Three Turkish cryptocurrency exchanges have suspended operations since last Wednesday after the central bank announced impending restrictions on the use of cryptocurrencies, triggering a run on the exchanges. Amid Turkey’s ongoing financial meltdown, the government hoped to tighten its hold on the country’s payment ecosystem, with the goal of preventing further devaluation of the Turkish lira, but the attempt backfired.
Cryptocurrencies have experienced a big spike in popularity in Turkey, especially after Turkish President Recep Tayyip Erdogan replaced three central bank governors within the last 20 months, aiming to dictate monetary policy in line with his unorthodox views about interest rates. The latest sacking of a central bank governor in March triggered yet another plunge in the national currency, which has lost 50 percent of its value over the last three years.
Turkish citizens, who had previously taken refuge in foreign currency deposits and gold as a hedge against the country’s double-digit inflation and persistent devaluation, turned to cryptocurrencies as Erdogan repeatedly urged them to convert their foreign exchange and gold assets to liras. In a country where private property rights have eroded significantly and the government has seized assets worth at least $11 billion from nearly 1,000 businesses over the last five years, locals see cryptocurrency as a safe haven out of Erdogan’s reach.
Given the low levels of financial and digital literacy in Turkey, citizens’ rush to hoard cryptocurrencies through institutionally and financially weak local cryptocurrency exchanges turned out to be a recipe for disaster. Turkish investors correctly interpreted the news of the central bank’s impending cryptocurrency restrictions as yet another heavy-handed attempt by Erdogan’s government to meddle in the markets. The ensuing run on cryptocurrency exchanges put a strain on exchanges that operated like pyramid schemes and tapped into crypto wallets without the authorization of their holders.
The first cryptocurrency exchange to fall was Thodex, which had 391,000 active users, who collectively held over $2 billion in their accounts. Turkish authorities are seeking to extradite the platform’s 27-year-old founder from Albania and have already confiscated $3.7 million from his bank accounts and issued warrants for 78 suspects. On April 24, Vebitcoin became the second exchange to collapse, followed by Goldexco.in.
Turkey’s restrictions on the use of cryptocurrencies as a form of payment were to take effect on April 30, but the market panic that followed the announcement of the deadline forced Turkish authorities to fine-tune their policies and rhetoric. Turkey’s central bank governor attempted to calm the markets on April 23 by stating that authorities did not intend to ban cryptocurrencies, promising to introduce a wide range of crypto regulations within two weeks.
The government claimed that a desire to combat illicit finance motivated its restrictions on crypto exchanges. Yet depositors know that explanation is a fig leaf to hide Erdogan’s real interest: tapping into citizens’ foreign currency, gold, and cryptocurrency assets to boost the economy and the lira. Under Erdogan’s rule, Turkey has become a permissive jurisdiction for terror finance, sanctions evasion, and other illicit financial activities. The U.S. Department of the Treasury has designated Turkey-based entities and individuals four times since 2019.
Last June, Twitter removed 7,340 accounts maintained by a network associated with the youth wing of Erdogan’s party, reporting that the network pursued “commercial activities,” including “cryptocurrency-related spam.” Given the Erdogan government’s record of questionable financial dealings, Ankara cannot boost confidence among investors by telling them that it seeks to curb illicit finance.
Aykan Erdemir is a former member of the Turkish parliament and senior director of the Turkey Program at the Foundation for Defense of Democracies (FDD), where he also contributes to FDD’s Center on Economic and Financial Power (CEFP). For more analysis from Aykan, the Turkey Program, and CEFP, please subscribe HERE. Follow Aykan on Twitter @aykan_erdemir. Follow FDD on Twitter @FDD and @FDD_CEFP. FDD is a Washington, DC-based, nonpartisan research institute focusing on national security and foreign policy.