Turkish Crypto Legislation

09 July 2024
Kerem Turunç
2197

Turkey’s first legislation governing crypto assets (the “Crypto Law”) entered into force on July 2, 2024. We present below a summary of the Crypto Law, which made significant amendments to the Turkish Capital Markets Law.

1. General Overview

The Crypto Law authorizes the Turkish Capital Markets Board (the “Board”) to regulate (a) crypto assets that accord rights specific to capital markets instruments and (b) the sale and distribution of crypto assets created by using distributed ledger technology (or similar technology) and whose value cannot be separated from such technology.

The Board’s primary authority is to regulate the sale and purchase, and distribution of such crypto assets on crypto platforms without subjecting them to general rules governing securities. The Board is also authorized to regulate crypto platforms themselves.

Accordingly, unlike the Markets in Crypto-Assets Regulation (MiCA), for example, the Crypto Law does not regulate all crypto assets or their underlying technology. That said, crypto assets that fall outside the scope of the Crypto Law may be subject to other legislation, and such crypto assets may be subject to the Crypto Law if they are traded on crypto platforms after their initial sale.

2. Issuances

The Crypto Law permits the issuance of capital markets instruments as crypto assets (i.e., tokenization). The Board has the authority to promulgate secondary legislation regarding such issuances.

Platforms will be required to adopt listing rules for the initial offering, distribution and trading of crypto assets that they admit. The Board has the authority to promulgate secondary legislation regarding such rules.

As a rule, platform customers will need to keep their crypto assets in their own wallets. However, if they do not wish to maintain their own wallets, authorized banks and other authorized institutions will be permitted to provide custody services. In such cases, customers’ cash must be deposited in banks.

3. Crypto Asset Service Providers

Under the Crypto Law, crypto asset service providers (CASPs) are defined as “platforms, custodians and other institutions providing services (e.g., initial offering, distribution) prescribed by the Board.

All CASPs must obtain Board approval to operate, and the scope of their operations will be limited to the approval granted by the Board.

The Board is required by the Crypto Law to promulgate secondary legislation relating to the operations of CASPs within six months of the effective date of the Crypto Law (i.e., by January 2, 2025). During that time, existing CASPs have to deliver one of the following two undertakings to the Board by August 2, 2024: (a) an undertaking that they will apply for a CASP license once relevant secondary legislation has been published or (b) an undertaking to start liquidation proceedings within three months and not to accept new customers during liquidation. Companies not operating as a CASP as of the effective date of the Crypto Law and want to start operating as such before relevant secondary legislation has been promulgated will be required to submit the former undertaking to the Board.

Strict financial and background rules will be applicable to direct and indirect shareholders, and directors of CASPs. Share transfers will be subject to prior approval by the Board.

IT systems of CASPs will need to meet the standards set by the Turkish Scientific and Technological Research Council (TÜBİTAK), a governmental agency, and be subject to independent audit.

Platforms (but not other CASPs) will be required to contribute 1% of their revenues (before interest earnings) for the previous year to the Board, and 1% to TÜBİTAK.

4. Penalties

Representatives of unauthorized CASPs will be subject to imprisonment for three to five years, as well as monetary fines. The definition of unauthorized CASPs include non-Turkish companies that (a) target Turkish residents (e.g., by opening an office in Turkey, creating a Turkish-language website, or undertaking publicity or advertising through firms in Turkey) or (b) provide crypto asset services prohibited by the Board to Turkish residents. Foreign CASPs must cease operations directed at Turkish residents within three months of the effective date of the Crypto Law (i.e., by October 2, 2024). Similarly, any crypto ATMs and similar machines must cease operations by October 2, 2024.

CASPs are liable, subject to certain limited exceptions, for losses suffered by customers due to breaches of their IT systems and actions of their personnel.

Furthermore, general liability provisions of the Turkish Capital Markets Law relating to violations of securities laws will normally apply to CASPs.

The Crypto Law sets forth severe penalties for the embezzlement of crypto assets (including, for example, their illegal transfer to third parties). Directors of, and potentially other persons associated with, CASPs found guilty of embezzlement will be subject to imprisonment for 8 to 14 years, as well as monetary penalties. Such persons will also be required to reimburse the losses of the CASP. The legislative history of the Crypto Law makes specific reference to recent scandals such as FTX, and indicates that the penalties are more severe than the penalties for other financial institutions because of the nature of crypto assets and the generally irreversible nature of crypto transactions.

5. Secondary Legislation

The Board is expected to promulgate a plethora of secondary legislation over the next several months, including, among other things, relating to licensing rules for CASPs; issuance, distribution, trading and custody of crypto assets; listing rules of platforms; customer agreements of CASPs; crypto asset management services; and advertising and publicity rules.

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The foregoing is a general overview of the relevant topics and does not constitute legal advice or opinion. Each situation must be examined on its own merits and the relevant legal structure constructed accordingly.

İltem Dokurlar ([email protected]), Naz Esen ([email protected]) and Baran Ezeli ([email protected]) would be happy to answer any questions you have about the above.

A Turkish summary of the Crypto Law is available here.