Chainalysis: What is the current state of cryptocurrency adoption in the Middle East and North Africa?

Written by: Chainalysis

Compiled by: Luffy, Foresight News

The Middle East and North Africa is the sixth largest crypto economy in our research this year (2023 Cryptocurrency Geography Report). From July 2022 to June 2023, the region's on-chain transaction value was approximately $389.8 billion, accounting for nearly 7.2% of global transaction volume.

The Middle East and North Africa region holds 3 seats among the top 30 countries in this year's index: Turkey (12th), Morocco (20th), and Iran (28th). Among them, Turkey dominates in terms of transaction volume, as shown below.

Overall, when segmented by transaction size and platform type, the transaction volume in the Middle East and North Africa region is similar to that of other regions.

However, we see significant differences between different countries in the region. Referencing the heat map below, which compares the activities of some top crypto economies in the Middle East and North Africa by platform type over the past year.

The UAE stands out prominently. Compared to neighboring countries in the region, except for Israel, the UAE has a much higher proportion of cryptocurrency activity conducted in DeFi. One reason may be that the UAE has implemented a regulatory framework favorable to innovation, allowing groundbreaking crypto platforms to thrive, thus transforming itself into a global cryptocurrency hub. These regulatory frameworks have attracted many cryptocurrency entrepreneurs and enthusiasts to the region, which may explain why DeFi has seen more adoption there.

On the other hand, Turkey's cryptocurrency activity is more concentrated on centralized exchanges, as its users seem more focused on acquiring cryptocurrencies to combat currency devaluation. We will explore these trends and more below.

United Arab Emirates (UAE): How Forward-Thinking Regulators Shape a Global Cryptocurrency Hub

With its unique innovation-friendly regulatory policies, the UAE attracts top financiers, young tech entrepreneurs, and innovative companies from around the world. The UAE is also at the forefront of adopting advanced technologies to enhance business efficiency and improve citizens' quality of life, including blockchain technology.

UAE regulators began focusing on cryptocurrencies early on, with Dubai, the country's most populous city, launching its blockchain strategy in 2016. Since then, UAE regulators have been at the forefront of the industry. In 2018, Abu Dhabi established the world's first cryptocurrency regulatory framework, aiming to create a forward-looking regulatory framework for cryptocurrencies that promotes innovation while protecting consumers and ensuring the UAE remains a leader in the cryptocurrency space. Dubai established its own Virtual Assets Regulatory Authority (VARA) in 2022, dedicated to achieving similar goals. Earlier this year, the UAE passed further cryptocurrency regulations at the federal level, allowing local regulators like VARA to flexibly regulate and maintain economic free zones to attract cryptocurrency innovation.

We interviewed Akos Erzse to gain insights into how regulators like VARA create a vibrant environment for cryptocurrency businesses operating in the UAE. Erzse is the Senior Manager of Public Policy at BitOasis, a cryptocurrency trading platform based in Dubai. He praised the comprehensive regulatory framework released by VARA in February 2023, stating, "VARA has brought new momentum for forward-looking regulatory clarity to the region, attracting a large number of cryptocurrency players to the UAE." He noted that the distinction of the VARA framework from others worldwide lies in its specificity in addressing different types of virtual asset services and activities. "There are different rules for staking, brokers, consulting services, and custodians—this makes it easier for businesses to understand the specific regulatory requirements for providing certain services." VARA is committed to ensuring that the rules meet industry needs, and Erzse cited a recent amendment made by VARA that now allows custodians to stake custodial assets. "This responsiveness enables us and businesses like ours to innovate quickly."

Erzse stated that the UAE's unique and dynamically evolving framework is particularly important as regulatory momentum increases in other parts of the world. "There is ongoing regulatory competition among markets seeking to position themselves as cryptocurrency hubs, and smaller markets are also rapidly developing." The UAE's regulatory approach allows it to attract global companies and cryptocurrency entrepreneurs, as well as high-net-worth individuals looking to invest in cryptocurrencies through regulated platforms.

When asked about the future of cryptocurrency in the UAE, Erzse expressed excitement about innovative business models such as asset tokenization. TOKO is a crypto platform focused on tokenization that recently received VARA's approval to offer such services in the UAE.

He also pointed out that remittances are an important use case for cryptocurrencies in the UAE and the broader region. "We are a remittance hub, and people are certainly using cryptocurrencies to send money home, but it will be exciting to see some dedicated products emerge under the existing regulatory framework." In fact, India, the Philippines, and Pakistan all rank in the top ten of our adoption index, which is also a good sign for the UAE. A significant portion of the UAE's expatriate population comes from these countries, and the rising popularity of cryptocurrencies in these countries may also be related to the increasing cryptocurrency adoption rate in the UAE.

Rising Inflation in Turkey Drives Cryptocurrency Adoption

In addition to ranking 12th in our global cryptocurrency adoption index, Turkey's cryptocurrency transaction volume is also the fourth highest in the world (with approximately $170 billion in transfers last year), following the United States, India, and the United Kingdom.

Yasin Oral is the CEO and founder of the Turkish cryptocurrency exchange Paribu, and he points out that Turkey's relatively high cryptocurrency adoption rate is not surprising for several reasons, including the country's recent macroeconomic environment and the interest of young people in innovation and technology. He explains, "The world has gone through a tough year under the influence of tightening monetary policies, and Turkey has also been affected. In this context, individuals tend to seek alternatives like cryptocurrencies to store value and diversify their portfolios. Associated with this behavior is the fact that as each market cycle attracts new investors and adopters, more individuals and entities are learning about the benefits of blockchain, ultimately leading to an increase in cryptocurrency adoption levels."

Indeed, Turkey has been facing rising inflation, with the inflation rate nearing 60% in August 2023. Additionally, after the Turkish central bank cut interest rates by 100 basis points, the Turkish lira plummeted in 2021. Since then, the lira has not recovered—indeed, it hit a historic low in mid-2023. We can see evidence of the lira's devaluation driving interest in cryptocurrencies in the chart below. A significant buying surge occurred around March 30. Analysts stated that regardless of who wins the elections in May, the lira's value would plummet significantly, while at that time, the lira was already weak. Following a continued decline, the lira hit a new low of $0.04, and shortly after the public awaited the central bank's interest rate announcement, USDT purchases surged again in late July. It is important to note that we use the 30-day average of lira purchases of USDT data to display this, which may slightly lag in showing trends.

Source: CryptoCompare and ExchangeRate-API

Overall, we also found that USDT is the most purchased cryptocurrency with lira across global exchanges.

Source: CryptoCompare

However, not all of Turkey's cryptocurrency activity is concentrated on stablecoins. Broader analysis shows that despite an overall decline in NFT activity since mid-2022, Turkey is the country with the highest network traffic to NFT platforms in the Middle East and North Africa region.

Turkish-American entrepreneur Refik Anadol is one of the earliest artists to use artificial intelligence to create immersive artworks, helping to spark the NFT craze in Turkey. During this period, local crypto platforms like Paribu attracted and supported NFT activities. Recent market turbulence may have led to a decline in the popularity of NFTs, but Oral believes NFTs will play an important role in the future. "We believe that NFTs and utility tokens are crucial for defining innovative solutions across many industries, such as retail, entertainment, and art. Turkey will indeed become an important center for the next wave of blockchain solutions, and NFT technology will be a key component of that."

Saudi Arabia Leads the World in Year-Over-Year Growth in Cryptocurrency Trading

Last year, no country saw its crypto economy grow faster than Saudi Arabia, which experienced a year-over-year increase in trading volume of 12.0%. In fact, Saudi Arabia is one of only six countries that saw year-over-year growth in trading volume during our study period.

Abdulmajed Alhamzah is the General Manager of the Saudi cryptocurrency exchange Rain, and he describes the reasons why cryptocurrencies are attractive to Saudi users. "Retail investors tend to be the largest group turning to cryptocurrencies in search of portfolio diversification. Many have already invested in real estate, stocks, and other assets, and they are eager to invest in cryptocurrencies. They recall the transformative impact of the internet and are eager to engage with cryptocurrencies early, anticipating significant growth in the coming years." He also noted that the adoption rate of cryptocurrencies in the region and institutional interest have increased, constituting a large part of Rain's institutional clients in the region. "Many businesses we work with see the long-term value of cryptocurrencies. Cryptocurrencies are viewed as an asset class in clients' diversified portfolios."

These positive use cases and the overall growth of the cryptocurrency market may prompt the Saudi government to take an interest in cryptocurrencies. In 2018, the Saudi government declared the use of Bitcoin illegal and warned of the potential risks of trading other cryptocurrencies. However, the country's crypto market continues to grow, and in September 2022, the Saudi Central Bank appointed tech entrepreneur Mohsen Al Zahrani as the so-called "Crypto Emir," leading the digital transformation of the central banking system. Additionally, Saudi Arabia has expressed interest in achieving economic diversification by nurturing Web3 and blockchain gaming projects. One such project is exploring the metaverse in collaboration with The Sandbox. Abdulmajed is optimistic about the prospects, stating, "Regulators in the region are working to provide a robust regulatory framework to drive innovation in the field, and more importantly, to protect user funds and safeguard users from potential scams."

Future Growth Potential in the Middle East and North Africa

Overall, our data and interviews with cryptocurrency companies in the Middle East and North Africa indicate that the region is adopting cryptocurrencies for various reasons. In countries with unstable currency inflation, cryptocurrencies help protect wealth, while users in more stable economies like the UAE may be more inclined to explore more investment-focused frontier use cases. The UAE also provides a valuable example of how innovative regulations and rules can enable countries to build cryptocurrency hubs, thereby boosting local economies.