More than 600 crypto or blockchain companies are now headquartered in Southeast Asia, according to a new report by venture investment firm White Star Capital. Much of the recent growth in venture capital funding across the region has stemmed from crypto, blockchain, and web3 startups, which drew in almost $1 billion in funding just in 2022 to date and are on track to surpass the $1.45 billion total in 2021, says the report.

Investors from all over the world are drawn to the region’s vibrant web3 scene, with those from the US, China, and Singapore being some of the most active ones, the report shows.

While much of the deep, fundamental research and infrastructure development in the blockchain space still takes place in the US, Southeast Asia is ideal for web3 startups offering consumer-facing services, Amy Zhao, lead at crypto investment firm Ocular, told TechCrunch.

“The demographics of Southeast Asia are very favorable for web3,” said the investor. “[It has] young populations who inherently understand the technology and are more willing to try new things. It’s [mostly] developing economies, so the financial aspect of crypto provides a lot of incentives for people to participate.”

Southeast Asia, with nearly 700 million residents, has one of the world’s fastest-growing populations. 480 million of them are active internet users and more are coming online. By 2040, Asia is estimated to make up half of global GDP and 40% of global consumption, with much of it coming from the ten-member Association of Southeast Asian Nations (ASEAN), a report by Pinebridge Investments found.

Much like other developing countries, large swathes of the population in Southeast Asia still have limited access to banking services despite the region’s great strides in financial inclusivity over the decade. More than 70% of the adult population remained “underbanked” or “unbanked”, according to a 2019 report from Bain & Company.

The lack of access to formal banking, in turn, gives room for alternative crypto-related finance to grow. Decentralized finance, or DeFi, has flourished in the region as it uses distributed ledger technologies to process transactions and promises to let users earn yield and gain access to capital without the cumbersome of traditional financial intermediaries. Blockchain games that let users earn money by playing (GameFi) are also popular, such as Vietnam-based Sky Mavis’s Axie Infinity, which has large followings in the Philippines and Indonesia.

Crypto adoption rates in Southeast Asia averaged 3.56% in 2021, but Singapore stood out with nearly 10% of its population owning crypto, ahead of the US at 8.3%, according to White Star Capital. In terms of DeFi adoption, Vietnam and Thailand were only after the US in 2021, Chainalysis found.

Each country in the region has its slight edge in crypto innovation, observed Zhao. Vietnam is a source of “hardcore engineers” whereas the Philippines loves entertainment. Thailand, on the other hand, has a vibrant financial market. Singapore is likely to produce more SaaS products given its pool of international talent.

Indonesia is “catching up” on web3 probably because the huge talent pool still rests in their web2 industry,” the investor said. But the country is also home to one of the most well-funded blockchain firms in the region — crypto trading platform Pintu, which brought in over $110 million from its Series B round recently.

It’s not just homegrown entrepreneurs courting Southeast Asia’s web3 adopters. Having spotted the region’s appetite for blockchain services, New York-based crypto exchange Gemini announced a roadmap to enter the region last year. San Francisco’s Coinbase had plans to hire in Southeast Asia as part of its global expansion before freezing recruiting amid the current market downturn.

Asides from consumer demand, Southeast Asian countries like Singapore also attract entrepreneurs with their relatively open-minded attitude toward crypto, which is largely banned in China and has come under growing regulatory scrutiny in the US.

“Singapore has always been very pragmatic. The regulations might not seem to be as lenient as say Dubai, which has attracted a lot of large exchanges to move there from Singapore. But Singapore’s approach has been to build up more trust in the long run to protect consumers here,” Zhao reckoned.

In January, the Monetary Authority of Singapore (MAS), the city’s state’s financial regulator, said that the trading of digital payment tokens or cryptocurrencies is highly risky and thus should not be promoted to the public.

“And in terms of innovation, it’s very supportive, such as setting out regulatory sandboxes,” the investor added.

For instance, MAS has worked with the industry to build a blockchain-based payments network. Temasek, the sovereign wealth fund of Singapore, has been an active investor in crypto startups, backing companies like crypto asset management unicorn Amber.

“We expect regulators in [Southeast Asia] to continue developing their regulatory frameworks that govern digital assets in the coming years. ‘Sudden-stop’ regulations look less likely as digital asset adoption rises, as it would put brakes on a vibrant sector with future prospects,” White Star Capital writes in its report.