Stablecoins in Türkiye As A Means Of Currency Substitution
Defined as holding foreign currency-denominated assets and liabilities to hedge against the risk of local currency depreciation in inflationary economies, dollarization has traditionally been a key concern for central banks, closely monitored and addressed through policy measures, particularly in its classical forms such as deposit and credit dollarization. In Türkiye, the trend of dollarization has been a persistent issue for years. With the diversification of financial instruments, this phenomenon now manifests in various forms, such as investment funds. Studies indicate that stablecoins have emerged as a highly popular new form of dollarization in Türkiye. The economic developments in March are expected to further amplify this trend to unprecedented levels.
What Are Stablecoins and What Kind of Ecosystem Are We Talking About?
Stablecoins are primarily defined as crypto assets designed to maintain a stable value linked to a specific currency, asset, or a basket of currencies and/or assets. Today, stablecoins serve as the sole and fundamental currencies for nearly all commercial activities and purchasing goods and services within the DeFi ecosystem, primarily facilitating income generation.
How Strong Is the Interest in Stablecoins in Türkiye?
With a market size of $136,8 billion, Türkiye holds the largest crypto asset market in the MENA region and ranks as the seventh largest globally. As a natural consequence, the trading volume of stablecoins -the primary currency of this market- is also remarkably high in Türkiye. However, what makes this figure truly striking is that, at 4% of its GDP, Türkiye surpasses the next country by a significant margin, making it the global leader in stablecoin transaction volume.
The intense interest in stablecoins in Türkiye is undoubtedly primarily related to consumer behaviors regarding crypto investment within the DeFi ecosystem. However, a survey conducted in September 2024 revealed that this interest is not solely driven by this factor. The study, conducted in five emerging markets, including Türkiye, shows that, in addition to their role in DeFi, stablecoins are also being used as a new form of dollarization with remarkable growth momentum. The report indicates that stablecoins are becoming increasingly popular in Türkiye for purposes similar to the role of money in traditional finance, such as saving and transacting in foreign fiat currencies, and particularly for conducting cross-border money transfers in foreign fiat currencies.
What is behind the rising interest in stablecoins as a form of dollarization?
The main reason for this interest is that, in inflationary economics, particularly stablecoins pegged to the US dollar are being used as a programmable substitute for the US dollar to make savings and transactions, as well as to facilitate fast and cheap money transfers. As recognized by international financial regulators, stablecoins have the potential to make cross-border payments cheaper, faster, and more accessible. Additionally, regulators have acknowledged the potential of stablecoins in promoting financial inclusion. Of course, the popularity of this ecosystem, which remains unregulated today, also owes much to its use for malicious purposes, such as money laundering and terrorism financing.
So, what can be said about the risks?
The use of stablecoins, which are new and still not regulated, as a form of dollarization presents various and yet unexperienced risks for both consumers and the financial system. Particularly, issues such as unclear repayment rights and vulnerabilities in stability mechanisms led to significant consumer losses during the events of 2022 and 2023. These events also affected the banking system. Financially, high levels of liquidity leaving the banking system and shadow banking risks can lead to outcomes that impact national economic policies and threaten the existing financial system. The report published by the FSB in July 2024 is noteworthy, as it provides examples based on the popularity of stablecoins in Türkiye. The FSB has shown that, in the absence of a comprehensive regulatory framework, the use of stablecoins in emerging economies makes the country much more vulnerable to risks such as monetary policy challenges, strain on fiscal resources, liquidity problems, and threats to monetary sovereignty.
What is the situation on the regulatory front?
In the stablecoin ecosystem, the lion's share, with a market capitalization of 99.3%, is held by stablecoins pegged to the US dollar. The US aims to turn this popularity into a financial advantage through legal regulations. In the US, regulations exist at the state level. However, the Trump administration announced that it would legalize a draft bill at the federal level within a noticeably short period, which would regulate stablecoins as insured bank deposits. Through this approach, the US stated that it aims to both protect consumers and integrate stablecoins into the existing banking system, keeping liquidity within the current financial system, and increasing liquidity inflows into the country through a regulatory framework that would foster trust, thus targeting a reduction in inflation.
The EU, with the enactment of MiCA, offers a competitive regulation that embraces the rising potential of stablecoins while addressing their economic and macroeconomic risks. MiCA also places stablecoins pegged to fiat currencies within the existing financial system as electronic money under PSD2. It is anticipated that similar regulations will be implemented in our country in the future.
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