Turkey is about to enact its much-anticipated crypto law, but will this be enough to satisfy the sector's concerns and get the country off of the FATF's grey list?
E. Mümtaz Hacıpaşaoğlu & Alp Mete Şirin
The increasing importance of crypto assets globally has prompted Turkey to take action. The long-awaited "Crypto Assets Law" has finally been submitted to the Grand National Assembly of Turkey (“Parliament”), as an amendment to the Law No. 6362 on Capital Markets. This bill introduces significant regulations within the crypto ecosystem and represents a critical step towards Turkey's adaptation to the digital economy. The bill covers a wide range of regulations, from the classification of crypto assets to licensing requirements for exchanges and the taxation of revenues.
One of the most noteworthy requirements in the bill is for crypto asset service providers (“CASP” or “CASPs”) to obtain a license in order to operate. However, the details of the licensing process, such as the required capital amount and application fees, are not yet clearly defined. It is stated that these details will be clarified through secondary legislation, that is, additional regulations to be issued later.
What does this mean? For now, you don't need to apply immediately when these regulations become law. First, we need to wait for the additional rules that the government will specify. These rules will determine the conditions under which companies operating in the sector can obtain a license and how much this license will cost. This process may take some time, so there is no need to worry right away. However, it is beneficial to be prepared because the licensing conditions and costs will be significant factors that directly impact the future operations of companies.
Is the Adoption of the Bill Necessary?
It is worth remembering that the acceptance of this bill in its current form is not certain. Changes can be made during discussions in Parliament, the bill can be rejected, or it can be sent for judicial review to the Constitutional Court and annulled either partially or completely. In other words, this process is dynamic, and the results are not yet finalized. Therefore, we need more time to speak definitively about the final shape of the bill and the regulations it will bring.
An Important Move for International Compliance
One of the main reasons for introducing the law is to comply with the demands of international organizations. These regulations are especially crucial for meeting the criteria of international financial oversight bodies such as the Financial Action Task Force (“FATF”), the OECD’s working group that combats money laundering and the financing of terrorism. Turkey has been on the FATF’s list of Jurisdictions under Increased Monitoring (the so-called “grey list”), a situation that can significantly damage a country's financial reputation. However, will the adoption of the Crypto Assets Law Bill be sufficient for Turkey to exit the grey list? Turkey needs to implement necessary regulations in other areas of its financial system, enforce its already-existing laws effectively, and strengthen international cooperation in order for a removal from the grey list to materialize.
Licensing and Transition Process
The new bill mandates that CASP apply for a type of permit to operate. This is a widely adopted method in many countries worldwide, including the United States, Singapore, Japan, and the United Kingdom. According to the transition provisions in the bill, existing crypto asset service providers must apply for a permit within one month after the law comes into effect. Otherwise, they will have to cease their operations entirely within three months. The bill also imposes severe penalties for unauthorized activities; those who operate without a permit could face imprisonment for 3 to 5 years and administrative fines.
The transition process might seem stressful for existing service providers because complying with the new regulations will require considerable time and resources. Large-scale CASPs in the sector might be able to allocate resources for this transition. However, small and medium-sized CASPs will need to follow careful steps to succeed in this transition process.
Taxation
Firstly, the bill does not include a direct tax regulation for end users. This means that individuals are not subject to a specific tax obligation on the gains from their crypto asset trading activities.
However, the situation is slightly different for platforms. According to the new bill, 1% of the revenues of crypto asset service providers will be paid to the Capital Markets Board (SPK) and another 1% to the Scientific and Technological Research Council of Turkey (TÜBİTAK). This means that 2% of the platforms' revenues will be transferred to state institutions.
Another interesting question is whether the 2% cut from the platforms' revenue will be sufficient. Will this cut be enough to finance the activities of the regulatory bodies? Or could these rates be increased in the future? This will become clearer as the bill is implemented and its effects on the market are observed.
The Storage of Crypto Assets
The secure storage of crypto assets is among the most important concerns for investors. The new bill introduces significant regulations in this area as well. So, what do these regulations entail and what do they mean for users?
Firstly, one of the most crucial aspects of the bill is the principle that crypto assets should be stored in user wallets. This aims to ensure that users keep their assets under their own control and protect themselves from potential platform risks. However, the concept of crypto asset custody providers is also being introduced alongside individual wallets.
Crypto asset custody providers will be professional service providers where users can securely store their assets. These providers will use advanced technology and security measures to ensure the safety of the assets. By entrusting their assets to these providers, users can gain additional protection against potential cyberattacks or losses.
The bill also mandates that customers' cash funds must be kept in banks.
The Status of Foreign Exchanges
Since the proposal was published, one of the most frequently asked questions has been about the status of foreign exchanges. According to the proposal, if a service provider has a Turkish-language website, operates a business in Turkey, or conducts promotions in Turkey, it will be required to obtain a license. This does not mean that foreign exchanges are completely banned. Users will still be able to trade on foreign exchanges, but those wanting to operate in Turkey will need to localize their operations.
Which Types of Crypto Assets Are Defined in Turkey's Crypto Law?
The bill defines various types of crypto assets, but some definitions remain unclear. The status of crypto assets that do not meet regulatory requirements is still not fully established.
The Crypto Assets Bill, which will significantly impact institutions and organizations in Turkey that involve crypto assets in their business processes, was submitted to the parliament last week. The bill imposes restrictive and challenging conditions for crypto asset service providers (CASPs) while classifying and defining different types of crypto assets. However, the definitions of some types of crypto assets remain ambiguious. Specifically, the status of non-fungible tokens (NFTs) is uncertain, leading to questions for many platforms conducting business processes related to NFTs.
The bill classifies crypto assets as securities crypto assets, electronic money crypto assets, utility crypto assets, crypto assets developed using distributed ledger technology or similar technological infrastructure whose value cannot be separated from this technology, stable crypto assets, and non-stable crypto assets. Let's briefly discuss these definitions:
Securities Crypto Assets
For a token to be defined as a securities token, it must include various rights specific to securities and provide certain returns to its holders.
Electronic Money Crypto Assets
All crypto assets issued for use in electronic payments are defined under this category. It includes a broad definition that covers multiple types of crypto assets.
Crypto Assets Developed Using Distributed Ledger Technology or Similar Technological Infrastructure
This lengthy definition encompasses crypto assets that operate using blockchain or similar distributed ledger technologies. Many well-known cryptocurrencies such as Bitcoin, Ripple, and Ethereum fall into this category.
Stable and Non-Stable Crypto Assets
The bill adopts the globally accepted definition of stable crypto assets. Crypto assets that use various commodities, precious metals, or government currencies as reserves to maintain their value are defined as stable crypto assets, while those that do not are classified as non-stable crypto assets.
Utility Crypto Assets
These crypto assets provide access to a service or product and include proof of ownership similar to copyrights for items such as photos, videos, audio, or artworks. This definition includes utility tokens and raises the question of whether NFTs are also included in this category.
The Status of NFTs
The bill's justification states, "It is possible to group crypto assets that provide access to a service or product, as well as those that create ownership proof similar to copyrights for items such as photos, videos, audio, artworks, and similar other elements, as 'utility crypto assets.'" This implies that NFTs are also considered utility tokens.
However, Article 3(8) of the Bill specifies that "this law is limited to crypto assets that provide rights specific to capital market instruments, or that are created using distributed ledger technology or similar technological infrastructure, and whose value cannot be separated from this technology, and crypto assets traded on platforms. It is aimed to clarify that other types of crypto assets that may exist within the ecosystem are not covered by this law." This exclusion leads us to question whether NFTs fall outside the scope of the regulation. We believe that the relevant recital section for the article categorizes NFTs as utility crypto assets and does not exclude them. However, we anticipate that these ambiguities will be resolved over time.
Conclusion
Crypto assets, which have entered our lives with blockchain technology, have quickly gained significant importance in the financial system. While the world continues to rapidly develop regulations, Turkey's introduction of this bill to the Parliament marks a beneficial start for the ecosystem and end users. Is the bill perfect? No. Does it need to be perfect? Again, no. The law will develop alongside the ecosystem, and a starting point was necessary. When I read the bill, I see that at least the lawmakers have done their homework. We will all observe the effects of the bill on the ecosystem once it is approved and enacted.
References
- Onur Sarı, NFT’ler Açısından Mali Hakların Devri Sözleşmesi, Seçkin,1.Bası
- Fatih Bilgili/Fatih Cengil, “Blockchain ve Kripto Para Hukuku”, Dora, Güncellenmiş 2. Baskı, 2022, (“Bilgili/Cengil”)
- Vedat Güven & Erkin Şahinöz, Blokzincir, Kripto Paralar ve Bitcoin, İstanbul, (“Güven/Şahinöz”), 2021
- FATF, Jurisdictions under Increased Monitoring - 23 February 2024.
- Grand National Assembly of Turkey, Draft Amendment to the Law No. 6362 on Capital Markets, May 16, 2024.