When Are Cryptocurrencies Securities and What Should Be Done?

What We Can Learn From the Hurried Way the Turkish Government Tried to Regulate Cryptocurrencies

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The ambitious plan of the Turkish government to limit the use of cryptocurrencies to protect the Turkish lira was met with strong opposition from the crypto communities in the country. It's a rare case of people working together to put pressure on the government, and lawmakers and organizers in other countries might learn something from it.

Even though President Recep Tayyip Erdogan said in December that cryptocurrencies needed to be regulated right away, no bill has been introduced yet. Late in December, a draft version of a crypto bill that the Justice and Development Party (AKP), the country's ruling party, was said to support was leaked and shared on social media.

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In order to protect the local currency from capital outflow, this bill would have made it harder for international exchanges to do business in Turkey and banned the use of self-custody wallets. Even though AKP never said that the leaked bill was written by the government, many people thought that it was written by a team close to the president and leaked on purpose to see how people would react.

The bill, which would make it harder to invest in and use cryptocurrencies, should be voted down. In Turkey, the number of people using cryptocurrencies has grown quickly over the past two years, in part because of high inflation. My co-author and I think that putting limits on crypto is like putting limits on freedom. Not only is this unethical and against the Constitution, but it would also make the country's problem with money leaving the country worse instead of better.

One of the main worries about the bill was that it would give local exchanges an unfair advantage over international ones, which could hurt Turkish users. Many people think that the leaders of the ruling party are being swayed by domestic exchanges to ban better and cheaper global options. The government has denied these claims.

Such a ban would help the government (which is trying to stop short-term dollar outflows) and Turkish crypto exchanges (which are trying to keep their market share against foreign high-volume exchanges), but it would probably hurt users.

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Engaging with crypto users

Because of the anger on social media, the government had to talk to different Turkish crypto communities to make them feel better about the restrictions.

Mustafa Elitas led a meeting on the draft crypto bill on December 29 at the Parliament (the former deputy economy minister from AKP). Mahir Unal, who used to be AKP's deputy tourism minister, Omer Ileri, who is AKP's vice president, and senior bureaucrats from the Central Bank, the Treasury, and other government agencies also spoke for the government.

Even cryptography was there.

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What happened in the meeting?

Members of various crypto communities expressed their concerns about the leaked crypto bill. My co-author, the economist Erkan Oz, detailed the prevailing concerns of crypto communities on social media as follows:

  1. There are at least 5 million crypto-asset investors in Turkey, according to the report published by local crypto exchange Paribu. Therefore, the opinions of these investors and entrepreneurs should be considered during the law-making process.
  2. Crypto investors do not drive foreign exchange outflow from the country, as it is generally assumed and the paramount concern of the government to protect the local currency. On the contrary, because the purchased crypto assets appreciate significantly over time, investors create foreign exchange inflows for the country.
  3. Measures such as licensing, technological compliancy and capital-backing requirements should be introduced to protect retail investors.
  4. The bill must not strictly prohibit investors from accessing exchanges and the use of self-custody wallets. Otherwise, Turkey's crypto industry would turn into a closed ecosystem. Furthermore, such a ban against exchanges and wallets would engender price premium/discount between the international markets and Turkey. This would also pave the way for establishment of black markets.
  5. If the draft circulating on social media is enacted in its current format, Turkey will lose the opportunity to educate software developers and entrepreneurs in the blockchain domain.

The officials and bureaucrats from the ruling party who were at the meeting did not say what they thought about the proposed law or the ideas from the crypto communities at that time. But, for what seems to be political reasons, the government put the bill off.

General elections in Turkey will happen in June 2023, if not sooner as was thought in November 2022. Most likely, AKP leaders told government officials to talk to crypto communities because they are mostly made up of young people who care about their freedoms.

Before the election campaigns start, it would not be politically correct to put millions of voters in danger because of a bill. Also, many polls show that the next election will be one of the most important ones for AKP to stay in power since 2002.

Even in Turkey, where democracy doesn't work as it should, a strong government that controls all parts of the state decided not to pass a bill from the top down to regulate cryptocurrencies because the community was against it.

Even a government that tends toward authoritarianism couldn't pass a law that would have limited the freedoms that come from using cryptocurrencies because of the power of grassroots organizations. From this point of view, we can assume that the United States and the European Union will pass laws more slowly than expected because of the strong deliberation processes made possible by the democratic structure.

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