Are citizens in countries and regions with capital restrictions, less monetary freedom, and greater monetary instability more likely to turn to Decentralized Exchanges to transact in Bitcoin?

A new study which tracked bitcoin volumes on DEXs determined the answer is yes.

The study, “Between Governance and Capital Restrictions: Determinants of Bitcoin Trade Volume in Decentralized Markets,” released on 18 April 2023, was conducted by several professors at the NEOMA Business School, and the ISTEC School of Management and Marketing, both in France.

It points out that over time, the price and adoption of bitcoin has evolved from being influenced by a myriad of speculative determinants and things like sentiments on social networks, to more traditional macroeconomic factors, including national uncertainties. 

According to the authors, “This latest evolution indicates that BTC is reaching maturity as an investment asset, depending less on pure market features than national characteristics.”

Currently centralized exchanges (CEXs) account for some 85 percent of crypto asset exchange activity.  But DEXs have advantages, especially in situations where governments experiencing financial and monetary instability have tried to suppress cryptos, or more generally restricted freedoms of citizens.

DEX Use Helps to Counter Restrictive And Poorly Run Regimes

DEXs are much harder to censor and stop participation on, than CEXs. That’s because all they require for use is the ability to get to a webpage, and connect a non-custodial (user-controlled) bitcoin wallet.

DEXs often have no easily targeted company or group operating them. They are simply “smart contracts” (a form of software) deployed to decentralized permissionless networks with redundant nodes that can be all over the world, and thus very hard for governments to shut down.

BTC DEXs have been little studied, according to the authors.

But by analyzing BTC transaction volumes and related info on DEXs, the authors established several interesting correlations tied to governance and freedom factors.

Firstly, the study found that DEXs do in fact allow citizens in nations and regions with onerous financial restrictions on freedoms to circumvent those violations of human rights.

The authors analyzed the impact of a set of economic governance and capital restrictions variables on the trade volume of BTC in the largest BTC DEXs currently in existence, Localbitcoin and Paxful.

They determined:

“Overall economic freedom, particularly monetary freedom, correlates indirectly with BTC trade volumes, while capital restrictions on residents’ transactions abroad correlate in two different directions. Purchase transactions inversely correlate with BTC volume in DEXs, while sales transactions correlate directly. These correlations suggest an incentive to trade in DEXs that eludes regulators unless the latter enact outright controls over purchase transactions of non-domestic assets—access to CEXs or DEXs usually necessitates some access via traditional finance networks.

“Moreover, controls over sales and issues of domestic assets abroad incentivize residents to look for an alternative asset, BTC. These characteristics of ‘governance hedging’ suggest that BTC can be used to hedge against poor institutional frameworks, particularly against poor monetary governance. More than a medium of exchange or a speculative asset, bitcoin provides traders from countries with poor economic governance a way out for their capital to markets with better governance. 

One of the main upshots of the study is the conclusion of the authors that the case for Bitcoin as a solid portfolio diversification asset is strengthened by their analysis.

The full study can be viewed here.