Türkiye enacts long-awaited regulations on cryptoassets

The draft regulations for cryptoassets, submitted to the Presidency of the Grand National Assembly of Türkiye in May, have now entered into force through their publication in the Official Gazette on 2 July 2024 (Law Amendment).

The Law Amendment generally governs crypto activities and cryptoasset service providers (Service Providers) by introducing licensing, compliance, and transaction requirements. Significantly, these regulations also stipulate a transition period during which cryptoasset service providers must fulfil specific declaration obligations within one month of the regulations coming into force.

The Law Amendment has been incorporated into the Capital Markets Law No. 6362 (Law), specifying that provisions of the Law that does not explicitly refer to Service Providers do not apply to them. According to the explanatory memorandum accompanying the  draft version of the Law Amendment, the regulations emphasize an approach that avoids hindering the development of blockchain technology and aims to regulate cryptoasset exchange activities before the platforms.

Key provisions of the Law Amendment

The Law Amendment details the regulations that cover the operations and liabilities of Service Providers, including a licensing requirement, the cryptoasset-related activities considered within the scope of the Law, the transition period for existing Service Providers to comply with the Law Amendment's requirements, and the sanctions to be imposed in cases of noncompliance.

Classification of cryptoassets and applicability of the Capital Markets Law

The explanatory memorandum accompanying the draft version of the Law Amendment acknowledges various types of cryptoassets and classifies them as follows:

1. Security cryptoassets: containing rights exclusive to securities;
2. Electronic money cryptoassets: designed for electronic payments;
3. Utility cryptoassets: defined as cryptoassets providing access to a service or product, and also include NFTs, as it is stated that utility cryptoassets include cryptoassets that constitute evidence of ownership similar to copyright in respect of photographs, videos, audio, works of art and other similar items;
4. Cryptoassets that develop distributed ledger technology or similar technological infrastructure and whose value cannot be separated from that technology: recognised as primary cryptoassets, such as Bitcoin and Ethereum.

Apart from the above classification, cryptoassets can also be classified as stable or unstable, depending on whether there is an asset behind the value of a cryptoasset.

When determining the law applicable to a cryptoasset, it is necessary to evaluate the benefits or rights that the cryptoasset will provide to its purchaser. Using cryptoassets to provide rights that can be granted by capital market instruments, such as offering a cryptoasset in exchange for shareholder rights, subjects that cryptoasset to the Law.

Regardless of their classification, the Law applies to any cryptoasset traded on an exchange platform and regulating these activities falls within the scope of the authorities of the Capital Markets Board (CMB).    

The Law Amendment authorises the CMB to determine principles for (i) the issuance of capital markets instruments in the form of cryptoassets; and (ii) the sale and distribution of cryptoassets specified under item (d) above, without applying the provisions of the Law regarding capital markets instruments.

The Law do not apply to the types of cryptoassets not listed above. Other governmental institutions, such as the Central Bank of the Republic of Türkiye and the Ministry of Trade, will be able to regulate these cryptoassets, particularly electronic money and utility tokens.

Requirements for Service Providers

Licensing and membership

• The Law Amendment requires Service Providers to obtain a licence from the CMB in order to operate. Service Providers include (i) cryptoasset trading platforms (Platforms), (ii) cryptoasset custody services, and (iii) other entities providing services related to cryptoassets, which will be further specified by future regulations based on the Law Amendment.
• Furthermore, Service Providers must apply to the Turkish Capital Markets Association to become members. The CMB will cease the activities of any Service Providers that fail to fulfil this membership obligation.

Compliance and governance

• The Law Amendment establishes principles that the shareholders, directors, representatives of the Service Providers must comply with and stipulates that any share transfers within Service Provider entities must receive permission from the CMB to be valid.  
• If shareholders of the Service Providers, who possess certain characteristics determined by the Law Amendment, such as holding more than 10% of the shares of a Service Provider entity, no longer comply with the requirements set forth for shareholders under the Law Amendment, they must transfer their shares within six months to persons who fulfil these requirements. Until the transfer occurs, the CMB will determine how and by whom the voting rights of these shares will be exercised.
• The CMB is authorised to determine additional principles that the Service Providers must follow, including principles regarding share capitals, employees, share transfers, information systems, and technological infrastructures. The Scientific and Technological Research Council of Turkey (TUBITAK) will set the criteria for information systems and technological infrastructures that Service Providers must adhere to, and compliance with these criteria will be necessary for the CMB to grant licences to Service Providers.

Financial obligations

• Platforms must pay an annual fee of 1% of their total income, excluding interest income, to both the CMB and TUBITAK (each at a rate of 1%), resulting in a total fee of 2%.

Regulations for foreign platforms

The Law Amendment underlines that engaging in activities directed at residents in Türkiye by Platforms based abroad is considered an unauthorised cryptoasset service provision. Establishing a website in the Turkish language and conducting promotional and marketing activities related to the services for residents in Türkiye are considered activities directed at residents in Türkiye.

Platforms based abroad must terminate their activities directed at residents in Türkiye within three months following the effective date of the Law Amendment. These Platforms must obtain a licence from the CMB to continue their services to Turkish residents.  

Transaction regulations and client protection

According to the Law Amendment, the CMB is authorised to determine the procedures and principles for trading, initial offering or distribution, exchange, transfer and custody of cryptoassets on the Platforms. Regarding agreements between the Service Providers and clients, which must be in written form, the Law Amendment stipulates that any contractual terms removing or limiting the liability of the Service Providers to their clients are invalid. The CMB will have the authority to determine the organisation, scope, amendments, fees and expenses, expiry and termination of agreements between the Service Providers and their clients, as well as the minimum requirements that must be included in these agreements.

Strikingly, the Law Amendment reserves the provisions of the currency control laws for all types of transactions made with cryptoassets. It is currently unclear how this regulation will influence practice.

The Law Amendment also provides regulations related to the storage and recording of clients’ wallets and assets, measures that must be taken for safe transactions, and prohibits attachment, pledge, or interim measures over clients’ assets related to the debts of the Service Providers. Additionally, it states that the CMB will issue regulations regarding investment advisory and portfolio management for cryptoassets.

Measures and sanctions for unauthorised activities

• The provisions of the Law regulating inspections to monitor compliance with capital markets legislation applies to Service Providers.
• Financial audits and independent audits of information systems of Service Providers will be carried out by independent audit institutions. The CMB, in cooperation with TUBITAK or other public institutions, may establish additional principles regarding information systems audits.
• Individuals and individual representatives of entities who conduct unauthorised cryptoasset service activities are subject to imprisonment for three to five years and a judicial fine ranging between TRY 500,000 to TRY 5 million.
• If a Service Provider fails to meet their transfer obligations or if their financial structure weakens, the CMB is authorised to take various measures, up to and including the withdrawal of the licences of the Service Provider.
• In response to certain unauthorised activities on the Internet, the CMB is authorised to decide to block access to the offending site or to remove the content.
• The provisions of the Law regulating measures to be taken by the CMB, as well as imprisonment and monetary fines to be imposed, in the event of performing unlawful activities, providing unauthorised activities or making unauthorised announcements or advertisements related to these activities, applies to Service Providers.
• The Law Amendment specifies that Service Providers and their personnel are liable for damages resulting from unlawful activities and failure to fulfil payment or deliver cryptoassets, detailing the extent of their liability.
• The Law Amendment regulates embezzlement committed by board members, personnel, and individual shareholders of the Service Providers, providing details and consequences for committing this offence.

Transition period for existing Service Providers

Service Providers currently operating must declare to the CMB within one month from the effective date of the Law Amendment, which is 2 July 2024, that either:

• They undertake to apply to the CMB to obtain a licence by fulfilling the requirements to be determined by the secondary legislation of the Law Amendment; or
• They will take a liquidation resolution within three months, ensuring that no losses will be incurred by their clients and will not accept new clients during the liquidation period.

For operations commencing after 2 July 2024, a declaration must be submitted to the CMB stating that the requirements to be determined by the secondary legislation of the Law Amendment will be met and an application will be made to obtain a licence.

The CMB published the declaration documentation on its official website on 2 July 2024. You may access the relevant documentation via this link.

Applications made to the CMB will be announced on the website of the CMB.

Upon the publication of the secondary regulations of the Law Amendment, the CMB may set a deadline for the completion of the authorisation procedures of the applicant entities and may request the entities that fail to obtain an authorisation certificate within this period to terminate their activities. The Law Amendment grants the CMB the power to extend the deadlines.

In the event of failing to fulfil declaration obligations and apply to the CMB, sanctions set forth for unauthorised activities, as detailed above, may be imposed.

Conclusion

The enactment of the regulations marks a critical step in establishing a comprehensive legal framework for cryptoassets and cryptoasset service providers. In addition, further insight is forthcoming as the Law Amendment designates the CMB to address unresolved issues, including licensing and compliance requirements and transaction regulations, which are set to be detailed within six months through secondary regulations.

For more information on cryptoasset regulations and their application in Türkiye, contact your CMS client partner or CMS experts: [email protected] and [email protected]