The ascent of crypto-assets: evolution and macro-financial drivers

ERIK FEYEN
YUSAKU KAWASHIMA
RAUNAK MITTAL

|APRIL 05, 2022

WORLD BANK BLOG

Unsplash

Crypto-asset transaction volumes have seen rapid growth globally driven by retail and institutional adoption, particularly since the beginning of the COVID-19 pandemic and against a backdrop of extraordinary loose global financial conditions. In light of its growing scale, diversity, complexity, and interconnectedness with the regulated financial system which may amplify risks, understanding the main drivers behind crypto-assets usage is relevant for policy makers, users, and industry alike.

While Bitcoin, other crypto-assets, including stablecoins, are currently not widely used as a medium of exchange, some recent research finds evidence that bitcoin has been used as a vehicle for domestic transactions and international payments (e.g., Graf von Luckner, et al (2021)). Additional relevant factors for crypto-assets adoption may also include high expected returns from speculative investment (Auer and Tercero-Lucas (2021)), their role as a perceived macro hedge protecting against macro-financial instability and excessive inflation despite their high volatility (Blau et al (2021) and Conlon, et al (2021)), and regulatory arbitrage, particularly related to illicit activity. Given their ease of storage and portability, crypto-assets may also support people “living under the threat of harm by their families, people in their communities, or repressive governments” (Peirce (2021)). Regarding Decentralized Finance (DeFi), Harvey et al. (2021) concludes it has potential to overcome the inherent challenges of the traditional financial sector of centralized control, limited access, inefficiency, opacity, and lack of inter-operability.

In a new paper (Feyen et al (2022)), we document the rise in on-chain crypto-assets activity around the world at the country level--transactions that are directly recorded on the distributed ledger that underpins a crypto-asset--and empirically investigate the association of crypto-asset volumes across countries with key global and domestic macroeconomic drivers.

Rapid rise of crypto activity around the world

Although data gaps are significant (e.g., IMF (2021)), it appears that crypto-assets activity is a global phenomenon. Some industry estimates claim that 100-200 million people around the world own or use crypto-assets in 2021, including in many emerging market and developing economies (EMDEs).

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, to investigate the potential drivers of crypto-assets activity in various ways. The sample spans the period April 2019 – June 2021 and covers 174 countries and 114 different crypto-assets. We mapped all crypto-assets into four groups: 1) Bitcoin; 2) Ethereum; 3) Stablecoins; and 4) Decentralized Finance (DeFi) and Others.

Total crypto-assets on-chain volume over the past two years surged to a total of US$2.8 trillion in the first half of 2021 alone. Figure 1 illustrates that the volumes in ether (40%) and stablecoins (24%) has gained more share over time compared to bitcoin (24%). DeFi and other crypto-assets represent 12%. When looking at crypto activity by transaction size, we find that large value transfers ($2.69 trillion) dwarf smaller transaction size transfers ($119 billion), suggesting a disproportionately large role of institutional activity.


Figure 1: Total Crypto-assets Volume by Type of Crypto-asset

US Dollars
All Transaction Sizes (in US$)



Sources: Chainalysis; World Bank staff calculations.

Figure 2 shows that the geographical distribution of crypto-assets activity is global. Annualized total volumes of crypto-assets activity for 2021 relative to GDP have become noticeable, particularly in regions like Latin America and the Caribbean (median: 0.07% of GDP), Sub-Saharan Africa (median: 0.06% of GDP) and Europe and Central Asia (median: 0.10% of GDP). Activity is relatively limited in lower- and middle-income countries and is dominated by bitcoin and ether. Smaller transactions still represent a minor fraction (7%) of total volumes across countries. The share of stablecoins also remains relatively low with 16% of the overall volume.

Figure 2: Total Crypto-assets Volume by Type of Crypto-asset (April 2019-June 2021)

% of GDP
By Type of Crypto-asset



Source: Chainalysis; World Bank staff calculations.

Note: A map of crypto-assets activity scaled by a country’s GDP – larger bubbles indicate higher activity relative to the size of the economy. The bubble sizes representing the relative values sent (% of GDP).

Macro-financial drivers of crypto-asset activity

The empirical findings suggest that crypto-asset volumes are strongly associated with a set of forward-looking global macro-financial factors--which may ultimately shape domestic macro-financial conditions --rather than recent domestic macroeconomic developments. For example, controlling for a range of global and domestic factors, a 10-basis-point increase in monthly U.S. inflation expectations (on a 5-year, 5-year forward basis as embedded in U.S. Treasury yields) increases monthly crypto volumes by about 28 basis points. In contrast, country-level macroeconomic indicators (e.g., inflation and the exchange rate) do not appear to be strongly related with country-level volumes.

Country-level volumes also move in the opposite direction of gold prices, suggesting that crypto-assets are perceived to some extent as a substitute for gold, a traditional global inflation hedge . The results further imply that crypto-assets are perceived as a speculative, “risk on” asset class with higher volumes when real U.S. Treasury yields, a proxy for global financial conditions, are lower. Crypto volumes also appear to be supported by a momentum effect in crypto-asset prices further suggesting that speculative motives play a role. Volumes also tend to be higher in countries with higher ICT penetration and higher reliance on remittances.

Conclusion

Crypto-assets are increasingly regarded as an emerging and diverse asset class as economic functions and risks differ across crypto-assets (e.g., unbacked crypto-assets, stablecoins, and DeFi).

While not a panacea to overcome financial sector challenges, crypto-assets and the underlying technology hold promise for financial innovation, inclusion, efficiency, transparency, and capital formation . However, in a context of their decentralized and cross-border nature which poses international regulatory arbitrage challenges, crypto-assets also present several serious risks, including to financial integrity, consumer and investor protection, fair competition, monetary sovereignty, capital control enforcement, and taxation (e.g., FATF (2021), G7 (2019)). Further, while crypto-assets still constitute a small portion of the global financial system, they could ultimately pose risks to global financial stability (e.g., FSB (2022)).

 
A longer version of this blog was first published in VoxEU.

Authors

Erik Feyen
Head Global Macro-Financial Monitoring and Lead Financial Sector Economist
MORE BLOGS BY ERIK


Yusaku Kawashima
Senior Innovation Officer at the World Bank Group
MORE BLOGS BY YUSAKU

Raunak Mittal
IT Officer, Business Solutions, World Bank
MORE BLOGS BY RAUNAK

Canadian ex-minister Catherine McKenna named to head UN greenwash watchdog

The group will promote real emissions reductions among cities, regions and businesses, rather than over-reliance on carbon offsets or carbon removal technology


Catherine McKenna will chair the new group after retiring from Canadian politics last year (Photo: World Economic Forum / Benedikt von Loebell)

By Joe Lo
Published on 31/03/2022

The UN has tasked a high-profile committee with drawing up standards so that businesses and sub-national governments “walk the talk on their net zero promises”.

Within twelve months, the 16-member group is to publish recommendations on how to judge net zero commitments and translate them into national and international regulations.

It will be called the High-Level Expert Group on the Net-Zero Emissions Commitments of Non-State Entities (HLEG) and be supported by a small full-time staff at the UN’s New York headquarters.

Announcing the group, the UN’s secretary-general António Guterres said: “Governments have the lion’s share of responsibility to achieve net-zero emissions by mid-century. Especially the G20. But we also urgently need every business, investor, city, state and region to walk the talk on their net-zero promises.”

He added: “To avert a climate catastrophe, we need bold pledges matched by concrete action. Tougher net-zero standards and strengthened accountability around the implementation of these commitments can deliver real and immediate emissions cuts.”

Canadian government ducks fight with oil and gas industry

The group will be chaired by Catherine McKenna. She was Canada’s environment minister and infrastructure and communities minister under Justin Trudeau’s government before leaving politics last year to focus on “[her] kids and the climate”.

Commenting on her appointment, she said: “The recent avalanche of net-zero pledges by businesses, investors, cities and regions will be vital to keep 1.5C alive and to build towards a safe and healthy planet, but only if all pledges have transparent plans, robust near-term action, and are implemented in full.”

Climate scientist and campaigner Bill Hare, another member of the group, said: “Governments are being held to account, but for non-state actors the situation is a lot more murky, and without guidelines, many net zero claims risk being simply [public relation] campaigns without verification”.

The group’s 16 members include climate campaigners, scientists, energy analysts, businesspeople, economists, finance experts, bankers and former politicians and civil servants.

The group is deliberately gender-balanced with eight men and eight women. There are eight representatives from the developed world and eight from the developing world. Around 80% of the world’s population live in developing countries.

They will attempt to combat greenwashing, when corporations claim to be helping the environment without doing enough to align with international climate goals. In particular, the group will focus on the over-use of carbon offsets and unrealistic dependence on carbon removal technology.

At a press briefing on Thursday, the UN's special advisor on climate Selwin Hart criticised companies which set long-term net zero targets but do not have shorter-term interim targets. "Under no circumstances can that be credible," he said.

Asked by Climate Home if "scope three" emissions, from the use of a company's products, should be included in a company's emissions, McKenna said: "I don't want to get ahead of the working group but my view is yes."

She added: "There are some people who want to greenwash, so the more that we can have robust standards, clear standards - including I believe scope three - the more that we're going to be able to be ambitious on climate action and reach the goal of 1.5C [of global warming]".

Oil and gas company Shell has recently appealed against a Dutch court ruling which ordered it to cut its emissions, including scope three, by 45% by 2030. Shell's chief executive Ben van Beurden argued it was not responsible for "reducing the emissions of its customers from the use of its products".

Hart said that the group will not be "naming and shaming individual companies". It's job is to ensure that standards and definitions are clear, not to enforce them, he said.

The most prominent benchmark for corporate net zero targets is the Science-Based Targets Initiative, which was set up by a coalition of green groups. But independent analysts accused the initiative of providing a "platform for greenwashing", noting that its revenue comes from the same multinational companies it validates.

The New Climate Institute found corporate net zero targets often rely on carbon offsets whose climate benefits are oversold while others use an anomalous baseline to make reaching targets easier.

Two taskforces have been set up to promote integrity in the market for carbon offsets. One, called the Integrity Council for the Voluntary Carbon Market was set up by UN special envoy for climate action and finance Mark Carney. The other, called the Voluntary Carbon Market Integrity initiative (VCMI) is co-chaired by former UN clean energy envoy Rachel Kyte.

The group's members

Table with 3 columns and 16 rows. Currently displaying rows 1 to 16.

Catherine McKenna	Canada	Ex environment minister
Amanda Starbuck	UK	Climate campaigner
Arunabha Ghosh	India	Climate & energy analyst
Bill Hare	Australia	Scientist & campaigner
Carlos Lopes	Guinea Bissau	Development economist
Camila Escobar	Colombia	Coffee chain CEO
Günther Thallinge	Austria	Insurance businessman
Helena Viñes Fiestas	Spain	Financial regulator
Jessica Omukuti	Kenya	Climate & Global South expert
Joaquim Levy	Brazil	Ex finance minister & banker
Malango Mughogho	South Africa/Malawi	Sustainable finance expert
Mary Nichols	USA	Ex California Natural Resources secretary
Miyake Kaori	Japan	Businesswoman
Oumar Tatam Ly	Mali	Ex Prime Minister
Rod Carr	New Zealand	Banker & climate adviser
Zhou Xiaochuan	China	Ex Central banker

Table: Joe Lo, Climate Home News  Created with Datawrapper

Canadian government ducks fight with oil and gas industry 

The Trudeau Administration is delaying delivery of a promised cap on emissions from the fossil fuel sector, insisting there is no need to curb production

A reclaimed tar sands waste pond in Alberta, Canada (Pic: Suncor/Flickr)

By Joe Lo, Chloé Farand and Isabelle Gerretsen
Published on 31/03/2022


The Canadian government has delayed announcing a cap on the production emissions of its huge oil and gas sector, saying it needs more time to consult with the industry.

Justin Trudeau’s government announced its emissions reduction plan on Tuesday, outlining how it plans to meet its target to reduce emissions by 40-45% between 2005 and 2030.

It predicts that oil production will continue to grow while emissions from oil production fall. Campaigners said this “doesn’t add up” and “bets too heavily on [carbon capture technology]”.

At Cop26, Trudeau told world leaders that the town of Lytton had burned down because of climate change and promised “we’ll cap oil and gas sector emissions today and ensure they decrease tomorrow at a pace and scale needed to reach net zero by 2050”.

“That’s no small task for a major oil and gas producing country,” he said. “It’s a big step that’s absolutely necessary.”

But Tuesday’s plan did not include a cap on production emissions from oil and gas. Environment minister Steven Guilbeault said earlier this month that this policy will be deferred to late 2022 or early 2023.

Announcing the plan in Vancouver, natural resources minister Jonathan Wilkinson explained: “We committed to the [oil and gas] sector that we would work with them in a collaborative basis to establish the cap”.

He added: “We will be working with them over the coming months to ensure we put in place an appropriate cap that’s going to work in a manner that will continue to employ people but that will allow us to get at those emissions”.

The way in which the cap is implemented is still up for debate. Guilbeault has said that a cap and trade system is one of the options. This is when a limited number of pollution permits are issued in key sectors and companies that cut their emissions faster can sell unused allowances to those emitting more.

The government projects that emissions from oil and gas production will decline 42% on 2019 levels, while oil production will rise 22% between 2020 and 2030.

The emissions reduction plan states: “The intent of the cap is not to bring reductions in production that are not driven by declines in global demand”.

Catherine Abreu, director of Destination Zero, told Climate Home it was good that Canada is “finally moving to address the glaring gap in all of its previous climate plans – the oil and gas sector”.

But, she said: “Increasing oil production while trying to reduce oil and gas emissions doesn’t add up… Canadian governments need to ask whether it makes sense to keep ramping up extraction in this critical decade of decarbonisation.”

Measures to reduce emissions without reducing production include tax credits for carbon capture technology and potentially domestic and international carbon offsets for “a small portion of the reductions”, the plan says.

Julia Levin, from the Environmental Defence Canada, said the plan “bets much too heavily on [carbon capture]”.

Jan Gorski, from the Pembina Institute think tank said that the projected oil and gas emissions reductions for 2030 were not ambitious enough. He said that the industry’s fair share was a 45% reduction from 2005 levels by 2030 not the plan’s 31% projection.

His analysis suggests this can be achieved through stopping methane leaks and venting, electrification, carbon capture, facilities reaching their end of life and “other decarbonisation activities for which we do not yet have adequate information”.

While campaigners criticised it, the oil and gas industry welcomed the plan. The Canadian Association of Petroleum Producers said that it “acknowledges that global demand for natural gas and oil will continue for decades and Canada has a role to play in providing lower emission resources to the world’s energy mix”.

According to the International Energy Agency, if the world is to reach net zero by 2050 then oil demand should fall by 75% between 2021 and 2050. Gas demand should decline by 55% over the same period.

Guilbeault said last November that the federal government doesn’t have the constitutional right to cap oil and gas production – that’s in the power of Canada’s provinces. But the federal government can cap production emissions.

Canada is the only G7 country whose emissions are still growing. This is largely because of the growing emissions from its oil and gas production and growth in polluting forms of transport like SUVs.

Canada’s Greenhouse gas emissions (kt of co2e) since 2005, compared with G7 European countries. Japan and the US have not been included for visual clarity but their emissions have also fallen. (Source: World Bank)

The emissions reduction plan includes C$9bn ($7bn) of new green investments in electric vehicles, green buildings, farming, restoring nature and a community air pollution fund. This is in addition to Canada’s rising carbon price on pollution.

The plan set interim targets for phasing out the sale of new internal combustion engine passenger vehicles. By 2026, 20% of new vehicle sales should be zero-emission. By 2030, this should be 60% and by 2035 it should be 100%.

The world’s poorest have the strongest resilience, yet their voices remain unheard

Comment: Those on the frontline of the climate crisis have something to teach the world about climate resilience if they are given a meaningful seat at the table

Students and their teacher stand outside a boat school in Bangladesh

 (Photo: Abir Abdullah / Climate Visuals Countdown)

By Sheela Patel and Sohanur Rahman
Published on 01/04/2022

Historically, the UN’s Conferences of the Parties (Cops) on climate change have been overwhelmingly focused on cutting emissions, but Cop26 felt different.

As Cop president, the UK made adaptation a priority, establishing a two-year Glasgow-Sharm el-Sheikh work programme on a global adaptation goal and a target to balance adaptation financing with mitigation financing by 2025. There was substantial participation on behalf of the adaptation community, albeit largely online and outside the negotiating rooms.

These conversations have carried on, for example at this week’s online Gobeshona Global Conference, creating opportunities to make progress before Cop27 in Egypt.

The rising significance of adaptation is underpinned by one key fact: the impacts of climate change are here now and set to escalate. However, despite feeling hopeful at times, the most recent climate negotiations still failed to match words about loss and damage, resilience, and adaptation with actions to actually protect the most affected people and areas.

After US fails to pay its debt, UN’s flagship climate fund warns of austerity

While negotiators have only belatedly started thinking about how best to create the conditions to build greater climate resilience, communities, including our own, have already been doing this for decades.

In Bangladesh, we have been forced to build our resilience by enduring yearly cyclones among other natural disasters and to develop survival techniques like growing vegetables on water, rainwater harvesting, water ambulances, floating schools, and procedures for early warning and evacuation.

Similarly, shack-dwellers globally have learned to build and rebuild their homes in the face of climate disasters. For many the question is not whether the roof over their heads will blow away, but rather when, and how often.

The injustice of climate impacts means the strongest resilience – ‘survival resilience’ built on compound crises – is developed by the world’s poorest communities. It is often informal and deeply local. Crucially, it is not fixed or static, due to the unpredictability of climate change impacts. International agreements require mechanisms that reflect this uncertainty.

They must also ensure that practical, local techniques and indigenous practices are coupled with external intervention. With only 10% of climate finance currently supporting locally-led adaptation, and just 2% reaching the most affected communities, we remain a long way from giving those experiencing the most significant climate-related disruption what they need.

Yet, the voices of those with the most knowledge to contribute to the discussion on adaptation and resilience continue to be pushed to the fringes of the Cop process and often go unheard worldwide. How can negotiations about the future remain inaccessible to those with the biggest stake?

A summit cannot truly deliver positive outcomes for youth, women, and indigenous people without their meaningful participation, yet at Cop26 they were outside being pushed back by police while big corporations were in the delegations.

The current system, based on the burning of carbon, resource extraction, exploitation of people in informal work and settlements, and concentration of vast amounts of capital, operates by locking out those who need the system itself to change for their survival. If the voices of those people had been given as much importance as those of 500+ fossil fuel lobbyists, Cop26 might have had a very different result.

But the UN’s daily subsistence allowance for delegates from poorer countries is provided only until the official final day of negotiations, forcing many to leave before talks conclude. Covid-19 further compounds the inaccessibility of climate talks for people from the global south: most of our colleagues have yet to be vaccinated and none of us could afford to be stuck for weeks if we test positive at a conference.

While the media may have labelled Cop26 ‘the most inclusive Cop yet’, that does not mean it was meaningfully inclusive. Recent reports of Egyptian hotels raising their prices for Cop27 suggest the same mistakes risk being repeated.

Finally, the lack of progress since Cop26 indicates still too little sense of urgency. The latest IPCC report reinforced the need for urgent, transformative adaptive action, yet Cop26 concluded with more delay, more long-term targets, and more climate finance directed towards mitigation than adaptation efforts.

We – the global south – have been forced into adapting now, not in a year or two. Delays of even one year mean more people lose their homes and livelihoods, fewer children go to school and more girls end up in child marriage.

Developed nations and the media must change how they talk about climate change and the people it affects. It is not just a scientific issue. It is about jobs, homes, health, and survival. It is about people fleeing their countries as climate refugees.

If there is one thing Covid-19 has demonstrated, it is that the world is capable of rapid and widespread change in the face of a crisis and that solutions start with the community. If we take this approach with climate change, we might just start moving forwards.

Sheela Patel is the founder and director of the Society for the Promotion of Area Resource Centres (Sparc) and Sohanur Rahman is a youth activist from Bangladesh.

Global hub launched to help countries slash methane emissions

Chilean ex-minister Marcelo Mena will lead the hub, urging governments to tackle methane from fossil fuel, waste and farming sectors in updated national plans

The Global Methane Hub is led by Marcelo Mena, Chile's former environment minister. (Photo: Comision de Medio Ambiente/Flickr)

By Isabelle Gerretsen
Published on 05/04/2022

A global hub to slash methane emissions was launched this week as leading scientists advised that reducing the short-lived gas is essential to limit dangerous levels of warming.

Set up with $340 million of philanthropic funding, the Global Methane Hub will offer grants and technical support to implement the Global Methane Pledge.

Launched by the US and EU at Cop26 climate talks in November, 110 countries have signed up to the pledge to date, committing to collectively reduce their methane emissions by 30% between 2020 and 2030. That is roughly in line with what is needed to keep a 1.5C warming limit within reach, according to the Intergovernmental Panel on Climate Change (IPCC) in its latest report on Monday.

Marcelo Mena, the former environment minister of Chile and director of the Climate Action Center at the Pontificia Universidad Católica de Valparaíso, will lead the hub.

The first 10% of funds is earmarked for the UN’s Climate and Clean Air Coalition (CCAC), which will work with 30 developed and developing countries to establish plans over the next three years to achieve the 2030 target.

“We’ll be helping all countries who’d like to develop national methane reduction plans, sharing the scientific, technical and regulatory expertise,” Drew Shindell, CCAC’s special advisor for action on methane, told Climate Home News.

Five takeaways from the IPCC’s report on limiting dangerous global heating

Methane contributes significantly to global warming. Although it only stays in the atmosphere for around nine years, methane has a warming impact 84 times that of CO2 over a 20-year period.

A paper in Environmental Research Letters last year found an all-out, rapid effort to slash methane emissions could slow the rate of current warming by 30% and avoid 0.5C of warming by the end of the century.

Tackling methane provides a “short-term climate win,” Shindell said. “Actions to reduce it can rapidly slow warming whereas decarbonisation provides needed long-term, but not near-term, climate relief.”

The aim is for all these countries to set specific methane targets in their national climate plans, in updates ahead of Cop27 in Egypt this year, Mena told Climate Home News.

“The quick wins are in the oil and gas sector,” Mena said, while emissions from farming and waste also need attention.

The oil and gas industry could achieve a 75% reduction in methane emissions by 2030 using existing technology, according to the International Energy Agency. And it need not be expensive: the IPCC estimates 50-80% of methane emissions from fossil fuel operations could be slashed at a cost of less than $50 per tonne of CO2 equivalent.

“Inaction on methane is not a technology or science problem, it is very much a political and organisational problem,” said energy analyst Poppy Kalesi.

Saudi Arabia dilutes fossil fuel phase out language with techno fixes in IPCC report

Rubbish tips are an enormous problem and must be addressed, Mena said. Satellite images show that landfill sites in the US have been leaking methane at rates as much as six times higher than estimated by the Environmental Protection Agency.

The other major source of methane emissions, responsible for almost 40%, is farming. A cow produces an average of 250-500 litres of methane a day from digesting grass.

The IPCC report said that behaviour and lifestyle changes, such as reducing meat consumption and shifting to plant-based diets, are an important part of the solution.

“We have a food system that is not healthy for people or the planet,” said Mena. “We need to build the groundwork for transformational change in our food system.”

Better livestock manure management and changing the diet of livestock could help curb methane emissions from agriculture. There are a host of methane-busting products being trialed, ranging from laboratory-made probiotics to natural additives such as seaweed and charcoal.

Research from the University of California, Davis, for example, has found that feeding seaweed to cows significantly reduced the amount of methane from their burps and farts.

“We need to tackle the neglected sectors of waste management and the food system to reduce methane emissions,” said Mena.