Turkey prohibits Bitcoins and other cryptocurrencies from being used as a means of payment. This is the government's way of reacting to the increasing demand for Bitcoin in many areas like gambling - which is admittedly homemade: Because the country is drifting deeper and deeper into inflation.
Turkey's central bank is banning cryptocurrencies from being used as a means of payment throughout the country. This comes as part of the "Regulation of the Non-Use of Crypto-Assets in Payments." In this decree, the central bank writes:
"The purpose of this regulation is to ensure that cryptocurrencies are not used in payments, either directly or indirectly, not by payment service providers and the issuers of electronic money, not by institutions or platforms for payments and electronic money that offer trading, custody, transfer or issuance of crypto-assets ..."
Neither merchants nor customers are allowed to use Bitcoin and other crypto-assets as a means of payment, nor are payment service providers allowed to develop business models directly or indirectly related to crypto-assets. Permitted, on the other hand, apparently remains the trading of cryptocurrencies.
The central bank gives several reasons for this measure in a government gazette: For example, the government is unable to effectively control and monitor cryptocurrencies, while the markets are too volatile and cryptocurrencies are too often used for illegal activities. Moreover, users enjoy no protection when wallets are stolen.
- All these arguments - if you like to call it that - are hard to read without irony and sarcasm, if you don't completely ignore the monetary situation in Turkey.
The pressure of the demonetization
- The government of Turkey is reacting restrictively to the increasing interest of citizens in cryptocurrencies with the ban. This was and is primarily triggered by the rising inflation of the Turkish lira.
- Since the end of 2019, the value of the lira has almost halved against the euro. This dynamic seems to have intensified in recent months, with consumer prices climbing by almost 16 percent year-on-year in February.
The former head of the central bank, Naci Agbal, wanted to fight inflation by raising the key interest rate by two percent. This is in line with the common sense of standard economic doctrine - when it becomes more expensive to borrow money, banks create less money through loans.
But the top central banker's boss, President Erdogan, doesn't think much of high interest rates, on mostly naive religious grounds. He fired Agbal and instead put Şahap Kavcıoğlu, an economics professor loyal to him, at the head of the central bank. Under this, the central bank declared, as expected, not to raise interest rates one day before the bitcoin ban.
Markets promptly reacted to this move by Erdogan: they saw it as an announcement that the Turkish government refuses to respond to inflation in a way that economists consider rational. Moreover, Erdogan demonstrated once again that he was denying the Turkish Central Bank what the European Central Bank says is the most important (and supposedly only) basis of monetary stability: central bank independence.
The result was exactly what everyone had expected: the depreciation of the lira continues. In March, food was already 17 percent more expensive than a year earlier, and the lira continues to weaken against the euro and dollar.
Bitcoin as a lifeboat
It may be taken as a sign that Bitcoin has found one of its global economic functions when a rise in inflation is accompanied almost everywhere by a rise in interest in the cryptocurrency. Bitcoin is a lifeboat from demonetization. This is also the case in Turkey.
According to a Reuters analysis based on data from analyst Chainalysis, crypto trading volumes in Turkey had been rising rapidly in the spring. Between February and the end of March, 218 billion lira - or about $27 billion - had been traded, which is up dramatically from 7 trillion lira in the same period last year, it said.
Google Trends speaks a similar language, reporting a veritable explosion in searches for bitcoin in Turkey following Agbal's dismissal.
Just days before the ban, Royal Motors, a Turkish luxury car dealer, had announced it would accept cryptocurrency payments for Tesla models. Helping in this effort is blockchain startup Bitci, which had earned so well through its own coin, Bitcicoin, that it could become a sponsor of Formula One team McLaren. Commenting on the move, Royal Motors President A. Hilal Aysal said, "We should take the fastest way to integrate cryptocurrencies, the currencies of our time, and we have achieved this first in Turkey."
An April 13 report by the U.K.-based Guardian reported from Çorum, a major provincial city in the Black Sea district of northern Turkey. According to the owner of a teahouse, "Everyone we know in Çorum is investing in cryptocurrencies." The entrepreneur expects cryptocurrencies to replace the collapsing regular currencies.
He said that after others, especially older people and customers, initially ridiculed cryptocurrencies, interest is now growing. Snack bars and other stores wanted to know how to accept the digital coins.
With the ban, the government is now trying to prevent citizens from escaping the consequences of its failed monetary policy. It is a typical reaction for a government that comes under financial pressure and conceals its own wrong decisions with restrictions.
Is insolvency already looming?
Turkey is in a relatively comprehensive crisis. On the one hand, there is Corona, which has now also made a full impact in Turkey. The government is reacting with lockdowns that are repeatedly hitting bars and restaurants. But probably worse is the absence of tourists last year and presumably this year as well, who are usually a reliable and rich source of foreign currency - especially dollars and euros - with which Turkish companies can settle bills abroad.
On the other hand, President Recep Tayyep Erdogan has continued to isolate the country internationally; the most recent example is the unnecessary snub of the President of the EU Commission, Ursula von der Layen, at "Sofagate." In view of the increasing instability in the surrounding region, Turkey urgently needs allies. Not only do Syria and Iraq continue to be trouble spots, but Lebanon, already plagued by refugee flows, is currently collapsing under massive inflation after the explosion of a grain silo, while in northern Turkey, on the Black Sea, the situation between Russia and Ukraine is coming to a head.
Didn't find it so funny when she was assigned a seat on the sofa at the audience with President Erdogan: EU Commission President Ursula von der Leyen. In the wake of this crisis, unemployment spread massively. According to unofficial sources, more than 30 percent of able-bodied citizens are without a job. The problems are typical: There is a shortage of foreign currency, requiring the country to create more money to pay for supplies from abroad. The increased money supply increases inflation, which in turn makes goods from abroad more expensive. A vicious circle in which the obvious solution to a problem alleviates it in the short term, but only exacerbates it in the medium term.
Accordingly, Turkey's companies are finding it increasingly difficult to pay their foreign debts. This is because those who earn in lira and have debts in euros effectively have debts in a deflationary currency - interest and repayments are becoming increasingly expensive. According to Manager magazine, Turkey has foreign debt of $435 billion, of which one-third is owed by companies and private households and the rest by financial institutions, the central bank and the public sector.
Because of this situation, Thomas Gitzel, chief economist at Liechtenstein-based VP Bank, for example, warns that if the government does not consistently fight inflation with higher interest rates, the devaluation of the lira will put indebted companies in deep trouble. As soon as banks begin to collect on the loans, this could trigger a chain effect, at the end of which would be the default of the entire country. Rating agencies such as Standard & Poor's, Moody's and Fitch also share this impression when they rate Turkey as just one notch above high-risk.
The damage caused by inflation
The situation seems to be getting worse and worse. All those who like to preach that inflation is not a bad thing because people do not store their assets in fiat money anyway, but in precious metals, real estate and securities, should take a look at countries like Turkey, where inflation is actually hitting the citizens.
For example, Tagesschau reports that people are losing their jobs - 250,000 in February alone - and government assistance is barely enough to live on. A normal job that pays about 100 lira a day no longer pays enough to feed a family. Like other countries, Turkey has repeatedly closed restraurants and bars during several lockdowns. The economy did continue to grow, at a rate of 1.8 percent, which is much more than European economies, but also much less than the rate of inflation.
The Istanbul correspondent of the FAZ, Bülent Mumay, writes something similar. Many people are waiting for the evening to get hold of fresh fruit and vegetables at markets for cheaper prices. The consequences of inflation are the same everywhere. You can see them in Venezuela and Nigeria, but also in Europe and the United States:
Those who already have assets - be it gold bullion, stocks or bitcoins - benefit enormously and become much richer in perception (and in fact). On the other hand, those who do not put their money into assets, but use it to pay for their everyday lives, are becoming poorer: wages are not rising at the same pace as prices, which is why income is sufficient for less and less consumption. Building up assets is no longer an option - while the assets of the wealthy are already growing automatically on an almost daily basis.
Squaring the vicious circle
Another common consequence of inflation and the accompanying dilemma with foreign currency and foreign debt is that the government is increasingly authoritarian in its attempts to bring the situation under control - and thus only makes the situation worse, which becomes the reason for further restrictions. And so on. Another vicious cycle.
One could observe this dynamic well in Venezuela and Nigeria, where capital controls and fixed exchange rates have exacerbated the crisis. Turkey is still far from such conditions. But President Erdogan is governing in an increasingly authoritarian manner, which unfortunately places him within the global political consensus in these times. Bülent Mumay lists a few examples of this:
Banning proceedings were initiated against the HDP, the third-largest party in parliament and representative of the Kurds; HDP politician Ömer Faruk Gergerlioglu lost his deputy status - because of a tweet. More and more human rights activists are being arrested in dawn raids for allegedly planning actions - which is remarkable, since now not the act itself, but the mere thought of it is enough for arrest. It seems downright Orwellian when the poet Yılmaz Odabaşı is prosecuted for insulting Erdogan in a poem 34 years ago and a journalist is arrested for sharing a cartoon on Twitter.
The Bitcoin industry has also been the focus of the government's restrictive ambitions for some time. A week earlier, for example, authorities demanded stricter identity checks from trading platforms.