Türkiye is introducing a stringent new cryptocurrency bill, mirroring the EU’s own tight regulations, providing critical oversight of the crypto industry – but it risks going too far. The bill aims to combat terrorism financing and money laundering, but by ramping up licensing and taxation requirements on crypto, it risks stifling innovation and pushing a vibrant industry into the shadows. Although well-intentioned, this over-regulation threatens to deter investors by increasing the cost of doing business in crypto and wrapping the industry up in red tape. 

In Türkiye, as the economic crisis deepens, many continue to seek alternative investment options. A significant driver behind this search is the disparity between the official inflation figures and the inflation experienced in daily life. For instance, in 2023, while the Turkish Statistical Institute (TÜİK) reported an official inflation rate of 64%, another calculation by ENAG, a non-profit independent inflation research group based in Türkiye, estimated it at 124%. This gap highlights the necessity for higher returns just to maintain financial stability.

The investment frenzy in Türkiye is not a new phenomenon. Still, factors like high inflation and exchange rates have transformed it from an option into a necessity. The number of stock market investors skyrocketed from 1,240,903 in March 2020 to over 8 million by September 2023. Despite the growth in volume, the market experiences sharp fluctuations, reflecting the economic uncertainty of the country. 1.5 million new investors joined the stock market in September 2023, but within two months, nearly 900,000 withdrew, underscoring the volatility of investment trends in Türkiye.

Among alternative investments, cryptocurrencies stand out as particularly popular. Türkiye has one of the highest cryptocurrency investment rates in the world, even controlling for population. As of May 2023, 52% of the Turkish population aged between 18 and 60 had invested in crypto assets, most of which were long-term. This trend is not just a fintech alternative for Turks but a long-term investment choice primarily driven by the country’s economic uncertainties.

Turkish Treasury and Finance Minister Mehmet Şimşek recently updated the public on the upcoming new law targeting crypto markets and assets. The draft bill places heavy emphasis on new licensing requirements, mandating crypto markets to fulfil bureaucratic preconditions. Currently, there is no surveillance mechanism in many markets, but the bill suggests that there should be one on a bureaucratic level. On paper, surveillance means transparency and accountability, yet when it comes to enforcement, it means more bureaucracy for simple transactions. This injunction therefore means two things: Either the markets fulfil the licence requirements and be surveilled, or they cease their operation in the country. 

On the other hand, in Türkiye, new licensing rules effectively translate into new taxation, which means less benefit for the actors (investors and traders) and more benefits for the government. It is safe to assume that from this point, even though the bill is still being drafted, the burden on Turkish investors seeking alternatives in crypto markets would not only be affected by increased trading rates but also by decreased alternatives since all the alternative markets cannot meet the requirements.

If they do so, there will be a significant financial burden on the market’s shoulders. To cover the cost of their bureaucratic expenses, markets are likely to place the burden onto investors through increased commission rates. The practical consequence of these requirements will be fewer choices and higher costs for investors.

We have seen this effect before in the money-transfer industry. Back in the late 2010s, PayPal ceased its operations in Türkiye because it would not fulfil the expected requirements for licencing. After 2020, Wise and TransferGo took a similar approach, and either discontinued or limited their operations for Türkiye-based users. Now, the same fate awaits the crypto markets.

The timing of the bill, as well as its content, is curious. Under the guidance of Minister Şimşek, Türkiye has made significant strides towards aligning with the Financial Action Task Force (FATF) standards. As of January 2024, Türkiye has achieved compliance with 39 out of 40 FATF recommendations, with the crucial remaining challenge being the regulation of crypto assets. This gap is precisely what the proposed cryptocurrency bill aims to address. The new crypto bill is nothing but another pivotal step in Türkiye’s comprehensive anti-money laundering (AML) and counter-terrorist financing (CFT) efforts to secure the country’s exit from the FATF’s grey list. With the FATF’s next plenary meeting set for February 2024, the timing of this crypto bill becomes more relevant.

It would do more harm than good for Türkiye’s economic administration to see crypto markets and assets as just a way to engage in terrorism financing and money laundering. As millions of Turks view cryptocurrency as an alternative method of investment, the consequences have to be taken into account. Even though these regulations might be well-intended and look good on paper, the unintended consequences of over-regulating a market can potentially cause significant problems for Turkish crypto fans.

While Türkiye’s pursuit of a robust regulatory framework for cryptocurrencies, led by the Şimşek administration, is commendable and strategically aligned with international standards like the EU’s Market’s in Crypto Asset Regulation (MiCA), it strikes a delicate balance. The imminent enactment of this crypto bill, essential for lifting Türkiye from the FATF’s grey list, also risks alienating a significant portion of its population which views cryptocurrencies as a vital investment alternative.

While Türkiye’s move towards compliance with global standards is a laudable step, it is crucial to balance these regulations with the need to foster a healthy, innovative, and inclusive financial environment. The challenge lies in crafting a regulatory framework which not only satisfies international obligations but also supports the burgeoning crypto market, ensuring its sustainable growth and integration into the global financial system.Tan Eroğlu is the co-founder of Individual Choice Initiative, a consumer advocacy group based in Türkiye. He graduated from Bilkent University Faculty of Law and continues his studies as an MA Student at Bilkent University Department of Philosophy.

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