Despite Turkey’s ailing economy, cryptocurrencies have gained significant popularity among its people, offering them a way to escape the inflation of their national currency.
Riding the Lira Wave
With Turkey’s economy in poor health and politicians who seem indifferent, cryptocurrencies have become increasingly popular among its citizens. These digital assets offer them an escape from the inflation of the national currency and the limitations of a mechanized life.
While the global crypto market has faced a tough year, interest in cryptocurrencies among Turks has surged. You might wonder about the value of assets that aim to protect against inflation yet behave in ways influenced by inflation. This value is easily understood by observing Turkey. Cryptocurrencies have become more than just a financial tool for the country’s citizens—they’ve become a necessity in daily life.
If you’ve visited Istanbul, you’ll notice the crypto fever everywhere. Small shops in the Grand Bazaar legally buy and sell cryptocurrencies, which is hard to miss. Even at Istanbul Airport, cryptocurrency ads catch your eye. According to a 2022 report by the Turkish crypto exchange Paribu, at least eight million people in Turkey are involved in cryptocurrency trading.
Politicians have a generally positive view of these assets. Recently, President Recep Tayyip Erdoğan mentioned the benefits of blockchain technology and advised the country’s youth to avoid gambling with cryptocurrencies.
“Turkey must be a producer in the world of digital assets, not just a consumer.” — Recep Tayyip Erdoğan, President of Turkey
Despite Turkey’s enthusiasm for the industry, the country hasn’t been immune to the global crypto market slump. According to Paribu, trading volumes in 2022 dropped from $850 million to $145 million, yet public enthusiasm for the market remains strong. This excitement is evident from the crowds at “Devcoin,” the largest Ethereum developers’ event in Istanbul.
Numerous articles describe cryptocurrencies as a refuge from Turkey’s high inflation and severe lira devaluation. While the lira’s collapse is a large part of the story, it doesn’t fully explain the allure of cryptocurrencies for Turks. In Turkey, cryptocurrencies represent a form of freedom—a break from the national currency, government economic policies, and the constraints of a mechanized life.
“Cryptocurrencies are a lifeline for the local population because they offer financial and mental freedom.” — Vidal Arditi, Founder of Layka DAO and Lunapark Web3 Hub
An Overview of Turkey’s Economy
In 2023, Turkey’s GDP growth halved, forecasted to drop to 2.6%. Misguided monetary policies and the impact of a devastating earthquake weigh heavily on the country’s economy. High inflation, the collapse of the lira, and overly expansionary monetary policies have led to a currency crisis.
Since the elections on May 14, Turkey’s economic outlook has worsened. The Vienna Institute for International Economic Studies (wiiw) predicts a grim future for Turkey. The country has battled high inflation for years, with GDP growth plummeting from 11.4% in 2021 to 2.6% in 2023, illustrating the depth of the crisis. Experts attribute this to weakened demand following the pandemic recovery and a decline in purchasing power.
Last year, inflation in Turkey reached nearly 72%, and though wiiw expected it to fall below 50% this year, it has surged past 80%. The February earthquake and restrictive monetary policies from the U.S. Federal Reserve and the European Central Bank in Frankfurt have significantly impacted Turkey’s economy. The country, burdened with high euro- and dollar-denominated debt, intensely feels the effects of every interest rate hike. From January to February, the country’s current account deficit (the balance between exports and imports of goods, services, and capital) soared 54% compared to the previous year. How Erdoğan’s government will manage this deficit remains unclear. Additionally, military conflicts in Ukraine and Gaza have further hurt Turkey’s economy.
Richard Grieveson, deputy director and Turkey expert at wiiw, warns: “If overly expansionary monetary policies continue, the country risks a sharp devaluation of the lira and greater financial sector risks, especially if the Fed continues raising interest rates.” Grieveson pointed out that similar issues arose with Turkey’s policies in 2018.
Many experts hoped the opposition’s victory and a new government in Ankara would ease inflation in the medium term. Although the opposition, led by Kemal Kılıçdaroğlu, promised to end Erdoğan’s unconventional economic policies and reform the central bank, it failed to win. However, there remains hope that Erdoğan’s administration will change its misguided monetary strategies.
The aftermath of the February earthquake presents a major challenge for any government. More than 50,000 people died, and around 13 million people in 10 provinces were affected. These areas accounted for 9.3% of Turkey’s GDP, 8.5% of its exports, and 15% of its agricultural production. The Turkish government estimated the total damage to be about $104 billion.
According to wiiw, Turkey has significant growth potential, but this can only be realized with more political and macroeconomic stability. Above all, a prudent, stability-focused monetary policy is needed to curb high inflation and reduce the lira’s devaluation. Addressing the persistent current account deficit—which has become harder to finance in recent years, making Turkey reliant on foreign investors and U.S. monetary policy—must also be a priority. For this, boosting domestic industrial production is essential to reduce the economy’s dependence on household spending fueled by credit.
The Lira on the Brink of Collapse
Let’s first examine the Lira to understand this interest. According to official data, Turkey’s inflation rate has recently surpassed 83%, reaching its highest level in the past 24 years; however, many experts and researchers believe that the actual inflation rate is significantly higher than 83%. Amid the government’s unconventional policy to lower interest rates, the Lira has dropped to its lowest level against the U.S. dollar. Critics attribute inflation to the government’s monetary policy, while Erdoğan has pointed to attacks by “foreign financial instruments” as the primary cause of the problem in his speeches.
In Istanbul, the pain is real and widespread. Prices—from housing rents to food costs—fluctuate daily, and economic stability has been forgotten. If we consider Bitcoin’s price fluctuations to be like a roller coaster, the changes in the Lira appear as a flat and smooth path in comparison. This is why many people turn to cryptocurrencies, fearing the loss of their capital value.
Çağla Gül Şenkardeş, founder of Women in Blockchain Istanbul, states, “No one believes in the power of the Turkish Lira anymore; everyone is looking for suitable investment opportunities to preserve the value of their money.”
Çağla believes that since the Turkish people are accustomed to investing in other assets such as the U.S. dollar, gold, and alternative investments, it was not difficult for them to turn to another alternative—cryptocurrencies—and trust them.
“We have completely become accustomed to investing in anything but the Lira. We can easily take risks.” — Çağla Gül Şenkardeş, Founder of Women in Blockchain Istanbul
Inflation can sometimes make wealth accumulation difficult or even impossible, a problem exacerbated by the lack of good investment options. Tansel Kaya, CEO of Mindstone Blockchain Labs, explains that Generation Y has limited investment opportunities in companies like Google, Tesla, or Facebook. To buy these stocks, you needed a broker, and even if you could invest, it might have been too late; however, today, you have the same investment opportunities in Bitcoin and Ethereum as you had 20 years ago in Google and Apple.
A Sick Economy: An Opportunity to Invest in Bitcoin
Salaries in Turkey often do not align with inflation, meaning that the purchasing power of workers and employees in the country is diminishing more than ever. In July, Turkey raised the minimum wage for the second time in six months by 30%, bringing it to 5,500 Lira, which at the time was worth $328 but is now less than $200.
Recently, Coindesk published a report highlighting the dissatisfaction of employees working in multinational companies in Turkey. The report featured an interview with a former Apple employee who recently left the company to enter the cryptocurrency market. What’s interesting about this interview is that the individual cited their main motivation for leaving Apple and investing in cryptocurrencies as a desire for freedom in expressing their thoughts and escaping the pressures of mechanized structures—not the prospect of earning more money.
The migration rate in Turkey has also increased compared to before, but many individuals find it difficult to migrate, leading them to turn to cryptocurrencies; according to many experts, cryptocurrencies now serve as a kind of virtual passport for Turkish citizens.
It might seem surprising that Erdoğan, given its weak monetary policies to date, has been relatively lenient regarding cryptocurrencies, which some governments view as a threat to economic control. Turkey ranked 103rd out of 167 countries on The Economist’s democracy index in 2021. This year, the Turkish parliament passed a law that prohibited the dissemination of false information, raising concerns among free speech advocates. However, despite this repression of free speech and closed policies, cryptocurrencies have remained somewhat free in the country. It’s worth noting that the Central Bank of Turkey banned the use of cryptocurrencies as a payment method last year, which, considering the popularity of these assets among the people and the declining value of the Lira, was not unexpected.
Overall, cryptocurrencies in Turkey remain unregulated. In most countries, Initial Coin Offerings (ICOs) for raising seed capital have been banned, but this process continues to occur more frequently in Turkey. An interesting point is the high-income tax imposed on companies dealing with cryptocurrencies, which is audited by the government itself. However, there is no dedicated regulatory framework specifically for cryptocurrencies in Turkey.
One possible reason for the lack of regulations is that the Turkish government has not yet found a suitable method for legislation, unlike other governments worldwide. Still, many experts believe that the Turkish government has refrained from regulating and imposing restrictions due to the public’s need for and dependence on cryptocurrencies.
Evidence suggests that Turkish policymakers are genuinely concerned about the anger of the public interested in cryptocurrencies. For instance, a grassroots movement disrupted the passage of a controversial cryptocurrency bill last year. A draft of this bill, leaked on social media, aimed to restrict international exchanges in Turkey and ban non-custodial wallets, which sparked outrage among people online. Ultimately, this grassroots campaign led to the bill’s postponement.
Many experts believe that if Erdoğan’s government had limited the use of cryptocurrencies during his previous term, it would have lost the votes of nearly 11 million cryptocurrency users during Turkey’s toughest presidential election period. Therefore, now that Erdoğan has regained the presidency and passed this significant hurdle, he may reconsider cryptocurrency regulation to prevent currency outflow from Turkey.
Moving Towards Cryptocurrencies
According to data from Chainalysis and Kaiko published by Reuters, daily cryptocurrency transactions in Turkey surpassed one million in March of last year. This surge occurred after the Lira experienced a dramatic fall following the unexpected dismissal of the country’s central bank chief by Recep Tayyip Erdoğan in the same month. However, after this event, the central bank announced that using cryptocurrencies as a payment tool was banned, leading to a decrease in trading volume in April. Later in April, two cryptocurrency exchanges, Thodex and Vebitcoin, were shut down in Turkey, resulting in the loss of assets for hundreds of thousands of users.
An interesting aspect in Turkey is the increasing number of billboards and television advertisements promoting various methods to enter the cryptocurrency market. In most television channels, the current value of Bitcoin is mentioned alongside the U.S. dollar and Euro.
“The collective awareness in Turkey is far greater than in the past, and people are using cryptocurrencies to hedge against the exhausting inflation of the Lira.” — Turan Sert, Advisor at Paribu
In addition to advertisements, the increase in collective awareness, local exchanges like Paribu and BTCTurk, and access to international cryptocurrency platforms like Binance and Coinbase have drawn more attention to cryptocurrencies in Turkey than in any other country in the Central Asian region.
Estimating the exact number of investors in Turkey who hold at least one cryptocurrency in their wallets is challenging, as exchanges like Iran do not publicly share their data. However, experts estimate that between 10 to 11 million people, or nearly one-eighth of Turkey’s population, are cryptocurrency users.
“Sima Baktas, a lawyer specializing in cryptocurrency and one of the co-founders of CryptoWomen Turkey, believes that this shift towards cryptocurrencies is being led by a young population that is both familiar with the online world and eager to find ways to protect their savings. According to this cryptocurrency activist, adapting to cryptocurrencies has not been difficult for the people of Turkey, as with the decline in the value of the lira and the worsening economic situation, people are trying to use more reliable financial tools for their savings.”
“If cryptocurrency supporters in Turkey were to form a political party, it would undoubtedly become the third-largest party in the country’s parliament.” — Sima Baktas, Cryptocurrency Lawyer and Co-founder of CryptoWomen Turkey
The Rise of Cryptocurrencies Following the Fall of the Lira
In examining the economic situation in Turkey and its impact on society, awareness of cryptocurrency values has grown more than ever. Following the decline in the Lira’s value and worsening economic problems in the country, people seek new solutions to protect their assets and savings. Cryptocurrencies seem to be a reliable option for many to take action to preserve their capital while also seeking political and financial freedom.
In this context, the government’s neglect of cryptocurrencies to limit these assets, alongside increasing collective awareness in Turkey—especially in Istanbul—has drawn people to this market. This heightened collective awareness and access to local and international exchanges have made Turkey pay more attention to cryptocurrencies than ever in Central Asia. If this trend continues, cryptocurrencies could become one of the significant factors in Turkey’s economic and political transactions.
Turkey and Cryptocurrencies from Chainalysis’ Statistical Perspective
According to a report from Chainalysis, the MENA region (Middle East and North Africa) ranks as the sixth-largest economy in the cryptocurrency sector, with transaction values estimated at nearly $389.8 billion between July 2022 and June 2023. Interestingly, this figure represents approximately 7.2% of global transaction volumes, with more than $170 billion attributed solely to Turkey.
Turkey has a high rate of centralized exchange usage compared to the global average and other Middle Eastern countries. According to this report, 58.9% of transactions in Turkey occur on centralized exchanges, indicating a lesser role for DeFi in this country.
In addition to ranking twelfth in cryptocurrency adoption, Turkey achieved the fourth position globally in raw cryptocurrency trading volume, following the United States, India, and the United Kingdom, during the reported study period.
Yasin Oral, CEO and Founder of Paribu, noted that the relatively high acceptance of cryptocurrencies in Turkey has been realized for several reasons, such as the country’s recent macroeconomic conditions and the interest of its young population in innovation and technology. According to Yasin Oral, a difficult global year has passed due to the impact of strict monetary policies, which has also affected Turkey. In such circumstances, individuals seek alternatives like cryptocurrencies for value storage, diversifying their investment portfolios, and engaging with new asset classes. Regarding this behavior, as each market cycle attracts new investors and adopters, more individuals and institutions learn about the features and benefits of blockchain, ultimately increasing the level of cryptocurrency adoption, particularly in Turkey.
Indeed, Turkey has faced increasing inflation, which reached around 60% in August 2023. Additionally, the value of the Turkish Lira fell in 2021 after a 100 basis point cut in interest rates by the central bank. The chart below shows evidence of the declining value of the Turkish currency, which contributes to the interest in cryptocurrencies, indicating the value of the Turkish Lira against the buying volume of Tether (USDT) in multiple exchanges. On March 30, 2023, we observed a spike in this chart coinciding with predictions of a declining Lira. Following the continued decline in the Lira’s value, reaching its lowest point of less than four cents in late July, the sale of Lira against Tether increased once again.
However, all cryptocurrency transactions in Turkey do not solely revolve around stablecoins. Furthermore, broader data analysis indicates that despite the overall decline in the value of non-fungible tokens (NFTs) since mid-2022, Turkey has been the best country in the region regarding web traffic to platforms related to this domain.
The Turkish Government’s Approach to Cryptocurrencies
As mentioned, Turkey is one of the world’s largest adopters of cryptocurrencies and blockchain technology. Contrary to exchange data, the government released a report through the Information and Communication Technologies Authority in May 2020, estimating that over five million people were cryptocurrency users in Turkey by that time. There is no legal framework to support investments in cryptocurrency assets in Turkey; however, the government is working on an unofficial draft law concerning these assets, which amends Capital Markets Law No. 6362 (CML). Although there has been no official press release regarding this unofficial draft law timeline, it is expected to be presented to the Turkish Grand National Assembly in the short term. It will impose additional requirements on Cryptocurrency Asset Service Providers (CASP).
This draft aims to regulate the cryptocurrency market, its trading platforms, cryptocurrency wallets, custody services for cryptocurrency assets, and providers of cryptocurrency asset services in Turkey.
At the time of writing this article, the Central Bank of Turkey’s notification issued on April 30, 2021, banning the use of cryptocurrencies as a payment tool remains in effect. As cryptocurrencies are defined in this notification as “intangible assets that represent value or rights that can be created and stored virtually through distributed ledger technology or any similar technology,” their use and regulation subject them to a different legal regime.
Cryptocurrency asset service providers must obtain a license issued by the Capital Markets Board of Turkey (CMB) for their establishment and operation. The Turkish capital market will supervise these trading platforms to ensure compliance with the relevant CML regulations.
Apart from cryptocurrency transactions that are also traded on foreign markets, where their prices are determined, any activities that cannot be explained logically or economically and may disrupt the safe and stable operation of transactions by cryptocurrency asset service providers will be under the supervision of this regulatory body.
Considering the recent developments in the European Union regarding the conclusion of tripartite discussions between the Council and the European Parliament about the cryptocurrency market (MiCA) and its publication in the EU’s official journal, it can be concluded that this draft law does not provide a strict regulatory approach to the Turkish market. Still, it may form a regulatory framework for future secondary regulations. In this context, once this unofficial draft or its amended version comes into effect, it can be safely assumed that the Capital Markets Board of Turkey will seek to implement secondary regulations to align its oversight with the European Union.
Cryptocurrencies and Turkish Regulators
Currently, the Central Bank’s regulations are the first and only regulations defined for cryptocurrencies in Turkey, and they directly govern them. Several factors can explain the Central Bank’s reasoning behind banning cryptocurrencies as a payment tool:
1. Using cryptocurrencies in payments may lead to irreparable losses for both parties due to the lack of regulatory mechanisms and the potential for excessive volatility.
2. There is no guaranteed mechanism to ensure the security of wallets.
3. Cryptocurrencies may be used in illegal activities due to their anonymous structure.
While the Central Bank of Turkey’s regulations primarily establish procedures and principles related to the prohibition of using cryptocurrency assets in payments, they may still serve as a pathway to define these assets within Turkey’s economy.
Moreover, Articles 4.1 and 4.2 of the Central Bank of Turkey’s regulation stipulate that payment service providers (banks, payment companies, and electronic money companies) are not permitted to:
– Collaborate or create business models that allow the direct or indirect use of cryptocurrencies.
– Provide any service to these business models for using cryptocurrencies directly or indirectly.
Since the Central Bank’s prohibition regulations only refer to payment systems, collaboration with cryptocurrency asset service providers is permissible for Turkish banks to provide integrated customer account services to facilitate fiat-to-cryptocurrency or cryptocurrency-to-cryptocurrency transactions.
It is clear that the Central Bank’s regulations have imposed severe restrictions on cryptocurrency payments and their use by payment service providers; however, some parties still expect the government to adopt a more flexible approach to future regulations concerning these assets.
In Turkey, cryptocurrencies are neither recognized as money nor treated like fiat currencies. However, it is essential to assess whether cryptocurrency assets are considered “electronic money.” The Turkish Payment and Securities Settlement Systems Law (Law No. 6493) defines electronic money as “monetary value received by the issuer of electronic money, stored electronically, and intended for making payments as defined in Law No. 6493, and used as a payment instrument by individuals and legal entities other than the issuer of electronic money.” Nevertheless, the Turkish Banking Regulation and Supervision Agency (BRSA) implicitly excludes Bitcoin from this definition as “electronic money.”
Despite the definition of cryptocurrencies in the Central Bank’s regulations, the Turkish Court holds that such assets fall within the scope of goods/securities and should be regarded as digital currency or virtual money. Under execution and bankruptcy laws, cryptocurrency assets have criteria that possess economic value by themselves and can be seized irrespective of definitions in the economic context.
Although the court’s definition contrasts with that of the Central Bank’s regulations, the ongoing debate about the definition and nature of cryptocurrency assets in scientific and economic fields constitutes the Republic of Turkey’s initial stages of legal recognition.
Turkey has no specific regulations regarding the buying and selling of cryptocurrencies; thus, the trading of these assets is conducted under Law No. 6098.
Additionally, all Initial Coin Offerings (ICOs) must be conducted under the supervision and enforcement of the Turkish market regulatory authority, as policymakers in Turkey view this as akin to an initial public offering of securities and crowdfunding.
In the realm of anti-money laundering and counter-terrorism financing laws, Turkey has taken an approach similar to that of other governments.
Taxes and Cryptocurrencies in Turkey
Article 73, paragraph 3 of the Turkish Constitution outlines the principle of legality in taxation, stating that taxes, fees, and other financial obligations must be imposed, amended, or repealed by law. In the doctrine of Turkish tax law, it is also accepted that not only the main elements of tax but also procedural duties and issues such as assessment, notification, obligation, and tax collection, as well as penalties arising from taxes, should be regulated by law. In this context, there is currently no tax regime concerning the taxation of cryptocurrency assets in Turkey, as there are no specific tax regulations regarding cryptocurrency assets and cryptocurrency exchange platforms.
In principle, the taxation of cryptocurrency assets depends on the nature of these assets and how they are acquired or exchanged. Therefore, defining cryptocurrencies is crucial for understanding how they fit within Turkey’s current tax regime. Given the unofficial draft law definition, it is challenging to accept these assets as qualifying as goods, as they are defined as intangible assets representing a value or right that can be created and stored virtually through distributed ledger technology or any other means. Furthermore, the principle of legality in taxation requires that no tax can be imposed on cryptocurrencies without legislation passed by the legislature. In this regard, ambiguity regarding whether cryptocurrency assets meet tax requirements must be clarified by law.
However, on September 23, 2020, the Edirne Tax Administration published its official opinion stating that “cryptocurrency assets must be declared with the inheritance and transfer tax return, as the term ‘goods’ refers to all other rights and claims that may be subject to movable and immovable property under Article 3.1 of the Inheritance and Transfer Tax Law No. 7338.” From this statement, it can be inferred that according to the mentioned article, the definition of goods includes cryptocurrency assets; however, the overall treatment of cryptocurrencies for tax purposes conflicts with the principle of legality in taxation and prevents us from accepting cryptocurrency assets as qualifying goods.
Turkey’s Macroeconomic Environment and Cryptocurrencies
Assuming that cryptocurrencies are used alongside fiat currencies in the current flow, various events occur in the macro economy of a country facing inflation, such as Turkey. Here, we examine some of these effects.
Let’s assume Bitcoin is accepted as a payment tool alongside the national currency in a country’s economy and is used to purchase movable and immovable assets. With this onset, an additional demand for the mentioned currency is created in its supply chain. But how does this help the economy? Assuming all currency used in the purchasing process is directly obtained from cryptocurrency mining, it can be inferred that with the increase in the country’s financial market value, the economy will become more dynamic. The national currency of a country like Turkey will no longer be affected by behaviors in the microeconomy. In contrast, cryptocurrencies are a buffer against these behaviors for the national currency. The key point is that these cryptocurrencies should not be purchased with the national currency, as this could lead to capital flight from the country and weaken the market.
Another interesting point is the effect of rising cryptocurrency prices on wealth within a country’s economic flow. In a country like Turkey, cryptocurrencies are viewed more as an investment tool, which has an interesting effect on the country’s macroeconomy. Since the supply of these cryptocurrencies is limited, their price also rises relatively as demand increases. Suppose this $50 billion from the $170 billion in cryptocurrency transactions in Turkey is stored in exchanges with a long-term view. A doubling of Bitcoin’s price could generate approximately $50 billion in foreign exchange earnings for the country, which, if spent in the country’s economy, would lead to prosperity and growth. This scenario may represent the most direct effect of cryptocurrency growth on the monetary system of a country with a weak economy like Turkey.
On the other hand, cryptocurrencies rely on more effective distribution models that can deepen and promote financial inclusion and increase financial access on a macro level, which drives economic growth in a country.
If Turkey allows the current trend in the cryptocurrency market to continue, innovation will continue to accelerate in the country. A cryptocurrency market could bring about exponential economic growth for a country like Turkey, which owes a significant part of its economy to the tourism industry. For example, the total value of Turkey’s tourism industry in 2022 was $46.48 billion, less than one-third of intra-chain transactions in the country. Many experts hope that with fewer restrictions imposed on this market, Turkey could become one of the world’s largest economies.
However, there are also opposing views in this area. Since managing market stability regarding cryptocurrencies is not straightforward, and this industry is rapidly evolving due to high scalability, structural vulnerabilities, and interconnections with traditional financial systems, it could threaten global financial stability.
The International Monetary Fund (IMF) emphasizes that economists have little consensus about whether currency competition improves or worsens global economic stability. Currency competition, or dollarization of markets, especially in emerging markets, is a major concern for all economists. Essentially, this risk is always present, and a sharp decline in exchange rates is a clear sign of it. However, aggressive business models may create more risks for the ecosystem.
