A New Era For Crypto Assets

The Law No. 7518 on Amendments to the Capital Markets Law, published in the Official Gazette No. 32590 dated 2 July 2024 (the "Amendment Law"), has introduced certain additions related to crypto assets to Capital Markets Law No. 6362 (the "CML"), and these additions have come into effect as of the publication date of the Amendment Law. Essentially, with these amendments, crypto asset service providers (the "CASP") operating or being established in Türkiye are now regulated under the scope of the CML and are subject to the regulatory and supervisory authority of the Capital Markets Board of Türkiye (the "CMB"). However, the duties and authorities of the relevant regulatory and supervisory institutions and organizations arising from other legislation concerning crypto assets are reserved.

The Amendment Law provides a general framework regarding crypto assets and CASPs, while detailed regulations concerning the obligations of CASPs will be addressed under the secondary legislation to be issued by the CMB. This secondary legislation will come into force within 6 (six) months from the effective date of the Amendment Law.

Definitions

The Amendment Law introduces new definitions on wallet, crypto asset, CASP, crypto asset custody service, and platform which are added to the CML. Accordingly:

• "crypto asset" refers to intangible assets that can be created and stored electronically using distributed ledger technology or similar technology, distributed over digital networks, and can represent value or rights;
• "wallet" refers to software, hardware, systems, or applications that enable the transfer of crypto assets and the online or offline storage of these assets or the private and public keys related to these assets;
• "platform" refers to institutions where one or more activities such as buying and selling crypto assets, initial sales or distribution, clearing, transfer, custody, and other specified operations are carried out;
• "crypto asset custody service" refers to the storage, management, or other custody services as determined by the CMB for crypto assets or private keys that grant transfer rights from the wallet of platform customers;
• "crypto asset service provider" refers to platforms, crypto asset custodians, and other institutions designated to provide services related to the crypto assets, including initial sales or distribution of crypto assets

as regulated by the Amendment Law.

Main Provisions Regarding CASPs

• It is mandatory to obtain permission from the CMB for the establishment and activity of CASPs, and CASPs will only be able to perform activities determined exclusively by the CMB. Accordingly, the activity license showing the activities of the CASPs will be issued by the CMB.
• While various criteria have been determined for the shareholders and managers of CASPs, it is expected that detailed regulations regarding these criteria, as well as principles and guidelines for their personnel, organizational structure, capital adequacy, obligations, information systems and technological infrastructure, permissible activities, and other principles and guidelines they should adhere to during their operations, will be included in the secondary legislation to be issued by the CMB.
• CASPs are obliged to make the necessary arrangements, take precautions, and establish the necessary internal control units and systems to ensure the secure management of their systems.
• Compliance with the criteria to be determined by the Scientific and Technological Research Council of Türkiye ("TÜBİTAK") will be sought concerning the information systems and technological infrastructure of CASPs.
• CASPs will not be subject to other provisions of the CML except for those explicitly referred to in the CML.
• CASPs will become members of the Turkish Capital Markets Association.
• The share transfers of CASPs will be subject to the approval of the CMB, and in case of non-compliance, such transfers will not be recorded in the share ledger. It is expected that the matters as to which share transfers will be subject to CMB approval and other details around it will be included in the secondary legislation to be issued by the CMB.
• CASPs are obliged to know their customers and maintain records related to the wallets where customers' crypto asset transfers are executed and the accounts where fund transfers are carried out in a secure, accessible, and transparent manner. In this context, they are also required to comply with the regulations set forth by the Financial Crimes Investigation Board (MASAK).
• Contracts for the purchase and sale of crypto assets between CASPs and customers can be established in writing, remotely, or through methods that can substitute written form as determined by the CMB, and through information or electronic communication devices that allow for the verification of the customer's identity. The CMB has the authority to determine the minimum requirements for the content of these contracts. Any provisions in these contracts that minimize or completely abolish CASPs' responsibilities towards their customers will be deemed invalid.

Main Provisions Regarding Crypto Assets

• The procedures and principles for the purchase and sale of crypto assets through platforms, their initial sale or distribution, as well as the exchange, transfer, and custody of crypto assets, will be regulated by the CMB.
• The provisions of the CMB will not apply to crypto assets that do not provide rights specific to capital market instruments and to those crypto assets other than those that will be traded on the platforms and initially offered or distributed.
• Apart from crypto assets that provide rights specifically attributable to the capital market instruments, the CMB was authorized to determine the principles on the sale and distribution of crypto assets, which are created through the distributed ledger technology or similar technological infrastructure where the value of which cannot be separated from this technology, on platforms without being subject to the provisions of the CMB on the capital market instruments. In determining the crypto assets that will be subject to these principles, technical reports may be requested from TÜBİTAK or relevant public institutions and organizations to evaluate technical criteria.
• Cash and crypto assets belonging to the customers will be segregated from the assets of CASPs. With this, the customer assets will be kept separate from the assets of CASPs, and due to the debts of CASPs, customers' crypto assets cannot be seized, pledged, included in the bankruptcy estate, or subjected to precautionary measures.
• Regarding the custody of crypto assets, the distinction between online wallets (hot wallets) and offline wallets (cold wallets) has been included in the Amendment Law's definition of wallets. As a basic principle, the Amendment Law establishes that platforms should ensure that crypto assets belonging to their customers are kept in the customers' own wallets. For crypto assets that customers do not prefer to keep in their own wallets, custody services should be provided by banks authorized by the CMB and approved by the Banking Regulation and Supervision Agency, or by other institutions authorized by the CMB to provide crypto asset custody services. It is also regulated that cash belonging to customers should always be held in banks.
• In all transactions involving crypto assets, the provisions of Law No. 32 on the Protection of the Value of Turkish Currency and the relevant legislation should be taken into consideration.
• Law No. 6750 on Movable Pledge in Commercial Transactions will not be applicable for the pledge agreements involving crypto assets.
• The principles regarding investment advisory and portfolio management related to crypto assets will be determined by the CMB.

Foreign Activities

Activities conducted by foreign platforms targeting residents in Türkiye or providing prohibited crypto asset activities as determined under the CMB regulations to the residents of Türkiye, will be considered unauthorized crypto asset service provision. In the event where foreign platforms opens a workplace in Türkiye, creates a Turkish-language website, or engaging in promotion and marketing activities relating to its crypto asset services either directly and/or through individuals or institutions residing in Türkiye, then such activities will be deemed to be targeting the residents in Türkiye. In parallel with the common practice in the realm of investment institutions, customers may request to obtain services from the foreign platforms or conduct transactions on the foreign platforms entirely on unsolicited basis (reverse solicitation basis) meaning that there should not be any promotion, advertisement, or marketing targeted directly to such customers.

Measures, Supervisions, and Sanctions

The activities of CASPs will be subject to the supervision of the CMB as regulated under Articles 88, 89, and 90 of the CML, and measures detailed in the Amendment Law will be applied to unlawful activities and transactions. The financial audit and independent audit of the information systems of CASPs will be carried out by independent audit firms listed by the CMB.

For unlawful activities and transactions of CASPs, the measures regulated under Article 96 of the CML will be applied. For unauthorized crypto asset service activities, Article 99 of the CML will be applied. Regarding the announcements, advertisements, and any disclosures of those engaging in unauthorized crypto asset service activities, the measures regulated under the first paragraph of Article 100 of the CML will be applied.

The Amendment Law primarily aims to protect investors from any damages that might arise from the activities around crypto assets. Accordingly, individuals and signatories of legal entities engaging in unauthorized crypto asset service activities will be subject to imprisonment and judicial fines as stipulated under the Amendment Law. Furthermore, CASPs will be liable for the operation of information systems, all kinds of cyber-attacks, information security violations and as such or any acts or losses of crypto assets caused by its personnels' acts as per the liability for dangerous activities and equalization provisions regulated under the Article 71 of Turkish Code of Obligations No. 6098. In addition, special provisions have been introduced regarding embezzlement offenses and personal liability for the chairman and the members of the board, other personnel, and real person shareholders who legally or de facto hold management or control of CASPs in relation to crypto assets. Therefore, although the primary responsibility lies with the CASPs, in cases where compensation cannot be obtained from the CASPs or it is clearly understood that compensation cannot be obtained, the members of the CASPs will also be held responsible to the extent that losses are attributable to their faults and also based on the circumstances of the specific event.

The provisions regarding market abuse regulated under the Article 104 of the CML will apply to actions and transactions on platforms that cannot be explained with a reasonable and economic justification and that disrupt the trust, transparency, and stability of the transactions conducted on the platform except for transactions related to crypto assets that are considered by the CMB to be widely traded in foreign markets and whose prices are also determined in foreign markets.

Lastly, crypto assets held in banks and the corresponding cash belonging to customers will not be subject to the deposit insurance provisions stipulated under Article 63 of the Banking Law No. 5411. Further, crypto assets will not be subject to the investor compensation provisions regulated as per Article 82 of the CML. Although the CMB has established certain measures, supervision, and sanctions as mentioned hereinabove, investors should always consider that they are not covered by the investor compensation provisions they have in capital market activities when making their investment decisions.

Payments to CMB and TÜBİTAK

Platforms are required to allocate 1% (one percent) of their total income, excluding interest income, from the previous year to the CMB and another 1% (one percent) to the TÜBİTAK budget for the development of blockchain and related information technologies. These payments should be made and recorded as income by the end of May of the relevant year. However, this payment practice will start in 2025 based on the 2024 income.

Transition Period

Existing CASPs should apply to the CMB with the necessary declarations within 1 (one) month from the effective date of the Amendment Law as per the transition provisions noting their intention to obtain an activity license to continue their activities or decision to liquidate within 3 (three) months without hindering any customer rights and interests in which case they will not onboard new customers during the liquidation process. The CMB acted promptly and published an "Announcement Regarding Crypto Asset Service Providers" (the "CMB Announcement") on its website on 2 July 2024 to clarify the procedures and principles relating to the CMB application.

In this context, as of 2 July 2024, CASPs that are operating and intending to keep conducting their activities should submit the necessary declaration along with the information and documents specified in the CMB Announcement to the CMB in writing within 1 (one) month from the effective date of the Amendment Law. CASPs that choose not to continue their activities should, within 1 (one) month from the effective date of the Amendment Law, submit to the CMB the necessary declaration along with the information and documents specified in the CMB Announcement, and note that they will liquidate within 3 (three) months and they will not onboard new customers and subsequently explain how they will conduct the liquidation process.

Institutions aiming to start their operations between the effective date of the Amendment Law and the effective date of CMB's secondary legislation should also submit the necessary declarations along with the information and documents specified in the CMB Announcement to the CMB before commencing their activities.

Foreign platforms should cease their activities targeting residents in Türkiye within 3 (three) months from the effective date of the Amendment Law. Additionally, the operations of ATMs and similar electronic transaction devices based in Türkiye that enable customers to convert their crypto assets into cash or cash-equivalent crypto assets and to transfer crypto assets should also be terminated by 2 October 2024 at the latest. However, there is no transitional provision for physical offices conducting these transactions, and it is expected that these will be included in the secondary legislation to be issued by the CMB.

All transactions and activities conducted in violation of these provisions will be subject to the relevant measures and sanctions regulated in the CML.

Conclusion

With the Amendment Law, a new era has been considered to begin regarding crypto assets. These regulations are aimed to protect investors and primarily aim to increase transaction security in the Turkish crypto asset market. In this context, the pioneering steps introduced by the Amendment Law will also be deepened by both the secondary legislation of the CMB and the regulations of other relevant institutions and organizations.

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.