Republic of Turkey, where we live our lives and which we love a lot, settled between two continents not just literally but culturally as well. The year 2020 is different from any other calendar years in many ways. Not only is there a pandemic all around the globe, but there is a general consensus that “a new era” is coming, although nobody has made an exact definition of that “new era” so far.
Even there is ambiguity in “new era” term, something is clear: economic system existing in this world about to change. There are several outstanding technologies, which have promising future, will take important roles in this change. Blockchain and crypto-digital currency are just two of those technologies and they are becoming more mature and gaining more acceptance around the world.
In this article, we are to explain our thoughts on these two concepts and why are they important and necessity for Turkey. We believe that Turkey’s below given problems can properly be addressed by way of implementation of said technologies. Before going any further, we would like to define two terms (crypto-digital currency & blockchain) to be used in this article as follows:
In this article we refer to crypto currency as “no paper money”. Just it. We have no intention to dive into other discussions about what kind of crypto currency or digital currency to be used. What kind of money should the new cashless society use is different subject and out of this article’s context. Some authors argue that it must be completely different from “fiat money system” and must be asset-backed money whereas others may argue that there is nothing wrong to have crypto or digital version of national currencies. Our key argument here is to have a currency that is not made of paper and which can not be circulated without any registration on big data (or on big ledger). However we still believe that money in form of small banknotes (5 TL, 10 TL, 20 TL up to 50 TL) should stay in circulation.
In this article we refer to blockchain as a kind of big data or as a big ledger. As it is known, there are several types of Blockchain and which one better is out of this article’s context (at least for now). We believe this technology has a promising future and can be adapted by national states by way of making amendments according to their needs and priorities.
Let’s Enumerate the Problems Turkey Has for a Long Time and Explain in Detail How Those Technologies Can Help:
I) INFORMAL ECONOMY
As a terminology “informal economy” or “grey economy” is [the part of any economy that is neither taxed nor monitored by any form of government. Although the informal sector makes up a significant portion of the economies in developing countries, it is sometimes stigmatized as troublesome and unmanageable. However, the informal sector provides critical economic opportunities for the poor. (source: wikipedia) ]
1.1) Definition: Above-given definition is not suitable for Turkey since there are many small and medium sized enterprises which are registered but shadowing their real revenue by way of making their sales in cash and not declaring them into taxation system. In other words, they are taxed and monitored but not properly. Therefore any research paper which takes the above mentioned definition as reference will reach to wrong numbers about informal economy existing in Turkey. We believe the definition of “informal economy” must also include the revenue generated by cash trade which is partially declared into taxation system.
1.2) Informal Economy Numbers: According to Hurriyet newspaper (as of Jan. 2016) informal economy was equal to 28 % of Turkish economy. Said article also added that this percentage was the highest in OECD countries. it was also estimated that informal economy would be equal to 24% in 2023. These figures explicitly show that there is a concrete problem in Turkey’s economy. We can not say our country is successful with this fight against tax evasion. The sad part of this research is that we have no hope to decrease these figures even in 2023.
1.3) Detrimental Effects: As it is mentioned earlier, many developing countries have similar problems. However, we would like to clear one thing out. There isn’t informal economy just because they’re developing countries but they are still developing countries because there is informal economy. Here is a short list about detrimental effects of informal economy.
1.3.1) Unfair Competition: If some people pay their taxes in full while others just pay (lets say) half, then the cost of their businesses are very different. While a decent citizen declares his income fully, paying all required social security premiums, other may choose to do exact opposite. In such circumstances it is very hard for that decent citizen to compete against others. In other words, competition is distorted and unfairness becomes normal! This reality definitely makes that decent citizen to think again. If he is not owning a big institution which is under the radar of tax office, then he will eventually slide to other side.
1.3.2) Losses in Tax Revenue: As we all know, states collect taxes based on a ratio determined in advance. Consequently if declared amount of income is less than real, then the tax to be paid to the State will be less than real. But there is a problem: expenses of a State is never less than real! This is one of the reasons why “Tax Rate” is higher than it should be. Another question here is, who will be paying such high rates. The answer is simple:
- Big and organized institutions (after rendering some “tax avoidance”)
- Decent, ordinary citizens who work for their salary. (Most effected group in these circumstances)
- Imposing indirect taxes on people’s expenditures (such as high tax rate on fuels, electronics, Vat etc.)
1.3.3) Social impacts: In our opinion the worst impact of informal economy is the harms it gives to society. Human kind is pragmatic and nobody wants to be fooled. If there is a way to evade tax then it will be definitely tried. States lose their people’s trust in fair competition and justice in tax collection, also States lose their people’s belief in supporting their country. Should it be possible to collect all taxes according to real revenue, it is certain that the tax rates would be much lower. Relatively lover rates mean people will be less uncomfortable while paying their dues to State.
Last but not the least: informal economy most of the time enjoyed by people who do not have high level of education or academic background. Lesser the education he has, more will (and courage) to participate in grey economy all of which results in losing educated minds of Turkey to abroad.
1.4) Justification: It might be asserted that informal economy helps the poor to earn their lives because employers do not pay taxes or social security premiums so that they have enough money to employ people. This is not correct at all. In most of the cases such employers have more than sufficient money but they want to maximize their earnings. The other argument they have is: “social security premiums” and “income tax cuts” on “minimum wage” are very high. This is unfortunately true in Turkey. There are some politicians who propose to abandon such burden over “minimal wage” which we agree. Doing so will:
- help the poor to be registered for health care system in Turkey,
- help the poor to have a hope for his/her retirement days.
Any argument which oppose removing “income tax cuts” on minimum wage due to possible increase on State health budget is not completely correct. As of 2020, anyone not having a job in Turkey, can pay a small amount of fee which is called “GSS” in order to join public health care system. We believe our State must take all necessary measures to include as many citizens as possible into public health care system. What we are trying to say that informal economy can not be use as an excuse to employ the poor. Any employment in informal economy is not “an employment” technically but rather a voluntary slave system.
1.5) Recipe: Until recently it has not been possible to fully cover or audit all economic activities in a State. Even if you employ as many “fiscal officer” as you can, there will still be economic activities that can not be detected wholly. However, if there is a crypto or digital currency in use as mandatory which means there is no cash money other than small banknotes, also if there is big ledger than a simple AI (artificial intelligence) can do all the math by itself faster and better than hundreds/thousands of officers. Economic actors will have no choice but just declare their real income. This was a dream in the past, it is now possible and applicable in near future. First step of such system is commenced to be used in UK: it is said that there is “Connect System” and the tax administration of UK uses social network analysis and data mining that cross-references company and individual tax records to uncover fraudulent or undisclosed activity.
2.1) Definition: Actually there is a formula for corruption: according to American economist Robert Klitgaard, the factors encouraging corruption in society can be formulated as [C = M + D + (- A)] Which means: Corruption = monopoly + discretion + (non existence of) accountability.
The difference between “a group of people” and a “society” is that: there are rules in society by which everyone abide. Officers, bureaucrats, politicians are empowered to render many task on behalf of the society. Competition vs monopoly, equality vs discretion, transparency vs lack of accountability are main concerns in democratic countries. History proved that if there is no (or insufficient) mechanism to assure equality, transparency, and accountability in State level, people suffer under favouritism, corruption and unfairness.
In bureaucracy, paper is power. who can have a trade license, who can join public tender or who is qualified for that tender, require great sum of knowledge, examination and a golden heart. There has always been unlawful people, the point is how to prevent them doing illegal acts. Bribery is the biggest concern when subject comes to corruption. It does not only include money, any interest provided to officers or politicians in exchange for something is bribery. We hereby will mention just a fraction of corruption, how is it done and how can it be prevented by way of using crypto – digital currency and blockchain technology.
2.2) How is it done? There are more than one way for corrupted people to gain interest. Some of which are as follows:
2.2.1) Cash Money: takes 1.st place on the list of corruption instruments. In order to capture (lure) unlawful officers cash is used most of the times. It is not easy to track cash money, not easy to find out where it has come from and why it is paid for.
2.2.2) Tangible and Intangible Assets: If not cash money then it can be real estate, stocks and/or shares or any other form of interest that can be used to capture (lure) unlawful officers. Lets assume that there is an unlawful officer and his salary for years is known but when you look at his/her assets there is huge difference. How come?
2.3) Pillars of Corruption: Will you overwatch each and every officer? It was a really hard question to answer in the past. We use “it was” because it is not that hard nowadays. Before offering our suggestion and explaining how it is now possible, let’s determine the two main pillars of corruption:
2.3.1) Payment: successful luring of an unlawful officer requires payment. Any interest (in any form) provided to such officer is the main pillar of corruption. It might be cash, tangible or intangible assets as we explained above.
2.3.2) Reasons or Excuses for such unlawful acts: What are the reasons or excuses people choose to bribe or lure officers?, which circumstances make them do it?
- As Robert Klitgaard said, “discretion” is one of main reasons. Should there be no accountability, no transparency, no clear cut and fair regulations (ie Byzantine regulations) and as long as there is “red tape” issues: people will surely attempt to take advantage over competitors by way of manipulating discretion according to their interest.
- In bureaucracies, paper is power. Unscrupulous bureaucrats abuse to extract bribes (in the processing of permits, licenses or any other kind of interest) It is certain that beyond the grand corruption scandals, petty bureaucratic corruption remains widespread in many countries.
2.4) How will you prevent it happen? In order to prevent corruption, roads to corruption must be closed. We have experienced that human factor has always been soft spot (fragile) when it comes to distribute limited resources of a state. Even though there is so called “morality”, “belief” or any similar arguments exist, they can not prevent corruption wholly, due to the fact that human kind can easily justify any of his acts. Therefore we need more precise ways to deal with the subject. Here is a short list that should be taken into consideration:
2.4.1) Reducing discretion and cutting “red tape”: Transparency is the key for reducing discretion. As part of digital transformation, states are trying to improve both efficiency and transparency, through the expansion of “Digital Services” and “Online Government”. Even some of official documents can be downloaded via such official online systems and can be used on daily life which can be easily validated by way of its barkod numbers or similar technologies.
The ambition of digital government is to transform the analogue and paper-based bureaucratic system into a new one where the citizens interact with public services and public records. This one by itself will provide enough acceleration on paper works at state level, not only for a citizen but for investors as well. Some governments even push this idea further and put them into practice. it is known that Mexico has expanded “fiscal transparency portal“, which includes public contracts, infrastructure investments, and transfers to sub-national states.
2.4.2) Cashless Society: We said that a new era coming at the beginning of this article. We believe cashless society can facilitate a promising future for any State including Turkey. Together with big ledger, crypto-digital currency can overwatch whole economic activities. It is for sure that actors of informal economy and parties to bribery will suffer a lot. As we mentioned earlier, we have no intention to dive into discussions about which crypto-digital currency should be used. It can be based on limited resources such as silver and gold or every State can prefer to have its own digital currency. It is certain that “national states” will strongly object to corporate currencies (i.e. Facebook’s Libra).
In 2019, the French Minister of Finance, addressed similar concerns for a private, global currency and stated that France would reject the development of Libra on European soil. Major partners such as Visa, Mastercard, and PayPal have pulled out of the project.
Which crypto currency is to be used by a national states must be decided by that national state. We don’t think corporate currencies will have a chance to be used at state level due to the fact that national states will take “corporate currencies” as a “great treat” to their existence. Thats why some states already commenced to test their own crypto currencies:
- China, who banned the use of Bitcoins in 2017, has been testing his eYuan with serious intention to fully adapt in near future. Even though it is asserted that e-Yuan will help government to monitor financial flows and prevent money laundering and tax evasion, we believe there is more than that. Without a national crypto-digital currency no state will have a chance to be world dominator in coming new era.
As second example: Sweden has been investigating a state-backed digital currency since 2017. In 2020, a “Pilot Project” aimed at finding technical solutions that would back a Swedish sovereign crypto currency. It is also a well known fact that Sweden is a country where cash money is used rarely.
Going back to our topic: Cashless society is approaching and we believe if there is no cash money circulated in society, bribery will collapse as long as States have ability to cross-referance records. However, it is sure that this will take some time for states to fully adept such system.
2.4.3) Big Ledger or Big Data: We use blockchain, distributed ledger technology (DLT) and even big data interchangeable in this article. There is no universal definition for blockchain. Altough we know that DLT has a definition (which we give below)
DLT is a “multi-party consensus system that enables multiple distrusting entities to reach agreement over the ordering of transactions in an adversarial environment without relying on a central trusted party” Source: “Blockchain as an anti-corruption tool”, U4 Anti-Corruption Resource Centre, Issue 2020-7
we use it interchangeable because it is not certain for now that which country will choose which technology. We believe each state will adopt the technology according to their needs and priorities. Going back to how these technologies help preventing corruption: We believe that should there be a big data or a big ledger where State can cross-reference income vs. assets corruption will surely collapse.
III) INEFFICIENT USAGE OF RESOURCES
For many countries this topic might be the last excuse for adapting blockchain. However in Turkey we are popular with our inefficient usage of everything “human resources”, “education”, “state resources”, “plaining for development”, “infrastructure investments”, “scales of investments”, “return rates of said investments” and their “burden on state treasury”.
Turkey is blessed with many things including fertile lands, abundance of drinkable waters and climate. The problem is that we have not yet developed a system to efficiently use those resources. Goods at farm is (lets say) X TL but when it is brought to consumers’ table its price becomes 5X TL. Not just because of there are unnecessary intermediaries but also farmers are not well informed when to plant which product. Farmers by themselves can not predict (or read) the demand in a market. Any state including Turkey should have a big data so that you can plan what you need and how much you need, how much will it cost, and if necessary how much public fund should be transferred to farmers. This notion is also applicable to all public investments.
IV) TURKEY’S TARGETS FOR 2023
In September 2019, Turkish Ministry of Industry and Technology has published a strategy paper called “2023 Industry & Technology Strategy” where the Ministry declares its aims for 2023. When we look at the paper we are happy to see emphasis on technologies such as cyber-security, cloud storage, national blockchain, internet of things and open data (page 76-80). You can download the paper from here → 2023 Strateji Belgesi (in Turkish) ←
On page 80, national blockchain has its own section under article 22 (it is short though). Ministry explains how blockchain can be used and gives examples from other countries (including South Korea and USA). Ministry declares that they:
- will promote national blockchain networks and infrastructure,
- will support application development which will work on national blockchain, giving priority to “land registry records” “customs” and “academic certificates”
- will provide testing environment for pilot projects such as “supply chain” “banking” “execution proceedings”
Ministry also mentions about “regulatory sandbox” which will be used to test and audit blockchain applications compliance with the legislation in force. Even tough these are not sufficient, it is nice to see that Turkey is not completely out of the game.
Blockchain and Crypto-currencies promise a brighter future for any State that can properly handle required transformation. We believe these technologies will facilitate States to overcome informal economy, corruption and inefficient usage of limited resources. However, there are some prerequisites particularly for blockchain to be successfully implemented such as:
- Digital infrastructure, related legislation, and digital literacy should be in place before blockchain is put into force particularly in developing countries.
- Records need to be digital, which in many cases entails a cumbersome process to digitise paper documents.
- The success and failure of blockchain-based projects depend on the surrounding infrastructure and awareness of people and politicians rather than on the technology itself.
Last but not the least, we are happy to have a digital transformation office at the level of Presidency of Turkey. We believe Turkey should initiate all testing environment as soon as possible which will include but not limited to “pilot projects”, “regulatory sandbox”, “app development workshops” and education for “digital literacy”.
Attorney at Law