Turkey and its crypto inconsistency

Though not one of the Gulf states, Turkey is a Muslim country with a significant influence over the entire region. And therefore, the cryptocurrency-related events there are also very important for all blockchain projects in the Middle East.

On July 19, the Turkish Ministry of Treasury and Finance announced that the cryptocurrency bill is ready for parliamentary consideration. Deputy Minister Şakir Ercan Gül said that the bill will be presented to the Grand National Assembly of Turkey at the beginning of the next legislative year, in October 2021. According to him, the finalized project aims to protect retail investors, prevent money laundering and strengthen supervision of crypto exchanges.

The bill defines various types of cryptoassets, determines their issuing and distribution, as well as trade policy and conditions for the provision of cryptocurrency storage services. There are also serious measures of state control over this area: The Capital Markets Board of Turkey will control companies working with crypto assets, while the Banking Regulation and Supervision Agency will check those involved in the crypto industry and create mechanisms to protect both consumers and the market integrity.

The legislation also imposes minimum capital requirements for cryptocurrency companies: they will have to be prepared for them before the end of the allotted adaptation period. The new legal framework also provides for a number of protective measures, such as vetting the constitutors and collateral.

The country needed a special “crypto” law to bring order into the tumultuous relationships between the Turkish authorities and the cryptocurrency business in recent years. It all began on August 10, 2018, when the rate of the lira, the Turkish national currency, fell by 18%, breaking the historical minimum set in 2001. The Turkish President urged the citizens to sell their dollars and euros in order to save the national currency.

The Turkish lira collapsed against the dollar after then US President Donald Trump announced a tariff increase on aluminum and steel from Turkey. In total, the lira lost more than 48% of its value against the US dollar in 2018.

Such national currency devaluation was of course followed by a rapid jump in Turkish citizens’ interest in cryptocurrencies as a means of saving and increasing capital, as well as a tool for conducting transactions that cannot be taxed or blocked by the state.

Then the growing interest in crypto was spurred by the governments’ idea to abandon the use of the US dollar in foreign trade. On September 2, 2018, at a business forum, Turkish President Recep Tayyip Erdoğan said that he was discussing a possible abandonment of the dollar in foreign trade settlements. According to Erdogan, Turkey intends to stop using dollars in settlements with many countries in the future.

“The use of the dollar only hurts us”, – claimed Erdoğan, referring to the sanctions that Washington had imposed against Ankara. He called for a “gradual end to the dollar monopoly” and the use of national currencies for settlements.

Curiously, the project of the “Turkish national cryptocurrency”, Turcoin, failed around the same time. The sale of Turcoin began in October of 2017, the cryptocurrency was launched by the Istanbul company Hipper founded by Muhammed Satıroğlu and Sadun Kaya. They argued that Turcoin would become the national cryptocurrency even if the government didn’t recognize it. The Turcoin scam was promoted according to the classic scheme: There were large-scale events featuring Turkish celebrities and the first participants received expensive gifts – usually cars. The fact that cryptocurrency cannot develop following the principle “each new person increases the profits of the one who invited them” didn’t deter new investors.

In June 2018, the project collapsed, revealing itself to be a financial pyramid. This was discovered only after its founders fled the country, taking with them 100 million TL (about $ 21 million), which the project collected from about 10 thousand investors. According to some estimates, the stated sum might be greatly underestimated, the real damage being up to 10 times that amount. All money was transferred to the account of Sadoun Kaya’s company in Cyprus.

Then, after two years of relative calm, there was the dramatic spring of 2021, when the Turkish authorities began strongly pressuring the cryptocurrency market, which became a haven for people’s savings against the background of the rapid collapse of the lira, which has depreciated fourfold over the past 8 years.

As the date for a legislative ban on cryptocurrency circulation was approaching, the largest Turkish cryptocurrency exchanges disappeared one after another, leaving their customers empty-handed. The first to cease its operations was the Thodex exchange with a daily turnover of $ 770 million (2nd largest in the country). Almost 400 thousand investors were denied the opportunity to withdraw funds, as the platform founder, 27-year-old Faruk Fatih Özer, according to police, fled to Albania. Exchange clients lost about $ 2 billion in total.

Vebitcoin, the fourth largest crypto exchange in Turkey with a daily turnover reaching $ 60 million, followed suit. At first, the exchange announced that it was suspending all operations, and the next day its CEO Ilker Bas was detained along with three other top managers.

The Turkish Financial Crimes Investigation Board opened a case against Vebitcoin and blocked all its accounts. The trading platform apologized to its clients, claiming that it found itself “in a very difficult financial situation” and had to cease operations to fulfill the requirements of government agencies.

Meanwhile, the volume of cryptocurrency transactions went from 500 million TL per day in November 2020 to 6 billion in March 2021 amid the ongoing ninth year of devaluation, which made the lira the world’s weakest currency. The authorities decided to intervene and stop the flight from the lira. Effective April 30, Turkey banned both direct and mediated use of cryptocurrencies in financial settlements.

Officially registered and licensed financial platforms, services, and payment systems in Turkey that work or have the ability to work with cryptocurrencies lost the right to provide any settlement transaction services with them – transferring funds between wallets or withdrawing them to fiat.

Furthermore, starting May 1 of this year, 31 of the country’s trading platforms must require proof of residence and ID, while also regularly checking the validity of these documents. Exchanges are also obligated to block any government blacklisted client, report any suspicious trading activity, and inform the government of any transactions conducted by institutional clients.

However, the head of the Central Bank of the Republic of Turkey Shahap Kavcıoğlu stressed that the new rules do not prohibit the entire cryptocurrency ecosystem. They are necessary in order to create a balanced system for digital money storage and settlements, and Kavcıoğlu is convinced that it’s better to avoid cryptocurrency transactions until its implementation.

We can assume, therefore, that the spring ban was a temporary measure, and the Turkish authorities are simply preparing to introduce the crypto market in the country under rather strict state regulations. In addition, once in 2020, Turkish President Recep Tayyip Erdogan mentioned that the same year the government would finish testing the digital currency of the Central Bank of the Republic of Turkey. Very little is known about this project, but it cannot be ruled out that the adoption of new cryptocurrency legislation is also a step towards the implementation of the Turkish CBDC.