707m in 2021, and has continued its momentum with $292m invested in the first two quarters of 2022.
The United Arab Emirates (Dubai)
Some of the world’s biggest crypto companies including Binance, FTX, Crypto.com and Bybit have announced foreign direct investment (FDI) projects in Dubai in 2022. The emirate has long embraced a strategy of accelerated digitalisation, and crypto assets form an integral part of this vision. In February 2022, Dubai announced a regulatory framework for virtual assets including cryptocurrencies in addition to a new regulatory body, Dubai’s Virtual Assets Regulation Authority. Dubai’s FDI-friendly business environment comprises a number of industry-specific free zones including Dubai World Trade Centre, which Binance has selected for its Middle East headquarters.
Often referred to as Europe’s ‘Crypto Valley’, Switzerland’s canton of Zug is a hub for crypto and blockchain start-ups and home of the Ethereum Foundation, the Web3 Foundation (Polkadot) and the Cardano Foundation. Furthermore, nearby Zurich’s reputation as one of the world’s premier banking hubs has further helped to establish this new moniker by offering access to capital and established trust in its banking services. In addition, Swiss regulators are taking a more open approach to crypto investing than many of their global counterparts. In August 2021, the Swiss government enacted the DLT Act, or ‘blockchain law’, providing clarity around ledger-based securities and digital securities exchanges.
Singapore’s strategic location as a gateway to Asia, in addition to its open FDI policies, have seen the country position itself as a digital hub for emerging technologies, including digital assets. Furthermore, the location provides an alternative to Hong Kong, which has become less attractive to foreign investors since political unrest in the special administrative region in 2020. However, while government support for institutional investment in cryptocurrency continues, retail trading is becoming more tightly regulated. In April 2022, lawmakers approved the Financial Services and Markets Bill 2022, which requires all crypto businesses to adhere to the same licensing requirements whether they operate locally or abroad – previously laws only covered local players.