Turkey was the largest cryptocurrency market in the Middle East in 2021, with an increase in trading volume of around 1,500% year-on-year, according to data from Chainalysis.

Lawyer Burcak Unsal, a cryptocurrency expert, noted that the volume of Turkish cryptocurrency transactions last year was one of the largest in the world. The Statista portal, meanwhile, presented data showing that Turkey was the world’s fourth largest cryptocurrency market in 2020 based on the number of users.

Forty cryptocurrency exchanges are currently operating in Turkey, the largest economy in the Middle East and home to around 85 million people. The most popular platforms are Bitcoin, Paribu, BTC Turk and Binance.

The attraction of cryptocurrencies in the emerging market of Turkey stems from the high volatility and plummeting value Turkish Lira (TRY), the local currency. Since 2020, the chronic depreciation of the lira has pushed many private actors to find a safer way to invest and save their money. The exchange rate of the lira against the dollar has not been stable for a decade. Between 2013 and 2018, the national currency depreciated 4 times against the USD. It lost 44% of its value in 2021 and since the start of 2022 it has lost more than another 25%, bringing total losses over the past three years to around 70%.

The high inflation rate in the country – an official rate of 80% in July but more than double according to an independent analysis by Istanbul economists – made worse by the damaging monetary policy pursued by the Turkish central bank and government in the race for growth has increased the attractiveness of the cryptocurrency market for Turks. The central bank is refusing to budge on interest rates, refusing to introduce hikes despite loud calls from the market as it tries to turn Turkey’s chronic trade deficit into a surplus. Soaring inflation and the collapse of the lira are here to stay for consumers and investors in Turkey under these circumstances. The government, meanwhile, is trying to stem the fall of the lira by restricting access to foreign currency for residents, often to no avail.

Hard currency instability

Finally, hard currencies are prone to instability in a global inflationary environment with soaring oil and gas prices. Turkish residents who relied on the dollar and other hard foreign currencies to protect their savings have become more reluctant to rely solely on this fiat currency to protect their assets and investments. Thus, cryptocurrencies are becoming increasingly popular as the national fiat currency is perceived as less stable than digital assets. A similar trend is visible in South America and Africa. According to surveys, the percentage of Turkish residents using cryptocurrencies was 16% to 20% between 2020 and 2022. Turan Sert of Paribu, the largest cryptocurrency platform in Turkey, said that “in the past was dollarization, which meant that to avoid fluctuations in their national currency, people kept their holdings in dollars […] now the recent trend is called cryptolization.”

Unsal explained that Turkish residents have invested heavily in cryptocurrencies since confidence in the lira has been in decline for a very long time. On digital platforms, anyone can easily invest small amounts without prior technical knowledge, unlike the stock market and currency trading and real estate. These options are less accessible, more expensive, and subject to state taxes.

That said, the cryptocurrency market in Turkey is not entirely safe and stable. fluctuation, sometimes dramatic, are often expected, especially when it comes to global platforms, due to restrictive measures taken simultaneously in different countries (in Russia, China, India and Qatar). Bitcoin fell to an all-time high recently following Chinese moves against digital currencies.

Additionally, two Turkish cryptocurrency platforms shut down in April 2021. Thodex CEO Faruk Fatih Ozer reportedly fled to Albania with over two billion dollars in funds invested in his platform, with several of his alleged accomplices having been arrested in Turkey. A few days later, cryptocurrency platform Vebitcoin ceased operations in Turkey and four of its employees were arrested. Investors could not access their funds placed in their digital wallets.

This case has increased mistrust of the Turkish state when it comes to cryptocurrencies traded on its territory. The government seems to fear that cryptocurrencies will diminish the value and trust in the national fiat currency. Officials began to adopt a negative attitude towards the market, even as Turks increasingly used the savings or investment option.

The growing suspicion was evident when Turkey’s central bank implemented a crypto-asset payment ban regulation on April 16, 2021, to prohibit the use of cryptocurrencies as a means of payment for goods and services. in Turkey. According to this law, Turkish platforms are not allowed to offer any system for transferring cryptocurrencies to fiat currency. However, the law does not impose a complete ban on cryptocurrencies in Turkey. Turkish Central Bank President Sahap Kavcioglu said the legislation was needed to implement a balanced digital currency system.

On May 1, 2021, changes were implemented via a Presidential Decree to the Regulation on Measures for the Prevention of Laundering of Proceeds of Crime and Financing of Terrorism. Cryptocurrency providers must report their activities to the Turkish Financial Crimes Investigation Commission (MASAK) and provide customer identification. The law was passed to prevent the use of digital money as a means of transaction in criminal or terrorist activities due to a lack of state control. Suspicious activity must be reported directly by digital providers to MASAK, regardless of the amount of the transaction and for all transactions over 75,000 TRY (approximately $4,200).

National branches

In May, Turkish authorities were reportedly working on a bill that would put in place more control over the cryptocurrency market and platforms. According to Turkish press reports, the law would aim at securing cryptocurrencies in the banking sector. The National Capital Market Council would issue licenses for the platforms to operate in the country. According to this law, a platform would need a capital of 6.1 million dollars to run its business. Foreign platforms should set up domestic branches which could be taxed in Turkey.

Analysts have complained that the legislation would neither benefit Turkey’s economy nor the safety of digital users. According to Unsal, the cryptocurrency market should be subject to controls under comprehensive legislation and Turkey was too late in its implementation; the proposed measures would not favor the development of Turkish investments.

Another market watcher, Bora Erdama, said that the Turkish cryptocurrency market has a very strong potential internationally: “If Turkey becomes a good bridge in the crypto-asset ecosystem, there will be significant capital inflows into the country, not to mention the concern of money leaving the country. Istanbul and Turkey will become a center of attraction for the crypto-asset ecosystem.” The protectionist measures adopted by the government could jeopardize this development, Erdamar said, adding that the decree implemented on April 16, 2021, preventing the he use of cryptocurrencies as a form of payment has spelled the end of business for many start-up entrepreneurs.

Cryptocurrency expert Vedat Guven concluded that this move to prevent such use could hamper projects based on blockchain technologies in Turkey. Guven said cryptocurrency platforms were crucial in the development of this technology.

The Turkish government, meanwhile, has attempted to provide state-controlled alternatives to the unregulated cryptocurrency market. The government has spoken of plans to soon launch a national digital currency, the Turkish Lira Digital Cooperation Platform, regulated by the Turkish Central Bank. The national digital currency was to mitigate the risks for investors in the digital market. The central bank would offer digital wallets and transfers based on blockchain technology.

Turkish President Recep Tayyip Erdogan claimed last year at a national youth meeting that he was waging a war against private cryptocurrencies. He said he would instead promote the development of the national digital currency. According to cryptocurrency expert Artem Deev, many countries were creating a national cryptocurrency to gain control over private exchanges, perceived as competitors, and evade regulation.

Deev added that the trend, seen in China and Russia, for example, could provide a strategy to weaken Turkey’s private cryptocurrency market, paving the way for state-sponsored digital assets to be presented as legitimate financial assets.

However, even given the negative events and publicity that have surrounded the private sphere cryptocurrency market over the past year, usage of the market is expected to continue to grow among the Turkish population. According to Sima Baktas, a Turkish cryptocurrency expert, “Even mainstream TV channels are talking about crypto now, and even when they are broadcasting really bad news about crypto, Turks are more interested in crypto because it seems like they don’t care about this bad news showing crypto as some kind of unreliable industry.