Turkey Enters a Transformative Phase in Crypto Asset Regulation

A New Era for Crypto Asset Regulation in Turkey

In an era where digital innovation is transforming financial landscapes at breakneck speed, Turkey has taken a bold step forward with the introduction of Law No. 7518, which amends the Capital Markets Law to encompass crypto assets. This groundbreaking legislation, effective as of July 2, 2024, not only redefines the regulatory framework for crypto assets but also positions Turkey as a pivotal player in the global cryptocurrency market. This law seeks to eliminate legal uncertainties and create strong governance frameworks, with the goal of promoting a secure, transparent, and dynamic environment for both investors and service providers in the rapidly growing digital asset sector.

Law No. 7518 was accepted by the General Assembly of the Grand National Assembly of Turkey on June 26, 2024, and published in the Official Gazette on July 2, 2024, marking its entry into force. This article explores the key components of the law, including its implications for crypto asset service providers (CASPs), the regulatory requirements they must meet, and the broader impact on Turkey’s financial landscape.

The introduction of Law No. 7518 represents a significant development in the regulatory landscape for cryptocurrencies in Turkey. It amends the existing Capital Markets Law No. 6362, originally enacted on December 6, 2012, to incorporate specific provisions for crypto assets. This integration reflects the increasing recognition of digital currencies and the necessity for a formal regulatory framework to govern their use.

The law not only defines crypto assets but also delineates the scope of activities related to their buying, selling, custody, and transfer. By establishing clear guidelines, Turkey aims to enhance investor confidence and facilitate the growth of a responsible crypto market.

A central aspect of Law No. 7518 is the introduction of new definitions related to crypto assets. Among these, "Crypto Asset" refers to intangible assets that can be created and stored electronically using distributed ledger technology (DLT) or similar technologies. They represent value or rights and are distributed over digital networks. The law also defines a "Crypto Asset Service Provider (CASP)" as an institution that provides services related to crypto assets, including custody services, trading platforms, and the initial sale or distribution of crypto assets. Additionally, a "Wallet" is defined as software or hardware systems that enable the transfer and storage of crypto assets and their associated private and public keys, either online or offline.

These definitions align with international standards and share similarities with the European Union's "Markets in Crypto-Assets" (MiCA) regulation, ensuring coherence in the regulatory landscape.

Regulatory Requirements for CASPs

Under the new law, CASPs are required to obtain permission from the Capital Markets Board (CMB) before commencing operations in Turkey. This licensing process is critical for establishing a framework that ensures the integrity and security of the crypto market. The general obligations imposed on CASPs include implementing necessary arrangements for the secure management of their systems, establishing internal control units and systems, and complying with the technological infrastructure criteria established by the Scientific and Technological Research Council of Turkey to obtain operational permits.

These requirements are designed to mitigate risks associated with cyber threats and ensure that service providers operate within a secure framework.

Shareholder and Board Member Qualifications

Law No. 7518 sets stringent criteria for the shareholders and board members of CASPs. Among these requirements, shareholders must possess adequate financial resources to ensure the stability of the CASP, demonstrating financial strength. Additionally, individuals must demonstrate the integrity and reputation necessary for their roles, which includes having no history of serious criminal convictions, particularly those related to financial crimes or crimes against the state.

These qualifications are intended to create a reliable management structure that upholds the integrity of the financial system and protects investor interests.

Capital Market Crimes and Sanctions

The law introduces specific provisions related to capital market crimes, particularly concerning unauthorized activities and embezzlement. Engaging in crypto asset services without the necessary authorization will result in severe penalties, including imprisonment for three to five years and judicial fines ranging from five thousand to ten thousand days. Moreover, board members and employees of CASPs found guilty of embezzlement will face imprisonment for eight to fourteen years, along with substantial judicial fines. They will also be liable for compensating the service provider for any damages incurred.

By instituting these regulations, Turkey aims to deter financial misconduct and foster a secure investment environment.

Regulations for Foreign Crypto Exchanges

Foreign centralized crypto exchanges that direct their services towards residents in Turkey must cease their operations by October 2, 2024. After this deadline, these entities will be subject to criminal proceedings if they continue to operate without authorization. To comply with Turkish law, foreign platforms are required to establish a local entity, obtain operating permits from the CMB, and promote their services through a Turkish website. Failure to adhere to these stipulations will classify their activities as unauthorized.

This provision aims to regulate the operations of foreign entities and protect domestic investors from potential risks associated with unregulated platforms.

Authority and Responsibilities of the CMB

The CMB has been granted extensive powers to regulate and supervise CASPs, ensuring compliance with the new law. Key responsibilities include establishing and enforcing secondary regulations that address issues not explicitly covered by the law and evaluating the organizational structures, capital adequacy, and technological infrastructure of CASPs seeking operating permits. This regulatory oversight is critical for maintaining market integrity and protecting investors, ensuring that CASPs adhere to established standards and practices.

Custody, Transfer, and Customer Relations

Law No. 7518 emphasizes the secure custody and transfer of crypto assets. The CMB will create comprehensive regulations that govern the management and protection of customer assets, as well as procedures for buying, selling, and transferring crypto assets. Standards for customer contracts will also be established to ensure that rights and obligations are clearly defined.

These regulations aim to enhance customer trust and establish clear guidelines for CASPs in their interactions with clients, fostering a more secure and transparent marketplace.

TUBITAK's Role in the Crypto Ecosystem

TUBITAK plays a vital role in the implementation of Law No. 7518. Its responsibilities include auditing the compliance of CASPs with technological and security standards and determining technical criteria for license applications while preparing technical reports. Furthermore, platforms will be required to allocate 1% of their annual revenue (excluding interest) to the CMB and TUBITAK, which will be used to promote blockchain technology and finance-related projects in Turkey.

This involvement of TUBITAK underscores the government's commitment to fostering technological innovation in the crypto space.

Transition Provisions for Existing Entities

The law provides specific transition provisions for existing CASPs, foreign entities, and those operating ATMs for crypto asset transactions. Current operators must apply to the CMB within one month of the law's effective date to declare their intent to comply with the new regulations. For liquidating entities, they must inform the CMB of their liquidation plans while ensuring customer rights are not compromised.

Moreover, foreign service providers must cease operations aimed at Turkish residents within three months, with penalties for non-compliance. These transition provisions ensure a structured adaptation to the new regulatory environment.

Recent Developments

Turkey's removal from the Financial Action Task Force (FATF) grey list on June 28, 2024, is a significant milestone that coincided with the passage of Law No. 7518. This decision was driven by Turkey’s efforts to address compliance issues related to money laundering and terrorist financing, specifically in the realm of virtual assets. The FATF acknowledged Turkey's progress in meeting 39 out of 40 criteria, with the only outstanding requirement related to the regulation of virtual assets.

With the implementation of Law No. 7518, Turkey is expected to achieve full compliance, enhancing its standing in the international financial community and demonstrating its commitment to responsible regulation of digital assets.

Conclusion

Law No. 7518 is a significant step forward in the regulation and supervision of the crypto asset market in Turkey. By providing a clear legal framework, the law clarifies the definition of crypto assets, establishes rules for the activities of service providers, and introduces measures to protect investors. The regulatory oversight by the CMB, coupled with stringent requirements for CASPs, aims to create a safer and more transparent environment in the market.

As Turkey continues to navigate the complexities of the global cryptocurrency landscape, the successful implementation of secondary regulations will be crucial in determining the final shape of the crypto asset market. The commitment to fostering innovation while ensuring security and compliance reflects Turkey’s ambition to be a leader in the evolving digital economy.

This legislation not only positions Turkey as a progressive player in the crypto market but also sets a precedent for other nations seeking to regulate digital assets effectively. With these comprehensive regulations in place, Turkey is poised for a secure and prosperous future in the realm of cryptocurrencies.