Thodex investors are victims of poor regulation

The Turkish crypto exchange Thodex, which ceased operations on Thursday after its chief executive officer fled to Albania, tells more about Turkish financial regulation than it does about cryptocurrencies.

About $2 billion is missing, according to reports from Bloomberg. However it has not been established that the owner of the exchange stole the money. It is not clear what has happened to the funds, which belong to investors on the exchange.

There is little the Turkish government can do about it. It has allowed Turks to invest in crypto without establishing the appropriate safeguards.

The trading platform is “unable” to continue operations with founder and CEO Faruk Fatih Özer out of the country, the company said in a written statement on Thursday.

While not the largest Turkish crypto exchange, the platform handled a substantial amount of transactions and held a large sum in custody. However, its closure has left the remaining assets of about 390,000 active users “irretrievable”, according to Oğuz Evren Kılıç, who represents a number of Thodex users and has filed a legal complaint on their behalf, the Bloomberg report said.

Thodex was unable to continue commercial operations after Özer failed to transfer his “shares to another investor”, the CEO said in a statement on the company’s website. He blamed the exchange’s financial woes on a “hacking incident” he said happened years ago.

There is, however, a strange and suspect chronology in the events leading up to the closure of the exchange and the flight of its owner.

On March 15, Thodex announced a promotional scheme to attract more investors. The exchange gave out 150 Doge coins, currently worth  about $40, to new users who signed up within the period. The company website claims to have paid this out to 4 million users, although the claim is difficult to substantiate.

The promotional drive was reportedly successful, and the exchange allegedly took in a considerable amount of investment right before it failed and its owner absconded.

On April 16, Turkey banned the use of cryptocurrencies for purchases of goods and services, according to a regulation published in the Official Gazette.

But there is no authority in Turkey responsible for regulating cryptocurrency activities, according to the Guden International law firm.

Turkey’s Banking Regulation and Supervision Agency (BDDK) put out a press release on Bitcoin in Nov. 2013, stipulating that the most utilised type of cryptocurrency didn’t fall under the criteria of electronic money as defined in Law no. 6493 on Payment Securities Settlement Systems, Payment Services, and Electronic Money Institutions, according to the firm, and as such, cannot be audited or administered.

“However there is no legislation specifically prohibiting cryptocurrency and/or cryptocurrency activities regardless of the fact that they are not administrable,” it said.

What this means is that, when you invest in cryptocurrencies in Turkey, you put up your money, and you take your chances.

However the scale of the scandal has required the Turkish government to take action.

Turkish prosecutors have launched an investigation of fraud and forming a criminal organisation for the exchange. The office of Istanbul’s chief public prosecutor said it was probing Thodex following complaints from users who could not access their assets. Television channel Habertürk said that a police cybercrimes unit searched the exchange’s Istanbul offices on Thursday.

While the police investigate, the government made righteous noises.

“The Turkish government should take action ‘as soon as possible’,” Cemil Ertem, senior economic adviser to President Recep Tayyip Erdoğan, told Bloomberg on Thursday. “Pyramid schemes are being established in this area. Turkey will undoubtedly carry out a regulation that’s in line with its economy but also by following global developments.”

 

There is, however, no evidence of cryptocurrency exchanges in Turkey running a “pyramid scheme”.

 

Özer hasn’t responded to multiple calls to his mobile phone. Bedirhan Oğuz Başıbüyük, the company’s lawyer, said he didn’t know where Özer was, but that he planned to return only after payments to all users have been made.

Demirören News Agency said Özer fled to Albania on Tuesday, publishing what it said was a photo of the CEO at the airport.

When Başıbüyük asked Özer why he went abroad, the response was that he would have been “either arrested or committed suicide” if he stayed, the attorney told Bloomberg.

“There was a decline in Thodex’s assets. When too many users demanded their money back, the company was unable to meet those,” the Thodex attorney said by phone, describing the situation as a “liquidity problem.”

“From today on, my sole aim is to repay my debt to you,” Özer said in his statement, addressing exchange users. “The day I repay all my debt, I will return to my country and give myself in to justice.”