Factors driving growth in Southeast Asia

The Southeast Asian nation of Vietnam now ranks among the top nations adopting cryptocurrencies. In fact, the country has ranked first on Chainalysis’ Global Crypto Adoption Index for two consecutive years.

Chainalysis’ research methodology took into account population-adjusted adoption in crypto-platforms ranging from centralized exchanges to peer-to-peer (P2P) payment networks. Online traffic to major crypto networks was analyzed to determine the countries with the highest interest and adoption rates.

That said, Vietnam’s high adoption rate is a puzzling phenomenon, which begs the question: Why is crypto adoption so high in the country?

No tax on cryptocurrency

There are many reasons why the crypto adoption rate in Vietnam is so high, and one of them is that, unlike in the US and other major jurisdictions where cryptocurrency holdings are taxed, there are no crypto taxes in Vietnam.

Right now, the Vietnamese government does not recognize cryptocurrencies as legal tender. While the country’s tax authorities have shown interest in taxing cryptocurrencies, they lack the mandate to designate them as taxable assets. As such, Vietnamese law is largely silent on crypto taxation.

Consequently, financial institutions in the country are barred from handling them. However, Vietnamese citizens are allowed to own and trade crypto.

The lack of crypto taxes makes digital currencies ideal as investment instruments, hence the increase in adoption. The trade-off is that Vietnamese law does not protect crypto users in the event of fraud or loss. As such, cryptocurrencies cannot be legally used in trading relationships.

However, the country’s financial regulatory agencies are working to come up with elaborate guidelines for the use of crypto. This follows a July 2021 directive issued by Prime Minister Phạm Minh Chính in which he asked the State Bank of Vietnam to explore the advantages and disadvantages of digital currencies with a view to drafting regulations. The institution will probably come up with a number of measures that include tax and user protection guidelines.

Cointelegraph had the chance to speak with Gracy Chen, CEO of Bitgets cryptocurrency exchange, regarding Vietnam’s regulatory landscape and development situation.

According to Chen, clear and robust rules would allow institutional inventors in the country to start trading crypto, and this would be a big win for the industry:

“When the regulation actually comes out, it may lead to a short-term impact on local fiat exchange trading, but in the longer term, clear regulation could encourage wider adoption and lay the groundwork for increased retail and institutional engagement as a better regulated market will provide greater protection and increase investor confidence. So overall the pros outweigh the cons.”

Vietnam has a huge unbanked population

Many Vietnamese have limited access to standard financial services. According to a 2021 study conducted by Statista, the country ranks second among the top 10 unbanked nations. The report highlights that around 69% of citizens lack access to typical banking services.

The World Bank’s estimates indicate that just over 61% of the country’s population lives in rural areas, where access to modern banking services is limited. This void is quickly being filled by cryptocurrency networks. New revolutionary blockchain concepts such as decentralized finance (DeFi) are also gaining traction among Vietnamese crypto investors who want to get credit for crypto investment purposes.

DeFi is a hypernym for blockchain-based financial networks that provide services similar to those offered by banks. DeFi platforms allow users to earn interest on their money, lend and borrow funds, as well as trade crypto derivatives. They also enable investors to protect their assets using DeFi insurance and require no paperwork. This makes them convenient for unbanked Vietnamese, especially those looking to scale their crypto investments and earn passive income.

Notably, Vietnam is ranked second among nations with the highest DeFi adoption in the world, according to the 2021 Chainalysis Global DeFi Adoption Index report.

Remittances

In 2021, Vietnamese nationals living in the diaspora sent home over $18 billion in remittances, setting a new record, making the country the eighth largest recipient of remittances in the world. This was a 3% increase from the $17.2 billion recorded in 2020.

For Vietnamese who regularly send money to their families in Vietnam, transfer fees are often exorbitant. The surcharges usually include administrative fees and exchange rates. According to World Bank statistics, remittance costs to Vietnam average around 7% as of 2020.

Exorbitant fees, in addition to the unbanked population’s lack of access to money transfer services, have made cryptocurrency transfers an attractive option for Vietnamese living abroad to help support their families back home.

While blockchains have transaction fees, they often pale in comparison to payment networks, and are also P2P and do not rely on an intermediary to complete the transaction.

The growing popularity of GameFi

Blockchain gaming with financial incentives, often referred to as GameFi, use innovative financial models that allow users to earn rewards while playing. The rewards are usually in the form of non-fungible tokens (NFTs) and cryptocurrencies.

As cryptocurrencies are at the core of GameFi environments, many players are learning how they work as part of gameplay, providing another avenue for adoption.

According to Chainplay’s State of GameFi 2022 survey in August, 75% of GameFi crypto investors said they started investing in digital currencies after joining GameFi platforms.

GameFi, especially play-to-earn (P2E) games, are immensely popular in Vietnam and have greatly contributed to cryptocurrency adoption in the country.

According to a 2021 research report published by data aggregation service Finder, Vietnam ranks sixth on the list of countries with the highest percentage of P2E players. According to the survey report, 23% of Vietnamese participants said they had played P2E games at some point.

Today, many GameFi startups have set up shop in the country due to the pervasive NFT gaming culture, and this in turn is driving crypto adoption. The developers include Ancient8, Sipher and Summoners Arena.

In particular, Axie Infinity, one of the most popular play-to-earn games in the world, has its roots in Vietnam.

Chen said the relationship between GameFi and crypto adoption is part of the reason both sectors are booming:

“According to data from Google, Sensor Tower and Data.ai, Vietnam ranks first in Southeast Asia when it comes to producing applications and games in stores such as the Apple Store and Google Play. Meanwhile, the new massive crypto adoption worldwide last year was partly due to GameFi These two factors are significantly connected, creating massive crypto adoption in Vietnam.

Cryptocurrencies as a hedge against inflation

Vietnamese citizens have historically preferred to use other national currencies such as the US dollar in times of economic turmoil and hyperinflation. In recent years, Vietnamese have also accumulated assets such as gold to hedge against inflation.

At one point in the last decade, the Vietnamese citizens held as much as 400 tons of gold.

Of course, the rise of cryptocurrencies has also led to more Vietnamese citizens using them to hedge against inflation instead of tangible assets like gold.

While Vietnam’s central bank has warned individuals and institutions against trading in virtual currencies due to their mercurial nature, waning faith in the Vietnamese dong has led more Vietnamese investors to turn to digital currencies. According to data obtained from Statista, Bitcoin (BTC), widely used by investors as a hedge against inflation, is currently the most popular cryptocurrency in the country.

The report reveals that search interest in the country for the primary cryptocurrency stands at approximately 84.5% compared to other cryptocurrencies.

Crypto adoption in Vietnam will persist as more Vietnamese discover the convenience and possibilities of digital assets. Comprehensive regulations, however, appear to be some way off. The State Bank of Vietnam has until 2023 to study the pros and cons of cryptocurrencies and make policy recommendations.