The exchange rate difference between the CBRT and the Grand Bazaar rates tells us that we are exposed to an incomprehensible exchange rate regime. In the process of suppressing the exchange rate before the elections, an important variable is being ignored. This article explains why tetherization occurs and what consequences it has.
One of the consequences of the CBRT and the USD buying and selling rate difference in the market is that people tend to stable cryptocurrencies (stablecoins). When we say stablecoin, Tether comes to mind first. In an economic system where 1 Tether is approximately equal to 1 USD, Tether protects the local investor against the risk of TL depreciation. In addition, unlike USD, Tether can be transferred with very low transfer fees, making it a good payment vehicle.
Although some uses of cryptocurrencies are banned in Turkey (e.g. buying and selling goods and services with cryptocurrencies or payment institutions cannot intermediate crypto services), Turkey is one of the top 3 countries with the highest number of cryptocurrency users relative to its population. It is estimated that 40% of the population currently uses cryptocurrency. Source: https://www.statista.com/statistics/1202468/global-cryptocurrency-ownership/
Although volatile financial instruments such as Bitcoin and Ethereum come to mind when we think of cryptocurrency, Tether and USDC have become quite widespread. As you can see from the table below, there are two stable cryptocurrencies in 3rd and 5th place.
The Root of Tetherization
The reasons for the widespread use of Tether in Turkey could be listed as follows until today:
- Low transfer costs
- Allowing tax avoidance due to the lack of tax regulations
- Enabling the privacy of individuals (it can also be used for money laundering and terrorist financing)
- Avoiding CBRT reporting (e.g., why are you transferring so much money abroad, etc. prevents exposure to bank inquiries)
There is a much more important reason these days: The high difference between bid&ask spread of the USD. The Tether price is fixed, there is no bid-ask spread. The brokerage firm takes a commission on transactions in thousandths. Therefore, the buying and selling margin in the dollar has made the flight to stablecoins, i.e. tetherization, at an extreme level.
The Problem in Monetary Policy and the Impact of Stable Cryptocurrencies
Where there is high and persistent inflation, there is a dual monetary policy regime. Money demand becomes so unpredictable that monetary policy’s dream of secure price stability, efficient payment systems and well-functioning financial markets becomes impossible. In particular, under high and persistent inflation, market participants defend themselves by switching to the exchange rate
The current structure destroys the shock absorbing role of the exchange rate. This is because dollarization leads to high pass-through from exchange rate depreciation to inflation. Therefore, the exchange rate makes it more difficult, let alone impossible, to absorb negative external shocks. Dollarization compromises the monetary transmission mechanism so much that it is now much more difficult to anchor inflation expectations through a weak interest rate channel. The solution to the financial instability associated with dollarization depends on central bank policies to increase foreign exchange reserves. However, in order to answer the question of how much foreign exchange should be increased and what is real dollarization, we need to know the magnitude of tetherization.
I estimate that 1 in 3 people with access to financial markets use Tether (based on a statistic of 40%). Everyone who believes that the dollar will increase after the elections are trying to buy dollars with Tether that they cannot get from banks. The high demand for Tether puts downward pressure on the value of TL through cryptocurrency service providers. The Central Bank of Turkish Republic, which thinks that it has relatively controlled the demand for dollars by opening the dollar buying and selling exchange rate difference, ignores the demand for tether and tetherization. 1 Tether is equal to 1 Dollar. Tether demand means USD demand. This also needs to be controlled. Because other negative consequences such as tax loss, further destabilization of the exchange rate, and the use of tether for black money are becoming widespread. But if by controlling it we mean putting pressure on crypto asset service providers, that would be a disastrous mistake. The decentralized cryptocurrency ecosystem, by contrast, can easily provide a solution.
In the 1980s, after the failure of monetary targeting, the governor of the Canadian central bank said. Central banks did not stop targeting the demand for money, the demand for money abandoned central banks. I don’t know if the CBRT realizes what it has abandoned, but Tether is waving disdainfully from somewhere far away.