Three Rings for the Elven-kings under the sky,
Seven for the Dwarf-lords in their halls of stone,
Nine for Mortal Men doomed to die,
One for the Dark Lord on his dark throne...
If we were to liken cryptocurrencies and their regulation to a story, The Lord of the Rings would undoubtedly take the lead. The power the rings provide, the innovations they bring, the allure, and the desire to possess them are common points between cryptocurrencies and the rings of power. Just like the rings, the emergence of cryptocurrencies changed worlds. The desire to have more led many to perish. Some, however, used cryptocurrencies to amass greater wealth and power. This newfound power and wealth, of course, did not go unnoticed by the authorities. Cryptocurrencies weakened the traditional financial system, and to regain its strength, states turned their dollar-sign-clad eyes to this realm. But there was a problem; contrary to the usual, the dollar sign was not green and was unexpectedly engulfed in red flames, much like the eye of Sauron seeking the One Ring.
Initially, various public institutions published news related to cryptocurrencies. Then, in 2021, the legal definition of cryptocurrencies was made. My article titled "Legal Aspects of Cryptocurrency in Turkey" covered these initial regulations. The fact that these regulations were introduced during the 2021 Bull Market was no coincidence. The state wanted to show that it was monitoring the sector. Now, the new regulation coincides with a time when cryptocurrencies are in vogue, Bitcoin and Ethereum ETFs have been approved, everyone is talking about crypto, and Bitcoin has reached an all-time high. In this article, I will examine the implications of the law numbered 7518, published in the Official Gazette on 02.07.2024, which amends the Capital Markets Law.
Definitions
With the amendment of the law, definitions for crypto assets, wallets, crypto asset service providers, crypto asset custody services, and platforms have been made. The term "crypto asset" has been preferred for cryptocurrencies, as in the Regulation on the Non-Use of Crypto Assets in Payments. However, it is evident that this will not eliminate the well-established term "cryptocurrency" and that it feels awkward. According to the amendment law, the expressions and explanations used in the law are as follows:
- Wallet: Refers to software, hardware, systems, or applications that enable the transfer of crypto assets and the storage of these assets or their private and public keys either online or offline. The law defines a wallet to cover both cold and hot wallets.
- Crypto asset: Defined as intangible assets that can be created and stored electronically using distributed ledger technology or similar technology, distributed over digital networks, and representing value or rights.
- Crypto asset service provider: Refers to platforms, entities providing crypto asset custody services, and other entities designated to provide services related to crypto assets, including their initial offering.
- Crypto asset custody service: Refers to the storage, management, or other custody services determined by the Board of private keys that provide transfer rights from the wallet of platform customers' crypto assets.
- Platform: Refers to entities that perform one or more of the following activities: cryptocurrency trading, initial sales or distributions, settlement, transfers, custody required for these activities, and any other activities that may be specified.
Registration of Cryptocurrencies
The amendment of the law states that the principles regarding the issuance of cryptocurrencies and the registration of crypto assets offered by crypto asset service providers in an electronic environment may be determined by the Capital Markets Board. In case of issuance of capital market instruments as crypto assets; the rights monitoring, their assertion against third parties, and their transfer will be based on the records in the electronic environment where they are created and stored. The CMB will also have the authority to make the integration of these records with the MKK system mandatory.
Operation of Cryptocurrency Exchanges in Turkey
The amendment of the law introduces some regulations regarding the operation of cryptocurrency exchanges in Turkey. Accordingly, cryptocurrency exchanges are required to obtain permission from the CMB for their establishment and operation. Exchanges that have obtained the necessary permissions must perform the activities specified by the CMB. These activities are clearly stated. The principles regarding the establishment and operation of exchanges, their shareholders, managers, staff, organization, capital, and capital adequacy, liabilities, information systems, and technological infrastructure, share transfers, activities they can perform, and other principles and rules they must comply with during their activities are also determined by the CMB.
Shareholders of cryptocurrency exchanges must obtain permission from the CMB when transferring shares. Otherwise, the transfers made cannot be registered in the share ledger or, even if registered, are invalid.
Rules to be Followed by Cryptocurrency Exchanges
Cryptocurrency exchanges must make the necessary arrangements, take precautions, and establish the necessary internal control units and systems to manage their systems securely. With the regulation, it is required that cryptocurrency exchanges comply with the criteria set by TÜBİTAK regarding information systems and technological infrastructure for obtaining permission from the CMB for their establishment and/or operation. The ownership structure of cryptocurrency exchanges must be transparent and clear. At this point, it is understood that creating intertwined partnerships through various companies and making it difficult to reach real persons by having legal entities as shareholders of legal entities will not ensure transparency and clarity.
Crypto asset service providers are subject to the provisions of the Capital Markets Law only in terms of the provisions referring to them regarding cryptocurrencies. The CMB is authorized to regulate and direct the application by establishing regulatory actions and making special decisions in unclear matters or issues that need to be directed in practice.
With the amendment of the law, crowdfunding platforms and crypto asset service providers are required to apply for membership in the Turkish Capital Markets Association. Accordingly, these entities are required to make the necessary application within three months from the date of obtaining their authorization certificates.
Qualifications Required for Cryptocurrency Exchange Shareholders
The new crypto law includes regulations regarding the qualifications of cryptocurrency exchange shareholders. Accordingly, shareholders must have the necessary financial strength and the honesty and reputation the business requires. Additionally, shareholders must not have previously gone bankrupt or declared concordat, and must not hold ten percent or more shares in certain institutions operating in the capital markets whose operating permits have been revoked.
Shareholders of cryptocurrency exchanges must not have been convicted of certain crimes specified in penal codes. These crimes include embezzlement, bribery, theft, fraud, forgery, abuse of trust, and fraudulent bankruptcy, as well as crimes such as obstructing, disrupting, destroying, or altering information systems, misuse of bank or credit cards, laundering assets derived from crime, financing terrorism, tax evasion, and imprisonment for five years or more for intentionally committed crimes.
Individuals who lose the required qualifications, except for having the financial strength and the honesty and reputation required by the business, must transfer their shares to others who meet the conditions. A period of six months is specified for this.
Regulatory Authority for Cryptocurrencies
The CMB is assigned to establish regulatory actions, make special and general decisions, and apply measures and sanctions for crypto assets providing rights specific to capital market instruments. It is specified that these Law provisions will not apply to crypto assets, other than those processed on platforms and traded within them or initially sold or distributed.
Principles for the Operations of Crypto Asset Service Providers and the Transfer and Custody of Crypto Assets
Contracts signed between crypto asset service providers and customers wishing to trade with them can be established in writing or using remote communication tools that allow the verification of customer identity. Any contractual clause that eliminates or limits the responsibility of crypto asset service providers towards their customers is invalid. Platforms are required to establish internal mechanisms to effectively resolve their customers' complaints and grievances.
It is mandatory to establish a written listing procedure for determining crypto assets to be traded within platforms or initially sold or distributed and to regulate the principles and rules by the Board in this regard. It is stated that the listing of a crypto asset by platforms does not imply that it is guaranteed by the public.
It is regulated that prices on platforms must be freely formed. Except for transactions related to crypto assets whose prices are also formed in foreign markets, sanctions for market-disruptive actions specified in Article 104 of the law apply to actions and transactions that cannot be reasonably and economically explained and that disrupt the operation of transactions on the platform with trust, transparency, and stability.
Platforms must determine the principles and rules of orders and transactions to ensure that transactions are conducted reliably, transparently, efficiently, stably, fairly, honestly, and competitively, detect, prevent, and prevent repetition of market-disruptive actions and transactions, establish the necessary surveillance system within them, and take all necessary preventive measures. Platforms are required to identify market-disruptive actions and transactions carried out within their operations, take necessary measures, including restricting, stopping, and closing accounts carrying out these actions, and report the findings to the Board.
It is regulated that having an operating license from the Board does not imply that transactions are under public guarantee. Therefore, crypto assets are not subject to investor compensation provisions regulated by the law.
Regulations on Customer Wallets
Records related to the wallets in which customers' crypto assets are transferred and the accounts where fund transfers are made must be kept securely, accessibly, and traceably by crypto asset service providers. The integrity, accuracy, and confidentiality of all transaction records must be ensured.
It is essential that the customers' crypto assets are held in their own wallets. For crypto assets that customers do not prefer to hold in their wallets, custody service must be provided by banks or other entities authorized by the Board to provide crypto asset custody services, and the customers' cash must be held in banks. The Board can determine separate principles for the custody of each crypto asset or within the scope of the technological features they rely on or the nature and quantity of the crypto assets.
Regulations on the Seizure of Cryptocurrencies
The new law regulates that cash and crypto assets belonging to customers are separate from the assets of crypto asset service providers, and the cash and crypto assets held on behalf of the customer at the crypto asset service providers cannot be seized due to the liabilities of the crypto asset service providers. The same applies to the platform's assets in relation to the customer's liabilities.
With the change, regulations on the seizure of cryptocurrencies have been legally regulated for the first time. According to the change, all administrative and judicial requests related to measures, seizures, and other actions regarding the cash and crypto assets of customers will be carried out exclusively by the crypto asset service providers and now it is regulated that electronic querying and seizure of cryptocurrencies are possible.
Measures to be Applied to Crypto Asset Service Providers' Activities
The measures to be applied to unlawful activities and transactions of crypto asset service providers are regulated in Article 96 of the Law. If deficiencies identified are not corrected within the period given by the board, the board is authorized to limit or temporarily suspend the scope of activities of these institutions, revoke their authorization for capital market activities either wholly or partially, temporarily or permanently cancel the licenses of their managers and employees, file criminal complaints against them, restrict or remove their signing authorities, dismiss board members and appoint new ones.
Measures to be applied in the case of unauthorized crypto asset service provision are regulated in Article 99 of the Law. Accordingly, the board can file a lawsuit to annul the results of unauthorized capital market activities and transactions and return cash or capital market instruments to their rightful owners, and can apply the measures mentioned above to the managers.
If the announcements, advertisements, and any commercial communications of unauthorized crypto asset service providers are unlawful, criminal prosecution can be pursued against the responsible parties. Additionally, the responsible parties' announcements and advertisements can be stopped, and documents, announcements, and advertisements in violation of the law can be seized or the workplaces can be temporarily closed.
Providing services to individuals residing in Turkey by platforms located abroad or offering prohibited crypto asset activities in Turkey also counts as unauthorized crypto asset service provision. If platforms located abroad open a business in Turkey, create a Turkish-language website, or engage in promotion and marketing activities directly and/or through individuals or institutions located in Turkey, such activities will be considered as targeting individuals residing in Turkey.
If a crypto asset service provider fails to fulfill its cash payment and crypto asset delivery obligations arising from its activities or if its financial structure is found to be seriously weakened or its financial situation is insufficient to meet its commitments, the board may request the strengthening of its financial structure within an appropriate period not exceeding three months, or may immediately suspend its activities, revoke its operational authorizations, and limit or remove the signing authorities of identified responsible managers and employees.
Decisions on Content Removal and/or Access Blocking
a) If it is found that announcements, advertisements, and notices are made on the internet contrary to the principles or prohibitions set by the board
b) If it is found that investment advisory and/or portfolio management activities related to crypto assets are carried out in violation of the principles set by the board
c) If it is determined by the board that crypto asset service provision is carried out via the internet without permission, measures will be applied against the institutions.
If announcements, advertisements, and notices are made through non-internet mediums unlawfully, the responsible parties can be required to stop these announcements and advertisements, and documents, announcements, and advertisements in violation of the law can be seized.
Responsibility of Crypto Asset Service Providers
Crypto asset service providers are responsible for damages arising from unlawful activities and failure to fulfill cash payment and/or crypto asset delivery obligations. If it is evident that damages cannot be compensated by the crypto asset service providers, the members of the crypto asset service providers are responsible for damages to the extent they can be allocated to them according to their faults and the nature of the situation.
Crypto asset service providers are also responsible for crypto asset losses resulting from the operation of information systems, any cyber attacks, information security breaches, or the conduct of personnel according to risk responsibility principles. If it is evident that losses cannot be compensated by the crypto asset service providers, the members of the crypto asset service providers are responsible for losses to the extent they can be allocated to them according to their faults and the nature of the situation. Losses arising from service interruptions without fault of the crypto asset service providers, such as temporary inability to send orders or conduct transactions/transfers, will not be evaluated in this manner.
Unauthorized Crypto Asset Service Provision
Real persons and legal entities who conduct crypto asset service provision without permission are punishable with imprisonment from three to five years and judicial fines ranging from five thousand to ten thousand days.
Misappropriation in Crypto Asset Service Providers
With the legal change, regulations regarding crypto asset fraud have been established and specific penalties have been defined. Accordingly, crypto asset service provider management board members and other members who misappropriate money or documents equivalent to money or securities, other goods, or crypto assets entrusted to them due to their position, or which they are responsible for protecting, storing, and supervising, will be punished with imprisonment from eight to fourteen years and judicial fines up to five thousand days, and they will be sentenced to compensate the damage caused to the crypto asset service provider.
If the crime is committed through fraudulent actions to prevent the discovery of the misappropriation, the perpetrator will be sentenced to imprisonment from fourteen to twenty years and judicial fines up to twenty thousand days. However, the amount of judicial fines cannot be less than three times the damage suffered by the crypto asset service provider and customers.
If the management or control of a crypto asset service provider whose activity license is revoked has been legally or de facto held by individuals, and they use the resources of the crypto asset service provider or customers, directly or indirectly, in a way that jeopardizes the secure operation of the crypto asset service provider for their own or others' benefit, it is considered misappropriation. Those who commit such acts will be sentenced to imprisonment from twelve to twenty-two years and judicial fines up to twenty thousand days; however, the amount of judicial fines cannot be less than three times the damage suffered by the crypto asset service provider and customers. Furthermore, there will be a decision to jointly recover the incurred damage.
If the misappropriated money or documents equivalent to money or securities, other goods, or crypto assets are returned as they were or if the damage is fully compensated before the investigation starts, the sentence will be reduced by two-thirds.
If the misappropriated money or documents equivalent to money or securities, other goods, or crypto assets are voluntarily returned or the damage is fully compensated before the prosecution starts, the sentence will be reduced by half. If this occurs before the verdict, the sentence will be reduced by one-third.
The sentence will be reduced by one-third to half if the value of the money or documents equivalent to money or securities, other goods, or crypto assets at the time of the crime is low.
Personal Responsibility Regarding Crypto Assets
The personal responsibility of the management board members of a crypto asset service provider found to have committed misappropriation can be directly adjudicated by the court upon the request of the Board. If these actions are done to obtain benefits for third parties, the benefits obtained will also be subject to the same measures. Assets of those who are adjudicated with personal bankruptcy will be used to cover customer losses. Customer losses will be covered first from the assets. If customer losses are not fully covered, interim payments will be made. Any remaining amount after covering customer losses will be returned to those who were adjudicated with personal bankruptcy.
Transitional Provisions for Crypto Asset Service Providers
Entities conducting crypto asset service provision on the date of entry into force of the Law must apply to the Board with the documents specified by the Board within one month from the effective date to obtain a service license or declare their decision to liquidate within three months without harming customer rights and interests and not accept new customers during the liquidation process.
Those wishing to start operations after the entry into force of the Law must declare that they will apply to the Board before starting their activities to obtain a service license by meeting the conditions to be specified in secondary regulations. Entities undergoing liquidation must announce this on their websites and notify their customers through email, text messages, phone calls, and similar communication channels.
Those who do not fulfill these obligations may be subject to criminal measures. Failure to fulfill transfer requests of customers with accounts in entities opting for liquidation or failing to apply to the Board within the specified period constitutes unauthorized crypto asset service provision.
After the regulation to be issued by the Board under this Law comes into force, entities other than those conducting crypto asset service provision on the date of the Law's entry into force cannot start operations without obtaining a service license. Entities already operating must apply to the Board for a service license within the period specified in the regulation. The Board will set a deadline for the completion of the procedures and may request entities that do not obtain authorization within this period to cease their activities.
Crypto asset service providers located abroad must cease their activities targeting individuals residing in Turkey within three months following the date of entry into force of the Law.
The activities of ATMs and similar electronic transaction devices located in Turkey that allow customers to convert crypto assets into cash or cash-equivalent crypto assets and facilitate the transfer of crypto assets must cease within three months following the date of entry into force of the Law. ATMs that do not cease operations will be closed by the competent authorities upon the notification of the local administrative authority. Those who continue to operate or facilitate such operations will be subject to the penal provisions of the Law.
Enforcement
The legal changes came into force on July 2, 2024. However, secondary regulations to be issued under Articles 35/B and 35/C of the Law will come into effect within six months from the date of the Law's entry into force.
Conclusion
One Ring to rule them all, one Ring to find them
One Ring to bring them all and in the darkness bind
them...
Cryptocurrencies have been a topic of debate since their creation. While some advocate for a complete ban on cryptocurrencies, others argue that traditional finance will be replaced and these freely priced units will become the sole legal tender. However, the latter situation poses a threat to governments, as inflation is created by printing money, which governments use to reduce debt. The potential removal of this power drives officials to worry deeply. The fear is amplified with each crypto bull market, driving governments under the shadow of recession to seek power. The Dark Lord of this story deploys armies of legislation, increasing its power of surveillance. With tightening regulations, strict rules on crypto exchanges, and intensifying taxation efforts, the inherent freedom of cryptocurrencies diminishes day by day. Obviously, the new regulations will reduce crypto fraud, money laundering, smuggling, unregistered trade, tax evasion, and other unlawful activities. But perhaps the real question is: On this dark and uncertain path, what is more important—freedom or order? After all, isn't the ultimate aim of wars to bring about peace?
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.