Emerging Market Digital Asset Venue Thesis

Author

Cadenza
April 03, 2023

Cadenza has earned a solid reputation for making early investments into emerging market digital asset exchanges, brokerages, and payment platforms over the last six years in which the team has been together.

To better understand our thesis, this document describes the factors that we believe will continue to drive growth in these investments: inflationary fiat currencies, restrictive monetary policies, and inefficient cross-border payment rails.

Inflationary Fiat Currencies

Although inflation has recently been a hot topic globally, countries such as Argentina and Turkey have been dealing with extremely high inflation (in some cases reaching hyperinflationary levels1) on their local currencies for decades.

Inflation is caused by a number of factors but two of the primary forces are:

  1. An increase to a country’s money supply (which takes place at the direction of local government through a combination of fiscal and monetary policy)

  2. Relaxed banking regulations whereby banks can lower their lending standards effectively increasing the amount outstanding debt.

The negative impact inflation has on society is higher prices for everyday goods and depleted savings value which can be significantly amplified if inflation is untamed ultimately resulting in hardship for citizens of that country.

Our view has been that alternative and globalized solutions to local currencies in countries and regions with uncertainties as described above would lend themselves well from a demand perspective.

Our investments in Lemon Cash in Argentina and Rain Financial in the Middle East2 were largely focused on the concept of inflation.

Restrictive Monetary Policy

Capital controls are a form of monetary policy that certain countries use to limit the inflows and outflows of foreign capital within a domestic economy.

There has historically been a lot of debate amongst economists as to the pros and cons of capital controls and their effectiveness as a form of monetary policy.

“One effect that’s undeniable is that capital controls limit the investment options for non-affluent citizens to invest globally”.

In the case of India, the Reserve Bank of India (“RBI”) has implemented specific limitations on how much Indian citizens can invest outside of India through a program called the Liberalised Remittance Scheme (“LRS”).

Currently, the LRS allows Indian citizens to invest up to $250K USD globally per year with prior written approval from the RBI (it should be noted that in 2004, the LRS had a limit of $25K USD).

With a population of 1.4B, India represents nearly 20% of the world’s population.

Our view is that globalization will continue to accelerate in the coming decades and citizens in countries with strict capital controls will actively seek the ability to invest globally without limitations.

Our seed investment in CoinDCX (India’s first crypto unicorn) provides access to global financial products starting with crypto.

Inefficient Cross-Border Payment Rails

Per the World Bank, remittances to low and middle income countries grew to over $625B USD in 2022.

Remittances have become a significant source of private financial resources for households in emerging markets.

These transfers have been extremely beneficial to economic growth in these countries helping to curb poverty, promote household formation, and technological advancement.

The remittance industry is known for high fees and slow processing times which has been a main focus of the United Nations (“UN”) in recent years.

One of the UN’s goals by 2030 is to reduce the cost of remittances to less than 3% and eliminate any remittance corridors with costs in excess of 5%.

In 2022,

  • The Philippines had the fourth largest amount of remittance inflows in the world with over $30B USD coming into the country.

  • Nigeria was not far behind with over $20B USD in remittance inflows, making it the ninth highest in the world3 .

In the Philippines, overseas foreign workers are a main part of the country’s economic development plans.

The current government continues to expand their labor exportation with plans to send over 500K Filipinos abroad in 2023.

These workers will contribute significantly to the remittance inflow over the coming years.

In 2021, the Central Bank of Nigeria (“CBN”) rolled out its ‘Naira 4 dollar scheme’ to further incentivize remittances throughout the region by offering 5 Naira for every $1 USD.

This program was originally only supposed to last three months.

But was extended indefinitely by the CBN given its overwhelming success.

Per Grand View Research, the global digital remittance market is expected to expand at a 15.6% CAGR between 2023-2030.

Our investments in PDAX in the Philippines and Busha in Nigeria were largely focused on the growth and inefficiencies surrounding the remittance market4.

Summary

Bitcoin, the original “cryptocurrency”, emerged on the heels of the 2008 global financial crisis by a group of cryptographers and computer scientists that were concerned about the risks associated with fractional banking (i.e. banks purchasing risky assets with client deposits leading up to the global financial crisis) and inflation (i.e. governments bailing out these banks by increasing the money supply to temporarily save the economy).

The most recent banking crisis and some of the repeated mistakes from 2008 have caused many to reflect on the principles that led to the adoption of Bitcoin and other cryptocurrencies.

While we have long avoided taking the extremist view that Bitcoin will displace fiat currencies and that banks will become extinct,

Here’s what we do think…

“Cryptocurrencies have the potential to act as a global settlement layer and coexist in a regulated manner alongside conventional currencies, payment rails and stores of value while continuing to gain adoption as technology advances and globalizes the world, especially in emerging markets”.

1. Please reference a recent article by the BBC speaking to Argentina’s inflation rate surpassing 100% for the first time since the end of their hyperinflation cycle in the 1990s.

2. Although Rain Financial services multiple countries in the MENA region, one of their key markets is Turkey.

3. Please reference a recent article by the World Economic Forum speaking to the role that remittances play around the world as well as the level of remittances by country in recent years.

4. Please reference an overview industry analysis by Grand View Research speaking to the global digital remittance market in recent years and the prospects in future years.