Draft Crypto Law Ready To Be Enacted

Recent Developments

In recent months, the Grand National Assembly of Türkiye ("TBMM") has brought to its agenda the long-discussed draft bill on crypto assets ("January Draft Bill"), which envisaged the introduction of regulations on crypto assets. Last week, the January Draft Bill was finalized ("Final Draft Bill") to be submitted to the General Assembly of the TBMM. Please refer to our previous alert on the January Draft Bill here.

What Does the Final Draft Bill Offer?

The January Draft Bill had defined the concepts of crypto asset, crypto asset trading platform ("Platform"), crypto asset custody service and crypto asset service providers ("Service Providers"). The Final Draft Bill retains these definitions from the previous January Draft Bill.

In addition, the procedures and principles applicable to the Platforms and institutions providing custody services, the rules regarding their supervision and the sanctions to be imposed in case of noncompliance with the legal regime are among the rules introduced by the January Draft Bill and maintained in the Final Draft Bill, although with some important changes.

While the Capital Markets Board ("CMB") will have the authority to regulate crypto assets that provide rights specific to capital market instruments, the duties and authorities of other governmental institutions arising from the legislation regarding crypto assets will be reserved. This means that the Central Bank of the Republic of Türkiye will be able to regulate crypto assets accepted as electronic money within the scope of payment services and electronic money legislation, and the Ministry of Trade will be able to regulate crypto assets that aim to access or represent a product or service offered.

Not All Crypto Assets Will Be Subject to the Law

According to the Final Draft Bill, crypto assets other than those that provide rights specific to capital market instruments and those that will be traded or will be offered or distributed by the Platforms under their own custody will not be subject to the provisions of the Law. Furthermore, the Service Providers are not subject to the provisions of the Law, other than those specifically referred to.

Capital Markets Instruments as Crypto Assets

Like the January Draft Bill, the Final Draft Bill provides that the CMB may authorize the issuance of capital markets instruments in the form of crypto assets. In this case, capital market instruments issued as crypto assets will be dematerialized not at the Central Registry Agency, but in the electronic environments offered by the Service Providers where they are created and stored.

Crypto Assets and Turkish Foreign Exchange Legislation

The Final Draft Bill brings a controversial provision on the status of crypto assets vis-à-vis Turkish currency control laws. According to the Final Draft Bill, the provisions of the currency control laws are reserved regarding all types of transactions made with crypto assets. Currently, crypto assets are not considered foreign currency according the currency control laws. It remains uncertain whether Turkish currency control laws, particularly the Decree No. 32 on the Protection of the Value of the Turkish Currency, will be drastically amended to include crypto assets. There was no such provision in the January Draft Bill.

Principles Governing Platforms, Custody Services and Service Providers

• One of the most important provisions of the Final Draft Bill, which is different from the January Draft Bill, is the authority of the CMB to determine the principles for the sale and distribution of crypto assets that meet certain conditions, without being subject to the provisions of Capital Markets Law No. 6362 ("Law") on capital market instruments. These conditions are:
  • The crypto asset to be sold and distributed must develop distributed ledger technology or a similar technological infrastructure.
  • The value of the crypto asset in question must be inseparable from the technology it develops.

The CMB will have the authority to request technical reports from the Scientific and Technological Research Council of Türkiye ("TÜBİTAK") and other public institutions and organizations when determining the crypto assets to be subject to these principles.

In addition, persons who sign all types of information documents regarding the sale or distribution of these crypto assets will be jointly and severally liable for any damages arising from false, misleading or incomplete information contained in these documents.

• As in the January Draft Bill, under the Final Draft Bill, the Service Providers will be subject to a license to be issued by the CMB for their establishment and operation, and the CMB will have the authority to make additional determinations regarding the establishment, operations, shareholders, capital obligations, information systems and technological infrastructure, share transfers and other similar matters of the Service Providers.
• The Final Draft Bill also sets out the requirements for the shareholders, directors, representatives of the Service Providers. Likewise, changes in the capital structure of the Service Providers may require the authorization of the CMB in certain circumstances.
• The Final Draft Bill grants to the CMB the authority to determine the procedures and principles regarding the trading, initial offering or distribution, exchange, transfer and custody of the crypto assets on the Platforms.
• The Platforms will pay to each of the CMB and TÜBİTAK a fee at a rate of 1% of their total yearly income, excluding interest income. The January Draft Bill stipulated that this fee would be paid only to the CMB and would be determined by the CMB at a rate not exceeding 10% of the total annual income of the Platforms.
• Records regarding the wallets where clients' crypto asset transfers are made and bank accounts where cash transfers are made will be kept in a safe, accessible and traceable manner by the Service Providers.
• The Final Draft Bill stipulates that the crypto assets belonging to the Platforms' clients will be stored in the clients' own wallets, but retains the January Draft Bill's rule that crypto assets and clients' cash that clients prefer not to store in their own wallets will be stored by Turkish banks authorized by the CMB and deemed appropriate by the Banking Regulatory and Supervisory Authority or other institutions authorized by the CMB.
• As in the January Draft Bill, clients' crypto assets and cash will be segregated from the relevant Service Provider's assets. Assets of the clients will not be subject to any attachment, pledge or interim measure in connection with the debts of the Service Providers or be incorporated in the bankruptcy estate of the Service Providers.
• Crypto asset trading contracts between the Service Providers and their clients must be concluded in writing, by way of a distant contract, or in any other manner the CMB deems may replace the written form requirement and that is realized through an information or electronic communication device and allows the client's identity to be verified. The applicable principles and procedures will be determined by the CMB.
• One of the most important provisions of the Final Draft Bill that was not included in the January Draft Bill is the invalidity of the contractual provisions in contracts between the Service Providers and their clients that remove the Service Providers' liability to their clients. In addition, Platforms are required to establish effective internal mechanisms for client complaints.
• Provisions on market abuse will be applied by analogy for the transactions carried out on the Platforms.
• The Final Draft Bill retains the broad liability regime introduced by the January Draft Bill, which aims to protect investors. Accordingly, the Service Providers will be primarily liable for damages caused by their unlawful activities, default on delivery obligations, due to cyberattacks, technical failures, operational errors or misconduct by the Service Providers' personnel. Where the relevant Service Provider fails to indemnify such damages, the relevant Service Provider's personnel will be held liable to the extent that such damages are attributable to them. Furthermore, natural persons deemed liable for such damages can be declared bankrupt upon the request of the CMB. However, according to the Final Draft Bill, crypto assets cannot benefit from the Law's investor compensation provisions.
• Special regulations will be established by the CMB regarding investment advisory and portfolio management for crypto assets.

Measures and Sanctions for Unlawful Transactions and Unauthorized Activities

• In the audit of the Service Providers, the personnel of other public institutions and organizations may be assigned upon the request of the CMB to carry out audit activities together with CMB personnel or to provide technical support to those conducting audit activities.
• The Final Draft Bill also sets out the principles regarding the independent audit of the Service Providers. Accordingly, financial audit and independent audit of information systems of the Service Providers will be conducted by independent audit institutions. Additional procedures and principles regarding the audit of information systems will be determined by the CMB in consultation with TÜBİTAK or other institutions and organizations deemed necessary. CMB personnel will be able to accompany every stage of the information systems audit as an observer, without jeopardizing the principle of auditor independence.
• As in the January Draft Bill, the Final Draft Bill refers, respectively, to the measures to be applied for unlawful activities or transactions of capital market institutions, measures to be applied for unauthorized capital market activities and measures to be applied for unlawful announcements, advertisements and notices, with regard to the unlawful activities and transactions of the Service Providers, unauthorized crypto asset service providing activities and announcements, advertisements and notices related to these activities. Accordingly, unlawful activities will trigger imprisonment and monetary fines. Natural persons and the personnel of legal persons who conduct unauthorized service providing activities will be subject to imprisonment for three to five years and a judicial fine of up to TRY one million. The activities and marketing carried out by the Platforms based abroad for and with Turkish residents will be deemed as unauthorized crypto asset service. Accordingly, the Platforms based abroad will be required to obtain license from the CMB in accordance with the provisions of this Law to carry out activities for and with Turkish residents. In cases where Platforms based abroad open a place of business in Türkiye, create a website in Turkish and engage in promotional and marketing activities directly and/or through persons or institutions based in Türkiye in relation to the crypto asset services offered, the activities are deemed to be directed to residents in Türkiye. The Access Providers Authority will be entitled to block access to the website upon the application of the CMB in relation to announcements, advertisements and notices in violation of the principles determined by the CMB.
• The CMB will be authorized to request the strengthening of the financial conditions of the Service Providers that it determines are unable to fulfil their payment and crypto asset delivery obligations or that their financial strength has weakened, or to temporarily suspend their activities, or to revoke their operating licenses, and to limit and suspend the signature authorities of managers and employees.
• The Final Draft Bill stipulates a special offense of embezzlement that may be committed by the members of the board of directors and other personnel of the Service Providers, as well as for the natural person shareholders of a Service Provider whose operating license has been revoked, who have held the legal or de facto management or control of that Service Provider.

Transition Period

Unlike the January Draft Bill, the Final Draft Bill comes with bad news for those already operating as Service Providers as of the date of its entry into force. Accordingly, these Service Providers will be obliged to submit a declaration to the CMB within one month from the date of entry into force of the Final Draft Bill, undertaking that they will make the necessary applications to obtain an operating license or that they will take a liquidation decision within three months without causing any loss to their clients and that they will not accept new clients during the liquidation process. Those that wish to commence operations after the entry into force of the Final Draft Bill, on the other hand, will apply to the CMB before commencing their operations and declare that they will make the necessary applications to obtain an operating license. Both groups will be able to obtain an operating license only after the secondary regulations on the activities of Service Providers and the transfer and custody of crypto assets enter into force.

Those that continue to operate without applying to the CMB for an operating license within the period specified in the secondary regulation will be deemed to be engaged in an unauthorized crypto asset service.

It is also stipulated that the Service Providers resident abroad will be required to terminate their activities for and with Turkish residents within three months following the date of entry into force of the Final Draft Bill, or otherwise their activities will be considered as unauthorized crypto asset service providing activities.

Finally, unlike the January Draft Bill, the Final Draft Bill stipulates the status of ATMs and similar electronic transaction devices. The activities of ATMs and similar electronic transaction devices that allow clients to convert crypto assets into cash or cash into crypto assets and to transfer crypto assets will be terminated within three months following the date of entry into force of the Final Draft Bill, and ATMs that do not terminate their activities will be closed by the competent authorities upon notification of the highest local administrative authority. The continuation of these activities will also be considered as unauthorized crypto asset service.

Conclusion

The Final Draft Bill retains the principles adopted in the January Draft Bill, such as the pro-investor liability regime and the "closed circuit" approach, and further codifies them. Compared to the January Draft Bill, the text of the Final Draft Bill appears to be better prepared for enactment.

However, as the Final Draft Bill authorizes the CMB to issue secondary regulations in many areas where it does not regulate, it will be the CMB's secondary regulations, not the Final Draft Bill, that will shed light on how the crypto asset market in Türkiye will take shape.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.