Policy Research Working Paper 9962 Crypto-Assets Activity around the World Evolution and Macro-Financial Drivers Erik Feyen Yusaku Kawashima Raunak Mittal Finance, Competitiveness and Innovation Global Practice & Information and Technology Solution Vice Presidency March 2022 Policy Research Working Paper 9962 Abstract On-chain crypto-assets transaction volumes have grown technology adoption and higher reliance on remittances. rapidly, particularly during the COVID-19 pandemic. Taken together, the findings shed new light on the drivers Crypto-assets activity appears to be a global phenom- behind crypto activity and offer support to the notions that enon, although it still remains modest relative to gross crypto-assets are perceived as a risk asset, a potential macro domestic product for most countries. Panel regressions hedge, and a potential tool to support cross-border transac- across more than 130 countries show that the variation tions. However, the results come with caveats: a significant in countries’ monthly crypto volumes is mostly driven portion of the sample period includes extraordinarily loose by globally relevant factors such as real U.S. longer-term global financial conditions; the crypto volume data have inflation expectations, U.S. real Treasury yields, and gold a short history, rely on important limiting assumptions, and crypto-asset prices, rather than recent country-level and do not represent all crypto activity; and crypto-assets macroeconomic developments. Cross-sectional regressions represent a fast-evolving, increasingly diverse asset class and offer tentative evidence that crypto activity is higher in industry. countries with higher information and communications This paper is a product of the Finance, Competitiveness and Innovation Global Practice and the Information and Technology Solution Vice Presidency. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://www.worldbank.org/prwp. The authors may be contacted at efeijen@worldbank.org, ykawashima@worldbankgroup.org, and rmittal1@worldbankgroup.org. The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. Produced by the Research Support Team Crypto-Assets Activity around the World: Evolution and Macro-Financial Drivers Erik Feyen, Yusaku Kawashima, and Raunak Mittal1 JEL classification: E42, F24, F38, G11, G12, G15, G28, O33 Keywords: crypto-assets, digital assets, virtual assets, digital currencies, cryptocurrencies, crypto, stablecoins, blockchain, distributed ledger technology, Bitcoin, Ethereum, stablecoins, medium of exchange, payments, remittances, inflation, depreciation, global financial conditions, store of value 1 All authors are with the World Bank. We thank Rachel Alexandra Halsema, Ani Popiashvili, and Hamed Honari for significant contributions. We appreciate comments and suggestions from Raphael Auer, Parma Bains, Uzma Khalil, Stela Mocan, Martin Melecky, Alvaro Enrique Pedraza Morales, Cedric Mousset, Uli Ruch, Jean Pesme, Nobu Sugimoto, Mahesh Uttamchandani, Jeanne Verrier, William Zhang, and Peter Zhou. We thank Kim Grauer for discussions and the crypto-assets transaction volume data. This paper’s findings, interpretations and conclusions are entirely those of the authors and do not necessarily represent the views of the World Bank Group, their Executive Directors, or the countries they represent. 1 Introduction Notwithstanding their significant volatility, crypto-assets present both potential opportunities and risks and are increasingly regarded as an emerging asset class by both financial market participants and policy makers, reaching over US$2.8 trillion in market capitalization in November 2021 as both retail and institutional adoption surged (Figure 1). The main objective of this paper is to document the rapid rise in “on-chain” 2 crypto-assets activity around the world -- transactions that are directly recorded on the distributed ledger that underpins a crypto-asset -- and empirically investigate key macroeconomic drivers of crypto-assets volumes to better understand the drivers behind their use. In the context of rapid growth and evolution of this space, understanding these drivers is important for policy makers, end-users, and industry alike. As crypto-assets are currently not widely used as a means of payment or to access decentralized financial services, 3 this paper’s research questions focus on two common hypotheses: Are crypto-assets used as a risk asset? Do users across countries perceive them as an emerging hedge against adverse macroeconomic conditions such as high inflation or currency depreciation? We also briefly explore which country characteristics are associated with crypto activity. While there is no commonly agreed lexicon, 4 crypto-assets can be broadly defined as private digital representations of value that can be used for payment or investment purposes or to access a good or service and rely on distributed ledger or similar technology (e.g., Financial Stability Board (2018a), Financial Action Task Force (2021), Basel Committee on Banking Supervision (2021)). 5 More specifically, crypto-assets typically operate on open, decentralized computer networks which aim to maintain an immutable distributed ledger that enables users to store, transfer, and receive funds 24/7 with global reach and relatively fast settlement in a purely peer- to-peer fashion without the need for intermediaries (i.e., “permissionless”) or the potential of third- party interference (i.e., “censorship resistance”). The open-source software protocols enforced by 2 Not all crypto-assets transactions are “on chain”. “Off-chain” transactions are only recorded on centralized ledgers and private order books of intermediaries such as crypto-assets exchanges, custodial wallets, and financial institutions. These “off-chain” transactions may involve buying or selling of crypto-assets in exchange for fiat currency or exchanging one crypto-asset for another. 3 However, Graf von Luckner et al (2021) find evidence that about 7 percent of “off chain” bitcoin transactions on a large crypto exchange reflect domestic and international payments. 4 Several other terms are often used by standard-setting bodies, national authorities, academia, and industry, often with slightly different connotations or emphases. These include “crypto currencies”, virtual currencies”, “digital currencies”, “virtual assets”, “digital assets”, “crypto coins”, or simply “crypto”. 5 The definition of crypto-assets excludes e-money, central bank digital currencies (CBDCs), and digital representations of traditional financial instruments. 2 these decentralized networks allow for consensus formation about the “state of the world” 6 in low- trust environments without requiring a trusted third party and seek to imbue crypto-assets with certain characteristics such as scarcity, verifiability, and, more broadly, programmability (e.g., Nakamoto (2008) and Buterin (2013)). 7 In response to the volatility of crypto-assets, stablecoins have emerged as a new type of crypto- asset which aims to maintain a stable value relative to a specified asset (typically a fiat currency and most commonly the US dollar), or a pool or basket of assets. Stablecoins have grown explosively with a market capitalization of US$136 billion in November 2021, up from US$28 billion in January 2021, according to The Block. The three largest stablecoins, Tether, USD Coin, and Binance USD, account for about 85 percent of the total. Furthermore, Decentralized Finance (DeFi) has also grown swiftly, a “smart contract” 8-based crypto-assets financial ecosystem that uses programmability features, spanning, among others, collateralized lending, borrowing, exchange, stablecoins, investment management, and derivatives services (e.g., Harvey et al (2021), JP Morgan (2021a), Schar (2021)). These services are interoperable and can be used as building blocks by users or developers allowing for complex ecosystems to emerge (i.e., “composability”). According to CoinMarketCap, in November 2021, a total of about US$190 billion was locked in DeFi projects, up from about US$20 billion in January 2021. An important driver of this explosive growth is the recent price surge in ether. Ethereum is the dominant DeFi platform, although its share has been falling as rival platforms gain momentum. While data gaps remain significant (e.g., IMF (2021)), it appears that crypto-assets activity is a global phenomenon. Some industry estimates claim that over 200 million people around the world own or use crypto-assets in 2021 (Figure 1). While its representativeness is not fully clear, a global Statista household survey conducted in 2020 found that there are at least 20 countries where over 10 percent of the respondents own or use crypto-assets (Table 1). According to industry analysis, global crypto-assets activity has grown by over 2,300 percent since Q3 2019 and over 881 percent to Q3 2021 and estimates suggest that the countries with relatively high activity are Emerging Market and Developing Economies (EMDEs) (Chainalysis (2021) and Table 1). 6 For example, the ownership status of all bitcoins on the Bitcoin ledger or the status of all smart contracts on Ethereum. 7 The benefits of decentralization come at a cost, typically by posing trade-offs with throughput capacity and/or security. 8 A “smart contract” is a piece of software that directly controls crypto-assets (also see Szabo (1997)). A smart contract runs on a distributed ledger technology network and can be created by anyone. 3 The data used in this paper suggest that total on-chain transaction volumes reached US$2.8 trillion in the first half of 2021 alone. In comparison, industry data indicate that total volumes, which include “off-chain” transactions, were approximately US$16 trillion during the same period (CryptoCompare (2021)). Off-chain transactions are facilitated by intermediaries such as crypto- exchanges and are only registered on private ledgers and order books rather than the distributed ledgers that underpin crypto-assets. As such, it is important to keep in mind that the on-chain activity we study in this paper is not fully representative of all crypto-assets activity. A limited, but growing number of institutions such as corporations, asset managers, and pension funds around the world have started to invest in crypto-assets, bitcoin in particular. 9 Crypto-asset derivatives and futures markets have grown rapidly, and spot- and futures-based exchange-traded products are already active in various countries. Several large international banks, payment card companies, and payment processors have started to offer crypto-asset wallets and related services. And new services have appeared such as crypto-asset-based lending (i.e., on a collateralized basis), borrowing, trading, asset management, and custody solutions, including by asset management companies and large banks which have expressed a desire to become more involved in the crypto- assets space (GFMA, et al (2021)). The ascent of crypto-assets has put a welcome spotlight on various well-known weaknesses in the traditional financial and monetary system. Some of these deficiencies are related to: financial inclusion, since 1.7 billion people around the world remain “unbanked” and have limited or no access to financial services (Demirgüç-Kunt et al (2017)); (cross-border) payments and remittances, which can be slow, costly, and opaque; citizen’s trust in and efficiency of traditional financial intermediaries, as in some countries competition is limited and memories of banking sector stress are still fresh; and macroeconomic policies, given that some countries experience regular bouts of excessive inflation and currency depreciation or volatility. Indeed, crypto activity has risen in various countries that have experienced sharp and persistent declines in macroeconomic conditions. Moreover, given their ease of storage and portability without the need for intermediaries, crypto-assets may also support people “living under the threat of harm by their families, people in their communities, or repressive governments” (Peirce (2021)). More broadly, crypto-assets typically operate on open platforms and open-source software protocols which are 9 According to Coingecko.com, in November 2021, over 25 public companies around the world, many of them in the crypto industry, collectively held more than US$13.6 billion in bitcoin on their balance sheets. 4 not controlled by a central entity which may be prone to failure, fraud or rent seeking and are accessible to anybody to use and build upon. Proponents argue that most of the value of open and decentralized systems accrues to participants and innovators, unlike centralized platform companies which tend to become extractive with users and competitive with developers and businesses as they reach scale (e.g., Dixon (2018)). Such conditions may therefore solicit more enduring innovation and network effects and give rise to a new wave of interoperable business models, products, and services. These innovations are not necessarily of a financial nature. For example, distributed ledgers can be used to create a decentralized system for digital identification where users have control and ownership over their own credentials, not third parties (e.g., Microsoft’s ION project on Bitcoin). However, the nascent crypto-assets industry also poses various serious challenges and risks. For example, the G20 concluded that crypto-assets “…raise issues with respect to consumer and investor protection, market integrity, tax evasion, money laundering and terrorist financing. Crypto-assets lack the key attributes of sovereign currencies. At some point they could have financial stability implications.” (G20, 2018). Recently, IMF (2021) re-emphasized financial and monetary stability considerations. The G7 concluded that stablecoins can pose legal, regulatory, and oversight challenges including issues related to, among others, monetary sovereignty, data privacy, cyber resilience, and fair competition (G7 (2019)). In light of their supra-national and cross-border nature, crypto-assets present international regulatory arbitrage risks. Various standard-setting bodies are closely monitoring developments and have issued guidance, recommendations, and binding international rules and minimum requirements (see FSB (2018b) for an early overview). More recent examples include the Financial Action Task Force’s (FATF) revised standards and updated guidance for a risk-based approach regarding money laundering and illicit finance of virtual assets and virtual asset service providers (e.g., FATF (2021)); the Basel Committee on Banking Supervision’s consultative document on the prudential treatment of crypto- assets (BCBS, 2020); the Financial Stability Board’s report on the regulation, supervision, and oversight of stablecoin arrangements (FSB (2020)); and the joint report by the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) on the applicability of the Principles for Financial Market Infrastructures to stablecoin arrangements (CPMI-IOSCO (2021)). National authorities around the world have taken very different stances towards crypto-assets: these range from supporting safe innovation 5 and adoption to limiting or banning certain crypto-assets activities – El Salvador has adopted bitcoin as legal tender. Understanding the main drivers behind crypto-assets usage is important for policy makers, investors, and industry alike. Although Bitcoin, the original crypto-asset, was conceived as a peer- to-peer electronic cash system without the need for a trusted third party such as a central bank or financial intermediary, crypto-assets are currently not widely used as a medium of exchange, although recent research finds evidence that bitcoin is used as a vehicle for domestic transactions and international payments (e.g., Graf von Luckner et al (2021)). Moreover, crypto-assets users may not be motivated by security concerns related to payments in cash or commercial banking services, at least in advanced economies such as the United States (e.g., Auer and Tercero-Lucas (2021)). And while growing quickly, DeFi is still nascent. We therefore explore two other often discussed drivers behind crypto-assets activity in this paper: i) crypto-assets serve as a speculative or risky investment vehicle (e.g., Baur, Lee and Hong (2018) and Athey, et al (2016)) and ii) crypto-assets are perceived as an emerging “digital, scarce, speculative store of value” (Gensler (2021)) which may act as a macro hedge providing protection against monetary and macro- financial weaknesses such as excessive and persistent inflation (e.g., Blau et al (2021) and Conlon, et al (2021)) and currency depreciation or volatility. Our paper contributes to a small, but burgeoning literature which empirically investigates the potential drivers and motivations of crypto-assets activity and usage in various ways. First, using a rich monthly data set of on-chain crypto-assets transaction volume estimates at the country level, we document the evolution of usage around the world and analyze both trends at the global level and in EMDEs. Second, using panel regressions we empirically assess the association between crypto-assets volumes and a country’s macro-financial fundamentals and relevant global financial conditions. Third, we use cross-sectional regressions to take initial steps to identify other potentially relevant country characteristics such as financial sector development and ICT adoption. 6 Figure 1: Crypto-assets: Market Capitalization, Prices, and Estimated Number of Users Panel A: Market Cap for Bitcoin, Ether, Stablecoins, DeFi and Other Crypto-assets (in US$) Panel B: Bitcoin and Ether Prices (US$ on log scale) 7 Panel C: Estimated Global Crypto Users (in millions) Sources: Messari; TradingView; Coinmetrics; Federal Reserve; Crypto.com. The estimated users figures should be interpreted with caution as data gaps remain significant. 8 Table 1: Estimates of Crypto-assets Adoption Panel A: Statista Global Country Survey: Share of Respondents who Indicated That They Used or Owned Crypto-assets (2020) % Country Share (%) Country Share (%) Nigeria 31.9 Lithuania 8.7 Vietnam 21.1 Egypt, Arab Rep. 8.3 Philippines 19.8 Norway 8.1 South Africa 17.8 Portugal 8.1 Thailand 17.6 Australia 7.8 Peru 16.1 Korea, Rep. 7.6 Turkey 16.1 Serbia 7.5 Colombia 15.3 Russian Federation 7.3 Argentina 14.4 Austria 7.2 Indonesia 13 Poland 7.2 Brazil 12.5 China 6.9 Malaysia 12.3 Hungary 6.4 Chile 11.7 Romania 6.4 Saudi Arabia 11.4 Belgium 6.3 Switzerland 11.1 United States 6.2 Greece 11.1 France 5.6 Kenya 10.5 Pakistan 5.6 Dominican Republic 10.3 Canada 5.2 Netherlands 10 Germany 5.2 United Arab Emirates 10 Finland 5.1 Mexico 9.7 New Zealand 5.1 Ireland 9.6 Israel 4.9 Singapore 9.6 United Kingdom 4.7 Spain 9.4 Italy 4.7 Morocco 9.3 Denmark 4.4 Czechia 9.2 Sweden 4.3 India 8.8 Japan 3.7 Source: Statista Global Consumer Survey. Note: Statista reported that the survey contains between 1,000-4,000 respondents per country and that the samples are representative of the online population. These figures should be interpreted with caution as data gaps remain significant. 9 Panel B: Chainalysis Top 20 Global Crypto-assets Adoption Index (2021) Ranking for individual weighted metrics feeding into Global Crypto Adoption Index Index Overall index On-chain value On-chain retail P2P exchange Country score ranking received value received trade volume Vietnam 1.00 1 2 4 3 India 0.37 2 3 2 72 Pakistan 0.36 3 12 11 8 Ukraine 0.29 4 5 6 40 Kenya 0.28 5 28 41 1 Nigeria 0.26 6 10 15 18 Venezuela 0.25 7 22 29 6 United States 0.22 8 4 3 109 Togo 0.19 9 42 47 2 Argentina 0.19 10 17 14 33 Colombia 0.19 11 23 27 12 Thailand 0.17 12 11 7 76 China 0.16 13 1 1 155 Brazil 0.16 14 7 5 113 Philippines 0.16 15 9 10 80 South Africa 0.14 16 16 18 62 Ghana 0.14 17 37 32 10 Russian Federation 0.14 18 6 8 122 Tanzania 0.13 19 45 60 4 Afghanistan 0.13 20 38 53 7 Sources: Statista; Chainalysis. Note: The panel shows the 2021 crypto adoption index calculated and published by Chainalysis. These figures should be interpreted with caution as data gaps remain significant. 2 Literature Drivers of crypto-assets usage Szabo (2017) observes that economic transactions and exchanges require trust between participants. However, trust does not scale well as the number of participants in a network grows, thereby increasing transaction costs. As a result, historically, trust has been delegated to a central authority which may be susceptible to failure, fraud or rent seeking. He then posits that the technology which underpins crypto-assets can lower social transaction costs in low-trust environments without the need to delegate trust to a central third party. As such, the technology may enable more and more efficient economic interactions between large numbers of agents as 10 they do not need to trust each other or an intermediary (i.e., “social scalability”). Raskin, Saleh and Yermack (2019) contend that non-state digital currencies could have important welfare implications for emerging markets as they can provide for an alternative asset which could serve as a check on the inflationary tendencies of the sovereign, suggesting that crypto-assets adoption may be driven by a diversification opportunity for local investment. Regarding Decentralized Finance (DeFi), Harvey et al. (2021) claim it has the best potential to provide financial services in the future to overcome the inherent challenges of the traditional financial sector of centralized control, limited access, inefficiency, opacity, and lack of inter-operability. Early work that aims to identify drivers of crypto-assets adoption includes Hileman (2014) which proposed a Bitcoin Market Potential Index based on seven country characteristics (technology penetration, international remittances, inflation, size of informal economy, financial repression, historical financial crises, and bitcoin penetration) and posited that the greatest potential for adoption lies in Latin America and Sub-Saharan Africa. Additional relevant factors for crypto- assets adoption may also include high expected returns from speculative investment and regulatory arbitrage, particularly related to illicit financial activity (e.g., IMF (2021) and Saiedi, Brostrom & Ruiz (2020)). Feyen, Frost, Natarajan, and Rice (2021) propose a set of supply and demand side drivers of crypto-assets adoption with a focus on stablecoins. As supply side drivers they include profitability and costs of traditional payment service providers, and the availability of infrastructures such ICT and agent networks. On the demand side, they consider cost and inconvenience, confidence in financial incumbents and the government, and macroeconomic conditions. There is a growing empirical literature that explores several of these drivers. Saiedi, Brostrom & Ruiz (2020) find some evidence that perceived failings of the traditional financial system contribute to the adoption of crypto-assets. However, using U.S. Survey of Consumer Payment Choice data Auer and Tercero-Lucas (2021), document that crypto-asset adoption in the United States is not driven by distrust in the regulated financial system and conclude that adoption is mostly driven by speculation. In addition, they also find that crypto-assets users tend to be educated, young, and digital natives. By analyzing on-chain Bitcoin transaction data, Baur, Lee and Hong (2018) and Athey et al (2016) also find that bitcoin transactions mostly reflect speculative activity. However, more recently Graf von Luckner et al (2021) study data from a centralized exchange and challenge the view that Bitcoin is only used for speculation. They find evidence that at least 7 percent of bitcoin transactions reflect its use for domestic transactions and 11 international payments. Athey et al (2016) also document that bitcoin ownership is highly concentrated. Indeed, even as the popularity of Bitcoin has continued to grow in the past few years, Marakov and Schoar (2021) more recently confirmed that bitcoin ownership and mining capacity are still very concentrated. Auer and Claessens (2020) find that in light of significant regulatory uncertainty, regulatory news regarding crypto-assets has had a significant impact on crypto-assets market prices and trading volumes. Box 1: Women and Crypto-assets Adoption In their Global Report on Women and Cryptocurrencies, Spindler and Rodriguez (2021) conducted a small survey of crypto-asset ownership and adoption factors among 60 women from 31 countries, with a focus on residents of Latin America. 36% of participants in the survey highlighted their interest in the underlying technology, while 14% saw crypto-assets as a long-term investment vehicle. Participants cited a number of factors that increased their interest in crypto-assets, including value fluctuations of their local fiat currency, domestic and regional financial crises, lack of economic empowerment and control over finances within their household, and perceived inefficiency of legacy financial systems. Importantly, 95% of the women respondents had some form of higher education, signaling that educational background could play a role in crypto-asset adoption. Measuring crypto-assets activity To understand the various motivations behind crypto-assets activity, it is important to properly measure it. However, while open distributed ledgers allow anyone to observe the complete historical on-chain transaction data, their pseudonymous nature makes it challenging in practice to match individual persons or businesses to on-chain addresses, unless they, for example, underwent Know-Your-Customer checks to obtain accounts at centralized intermediaries such as crypto- exchanges. Several studies have taken different approaches to measure crypto-assets activity. To estimate the number of bitcoin and ether owners, Wang (2020, 2021) utilizes on-chain data to count the total number of on-chain deposit addresses 10 which are required to deposit funds into crypto exchanges. One of the heuristics used by Athey, et al (2016) to analyze Bitcoin activity is to associate multiple Bitcoin addresses to user wallets. Estimating country-level activity is also challenging, as crypto- assets networks are global with no on-chain information regarding the geographic origin or 10 Deposit addresses are temporary on-chain addresses of users transferring funds to crypto exchanges. 12 destination of transactions. Lischke and Fabian (2016) leverage publicly available Bitcoin transaction data and the IP addresses of transactions to gauge geographical location. However, this approach assumes that the Bitcoin node that broadcasts the transaction to the network is also its source. Crypto-assets prices and inflation There is a small literature that studies the link between crypto-asset prices and inflation. Using a vector-autoregressive framework, Blau et al (2021) find an empirical relationship between bitcoin prices and inflation expectations suggesting that bitcoin acts as an inflation hedge (i.e., changes in bitcoin Granger-cause changes in inflation expectations). Conlon et al (2021) confirm a link between forward inflation expectations and bitcoin and ether prices, but this relationship is only limited to the onset of COVID-19 casting doubt over the ability of these crypto-assets to hedge expected inflation going forward. 3 Data 3.1 Description of the on-chain crypto-activity data set We use a large global monthly country-panel of on-chain crypto-asset transaction volumes of value sent in US dollars provided by Chainalysis, a global blockchain analysis company. “On-chain” transactions are directly recorded on the distributed ledger that underpins a crypto-asset. The sample spans the period April 2019 – June 2021 and covers 174 countries, 114 different crypto- assets, and five transaction size categories. We have mapped crypto-assets into four groups: 1) Bitcoin; 2) Ethereum; 3) Stablecoins 11; and 4) DeFi and Others. 12 We also group transaction sizes into two categories: a) less than or equal to $10,000, which is more reflective of retail use and b) greater than $10,000. While on-chain crypto-assets transaction data are fully transparent for most crypto-assets, in light of their pseudonymous nature, the destination country of a particular transaction may not be known 11 These include some of the major US$-linked stablecoins: USD Coin (USDC), Tether (USDT), DAI (crypto-assets backed), TrueUSD (TUSD), Paxos USD (Dollar (PAX), Binance USD (BUSD), and Gemini Dollar (GUSD). In November 2021, the top 3 stablecoins account for about 85 percent of the total stablecoin market capitalization. 12 This category includes 103 different crypto-assets. The top 10 with the largest volume are: Wrapped Ether (WETH), XRP, Litecoin (LTC), Wrapped Bitcoin (WBTC), Chainlink (LINK), Bitcoin Cash (BCH), EOS, Uniswap (UNI), Yearn Finance (YFI), and Sushiswap (SUSHI). 13 with certainty. To overcome this challenge, Chainalysis combines proprietary knowledge of crypto-assets wallets ownership with web traffic data provided by SimilarWeb, a website analytics & traffic intelligence platform, to provide estimates of the total on-chain value sent to countries (in US dollar terms). Figure 2 provides an overview of the methodology. More specifically, Chainalysis maps known on-chain addresses to services such as crypto-exchanges which can be associated with many on-chain addresses. Next, Chainalysis allocates transaction volumes of a service to a country in proportion to the web traffic that originates from that country to each service’s website. To further improve classification, Chainalysis also accounts for time zones, fiat currency pairs offered, website language options, and the location of the service’s headquarters. These volume estimates come with important caveats. First, they do not capture “off-chain” transactions which are recorded on the private order books of intermediaries such as crypto- exchanges or financial institutions (with the exception of peer-to-peer exchanges such as Paxful). As such, our data do not capture activities that are facilitated by such intermediaries which include purchases of crypto-assets with fiat currency, sales of crypto-assets for fiat currency and swaps between crypto-assets. Total off-chain volumes appear significantly larger than on-chain transactions with some industry estimates suggesting the approximate ratio of off-chain to on- chain volume being roughly 6:1. 13 Total off-chain volume in the first half of 2021 was approximately US$16 trillion (CryptoCompare, 2021), compared to the on-chain volume of US$2.8 trillion. Second, the web traffic data does not account for virtual private network (VPN) activity which obscures the true destination of web traffic. Third, the transaction value associated with a known crypto-exchange wallet is assumed to be proportionate the volume of web traffic, an important limiting assumption. 13 Chainalysis estimate based on trade volume data from Kaiko and on-chain transaction data from Chainalysis. https://blog.chainalysis.com/reports/fake-trade-volume-cryptocurrency-exchanges 14 Figure 2: Country-level Crypto-assets Activity Estimation Methodology Source: Chainalysis. Note: Example demonstrating Chainalysis’ methodology for estimating country-level crypto activity using crypto- service platforms volume (in US$) and countries’ web traffic data. 3.2 Trends and patterns in on-chain crypto-assets volumes Table 3 provides summary statistics of the crypto-assets activity data aggregated by type of crypto- asset category and shows that the average transaction size for bitcoin and ether (US$57.9 mln and US$38.5mln) are much higher in comparison to stablecoins, DeFi or other crypto-assets, suggesting that activity is mainly driven by large and institutional players, rather than retail consumers. Next, we highlight several main trends and patterns in crypto-assets activity. The Annex contains additional charts.  Total volume has been increasing in the past two years, driven by ether and stablecoins. 15 Figure 3 Panel A shows a rapid rise of total crypto-assets activity over the past two years reaching a total of US$2.82 trillion year to date in 2021. Across all transactions, the breakdown by type of crypto-asset shows that the value sent in ether (40 % of overall volume 2021 year to date) and stablecoins (24% of overall volume 2021 year to date) has gained more compared to bitcoin (24% of overall volume 2021 year to date). DeFi and other crypto-assets activity represents 12% of crypto activity year to date. The on-chain stablecoin activity (US$ 602 billion 2021 year to date) is significantly less in comparison to total stablecoin transaction volumes (i.e., including off-chain which is US$ 2.8 trillion 2021 year to date). 14 This indicates that a majority of stablecoin volume is driven by intra exchange trade for settlement of crypto-asset trading. Figure 3 Panel B shows a similar trend for volumes associated with smaller transaction sizes. Stablecoin activity remain relatively low with 16% of overall volume year to date. When looking at the crypto activity by transaction size, we find that while large value transfers ($2.69 trillion year to date) dwarf smaller transaction size transfers ($119 billion year to date), the smaller transaction size transfers have also been rising steadily in the past two years. 14 Estimate based on Coinmetric data. 16 Figure 3: Total Crypto-assets Volume by Type of Crypto-asset US$ Panel A: All Transaction Sizes (in US$) Panel B: Small Transaction Sizes (