Crypto Asset Regulations Came Into Force

The need for legal regulation regarding crypto assets has been discussed for a considerable time. With the amendments made by Law no. 7518 (the “Law”) introduced to the Law on Capital Markets no. 6362, published in the Official Gazette numbered 32590 dated July 2, 2024, a comprehensive legal basis for crypto assets has been established within the Turkish legal framework for the first time. The Law has authorized the Capital Markets Board (the “Board”) for drafting secondary regulations in various aspects. Accordingly, the Board has taken some principle decisions following the entry date of the Law, which has clarified and substantiated the scope of the legal framework outlined by the Law.

Scope of the Law

The Law defines technical terms related to crypto assets and specifies the procedures and principles that crypto asset service providers must follow, and specifies the sanctions to be imposed for violations of the obligations set under the Law.

Crypto Assets

According to the Law, crypto assets are defined as intangible assets that can be electronically created and stored with the use of distributed ledger technology or similar technology, and that can be distributed over digital networks while representing value or rights.

The crypto assets covered under the Law are essentially those that grant rights specific to capital market instruments, as well as crypto assets that are traded on platforms or have undergone initial sale or distribution. For instance, in the Board's principle decision numbered 2024/48, it was determined that the provisions of the Law would not apply to those involved in buying, selling, initial sale or distribution, exchange, transfer, and custody of NFTs and the crypto assets used solely for creating or acquiring various elements in virtual games. Aside from crypto assets that provide rights specific to capital market instrument, the Law also grants the Board the authority to establish principles regarding the sale or distribution of crypto assets created through the development of distributed ledger technology or similar technology, which cannot be separated from the value provided by this technology, without being subject to the provisions related to capital market instruments. Although the Board has not yet determined the listing requirements for these types of crypto assets on platforms, it is anticipated that these criteria will be determined in the future with the technical assistance of TÜBİTAK (The Scientific and Technological Research Council of Türkiye).

Crypto Asset Service Providers

According to the Law, crypto asset service providers are classified as follows:

   i. Platforms: The platforms are broadly defined to include entities that conduct one or more of the following activities: buying and selling crypto assets, initial sales or distributions, exchanges, transfers, custody required for these activities, and other specified operations. At this stage, it appears that both the Law and the Board’s principle decisions are primarily focused on platforms, as the majority of the entities currently operating in the crypto sector are platforms.

   ii. Organizations Providing Crypto Asset Custody Services: These are defined as entities responsible for storing and managing customers' crypto assets or the private keys that authorize transfers from wallets, as well as other custody operations to be designated by the Board. Custody services for crypto assets are treated as a separate category, and the principles and rules regarding these services are expected to be established through secondary regulations by the Board in the future.

   iii. Other Organizations Designated to Provide Services Related to Crypto Assets, Including Initial Sales or Distributions Based on the Law: Secondary regulations are anticipated to identify the organizations that fall under this category.

In this context, it has been observed that the broad nature of the definitions in the Law has led to some uncertainties in determining the scope of the Law. Although the current framework of the Law is believed to primarily target platforms, it is important to recognize that numerous other entities operating in the crypto market could also fall under the scope of the Law and the secondary regulations to be issued by the Board.

Obligation to Obtain an Operating License

The most fundamental obligation imposed by the Law on crypto asset service providers is the requirement to obtain an operating license from the Board in order to provide services. In its principle decision numbered 2024/38, the Board set the following criteria for the establishment of platforms to prevent potential negative impacts that organizations lacking some qualifications might cause in the sector:

• establishment as a joint-stock company in Türkiye,
• all shares required to be registered shares,
• shares required to be issued in exchange for cash,
• a minimum pre-paid capital of 50,000,000 Turkish Lira and the equity not being less than this amount,
• the articles of association of the relevant companies to comply with the provisions of the Law and relevant regulations (e.g., including the phrase "cryptocurrency trading platform" in the trade name to indicate the services offered; specifying that the business purpose is exclusively the buying and selling of cryptocurrencies; exclusively defining the subject matter of the business as the execution of one or more of the following activities: crypto asset trading, initial sale or distribution, exchange, transfer, and the custody transactions required for these activities; and ensuring that the board of directors consists of at least three members, etc.),
• founders, shareholders, and managers required to meet the conditions specified in the Law and regulations (e.g., founders not being convicted of crimes involving moral turpitude, crimes against national security, or crimes against the banking system or possessing the necessary financial capacity and the integrity and reputation required for the business, etc.), and

• partnership structure to be transparent and clear.

According to the Law, those engaged in cryptocurrency service provision at the time the Law came into effect had to apply to the Board for an operating license within one month from July 2, 2024. During this period, 80 entities applied to the Board for an operating license, and a list of these entities can be accessed on the Board's website under the "Active Providers List". As clearly stated on the Board's website, this list is still temporary, and its existence does not mean that the listed entities have been authorized under the relevant legislation. Therefore, the applications for operating licenses are still under review, and no entity has yet been announced as having obtained the operating license. Furthermore, the Board's website also includes a list of entities that have decided to cease operations and not apply for permission, listed as the "Liquidation Declaration List". Entities that applied for an operating license but had their applications withdrawn or were not processed are included in the "Withdrawn Applications List and the Unprocessed Applications List for Platforms".

Other Obligations and Prohibited Activities

Under the Board's Principle Decision No. 2024/48 along with the Law, certain prohibited activities and additional obligations that crypto asset service providers must comply with have been determined. Some of the significant obligations outlined in this framework include the following:

• First of all, accounts opened on behalf of clients must be explicitly defined as belonging to the relevant platform's clients and cannot be used for purposes other than those intended.
• It is mandated that client cash transfers must be conducted through banks or authorized institutions, with provisions stating that cash cannot be taken in person from clients, delivered to them, or held in any manner by the platform.
• Platforms are required to receive orders through their websites, mobile applications or registered phones, which they have notified to the Board; otherwise, it is prohibited to receive orders through instant messaging applications. It should be noted that, except for the media or methods deemed appropriate within this scope, it is prohibited to execute (i) transactions such as trading, initial sale or distribution, clearing, settlement, transfer, custody transactions required by them, or conversion of customers' crypto assets into cash or cash into crypto assets by operating in a structure similar to a foreign exchange office, or (ii) transactions on peer-to-peer digital marketplaces that enable the purchase, sale and exchange of crypto assets directly between their users, the performance of transactions one's own name but on behalf of another person as a regular occupation, commercial or professional activity. Otherwise, the relevant activities can be considered as an activity requiring permission and may be deemed unauthorized cryptocurrency service activity.
• It is stipulated that platforms may only conduct transactions to the extent of the crypto assets available in their wallets and are prohibited from disposing of clients' crypto assets for their own or others' benefit. Additionally, platforms are banned from lending or crediting crypto assets or from engaging in any transactions that would result in such outcomes.
• The organization of promotional campaigns that promise returns or warranty against losses, or that provide any benefits to individuals who attract clients or the clients they bring in, is also prohibited.
• Obligations have been established regarding how records of received orders must be maintained. For orders received via the website or mobile application, the date, time, and source of the order must be recorded, while orders taken by phone must have their voice recordings stored in an unalterable manner. A deadline of November 8, 2024, has been set for establishing the necessary infrastructure to maintain these records as specified.

Foreign-Based Platforms

The Law also contains regulations concerning foreign-based platforms. Accordingly, it is regulated that any activities conducted by foreign-based platforms targeting individuals residing in Türkiye or the provision of activities related to crypto assets that are prohibited under regulations set by the Board to individuals in Türkiye will also be considered unauthorized crypto asset service provision.

Foreign-based platforms will be considered as targeting individuals residing in Türkiye in case of any of the following: (i) having an enterprise (presence) in Türkiye, (ii) having a Turkish-language website, and (iii) making any promotional and marketing activities related to the crypto asset services offered either directly or through individuals or institutions based in Türkiye. It should be noted that particularly promotional and marketing activities may have a broad scope and could result in many foreign-based crypto asset service providers falling under the Law’s scope.

Furthermore, additional criteria for determining whether activities target residents in Türkiye may also be established by the Board, although no such determinations have been made yet.

If foreign platforms with activities targeting individuals residing in Türkiye have not applied for an operating license, they had to terminate their activities aimed at residents in Türkiye by October 2, 2024. Platforms that do not comply with this requirement may face sanctions.

It is debated that these specific provisions concerning platforms rather than all foreign-based crypto asset service providers may also apply to other crypto asset service providers in case of any dispute. Since, the sanctions are generally addressed in relation to unauthorized crypto asset service provision.

Sanctions

The Law also stipulates the penalties to be imposed due to violations of the obligations under the Law and the Board’s decisions:

• Accordingly, the authorities of real and legal persons which operate as crypto asset service providers without obtaining an operating license shall be punished with imprisonment for a term of three to five years and judicial fines. It should be noted that this is an offense that can be prosecuted ex officio. In practice, investigations and prosecutions are expected to be conducted following a notification from the Board.
• It is stipulated that the chairman, members of the board of directors, and other officials of a crypto asset service provider who embezzle funds, monetary instruments, securities, or other goods or crypto assets entrusted to them by virtue of their duties, or which they are responsible for safeguarding, storing, or supervising, shall be subject to imprisonment for a term of eight to fourteen years, in addition to a judicial fine. Furthermore, they shall be required to compensate the crypto asset service provider for any damages incurred as a result of their actions.
• It is regulated that the natural person partners of a crypto asset service provider whose operating license has been revoked and who legally or de facto held the management or control of the crypto asset service provider or its customers, to the crypto asset service provider or its customers by directly or indirectly using the resources of the service provider or its customers for their own or others' interests in a way that jeopardizes the safe operation of the crypto asset service provider will be considered as embezzlement. Accordingly, those who commit these acts will be sentenced to imprisonment from 12 years to 22 years and a judicial fine up to twenty thousand days; however, the amount of the judicial fine shall not be less than three times the amount of the damage incurred by the crypto asset service provider and its customers. Furthermore, the relevant persons may also be required to compensate the damages jointly and severally.
• Additionally, it is regulated that if it is determined that unauthorized capital market activities are carried out through the internet, the Board may decide to remove the content and/or block access to the relevant contents/platforms or other publications made through the internet.

The Board also has the authority to request the strengthening of the financial structures of crypto asset service providers, as well as to temporarily suspend their operations or revoke their operating licenses.

Conclusion and Evaluation

The Law provides a comprehensive framework for crypto assets and related services. While the broad scope of the Law may currently lead to uncertainties in practice, the Board has started to clarify many aspects through its principle decisions. It is anticipated that the Board will establish the conditions for the listing of crypto assets on platforms, clarify types of other activities by foreign-based platforms targeting individuals residing in Türkiye, finalize operating license applications and intensify oversight on unauthorized activities as the next steps. It will be crucial to closely monitor secondary regulations and announcements from the Board.

Authors:

• Begüm Yavuzdoğan Okumuş (begum.yavuzdogan@gun.av.tr)
• Yalçın Umut Talay (umut.talay@gun.av.tr)
• Göksu Ayçıl Altınok (aycil.altinok@gun.av.tr)