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The First Comprehensive Regulation for Crypto is About to Arrive!


Berk Cin

Cenk Civan

Due to the widespread use of crypto asset trading platforms and the high volatility of crypto asset prices regulating these markets to protect users against the inherent risks associated with crypto assets has been on the legislative agenda for a long time. In this regard, a draft law proposal that had been unofficially leaked to the press in recent months frequently occupied our agendas. Finally, on May 16, 2024, the Proposal Law No. 36 (“Proposal”) on the Amendment of the Capital Markets Law (“CML”) which regulates the trading activities on crypto asset platforms was submitted to the Turkish Grand National Assembly. 

Before sharing our opinions regarding the Proposal, we believe it is necessary to address some important points mentioned in the preamble of the Proposal. Firstly, although there is no clear legal distinction in the draft provisions, the general preamble addresses the differences between types of crypto assets; classifying them as “securities crypto assets, electronic money crypto assets, and utility crypto assets” and “stable and non-stable crypto assets”.  

The Capital Markets Board of Türkiye (“CMB”) will be authorized to regulate the crypto market in accordance with the Proposal. 


Definitions of Crypto Assets in the Proposal 

The Proposal defines crypto assets as “intangible assets that can be created and stored virtually using distributed ledger technology or a similar technology, distributed over digital networks, and can represent value or rights”

In addition, Platforms are defined as “entities where one or more of the following activities are carried out: crypto assets trading, initial sale or distribution, exchange, transfer, the required custody, and other transactions that may be determined”. “Platforms, entities providing crypto asset custody services, and other entities that will provide services related to crypto assets as stipulated in the secondary regulations to be made within the scope of the CML” are defined as crypto asset service providers (“Service Providers”). 


Issuance of Crypto Assets in Capital Markets 

The CMB will be authorized to determine the principles regarding the issuance of capital market instruments as crypto assets. The Proposal enables crypto assets to be dematerialized, allowing the Service Providers to electronically monitor and keep records in their own systems instead of Central Securities Depository (“CSD”). However, the CMB will also be authorized to require the integration between the Service Providers and the CSD’s system. In particular, we believe that in requiring electronic records to be kept centrally at the CSD could contradict the decentralised nature of crypto assets. 


Status of Crypto Asset Service Providers 

  • Service Providers will be required to obtain incorporation and operation license from the CMB, and the CMB will determine the limitations on the activities of these providers. Service Providers' information systems and technological infrastructures will also be required to comply with the criteria to be determined by the Scientific and Technological Research Council of Türkiye (TÜBİTAK). 

  • The CMB will regulate the principles regarding the shareholders, managers, personnel, capital, capital adequacy and share transfers of Service Providers through secondary regulations. Service Providers will be required to obtain the CMB’s approval for the transfer of (i) shares representing 10% or more of their capital or (ii) shares granting privileges regarding the appointment of the majority of the directors. 

  • Certain conditions such as not being a bankrupt and not being convicted of certain offences (which are customary in the financial sector) will also be required to be a shareholder of the Service Provider. The members of the board of directors and other personnel authorized to represent the Service Providers must also meet the conditions stipulated for shareholders, except for the financial power requirement. 

  • The CMB will regulate the procedures and principles regarding the trading and initial sale or distribution of crypto assets through Platforms, and the procedures and principles regarding the exchange, transfer and custody of crypto assets through the secondary regulations. 

  • Service Providers will be subject to the financial audit and information systems audit conducted by the CMB licensed independent auditors, similar to the other capital market institutions. 


Activities of Crypto Asset Service Providers and Transfer and Custody of Crypto Assets 

  • Customer agreements between the Service Providers and customers can be executed electronically. Additionally, the CMB will determine the minimum content which customer agreements must provide for. 

  • Service Providers will be obliged to verify customers’ identities in accordance with the regulations. 

  • Platforms will be required to establish a written listing procedure for determining crypto assets to be traded or initially offered or distributed, and for the termination of their trading. 

  • As a general principle, customers’ crypto assets should be kept in their own wallets; however, customers’ cash must be deposited in the banks. Authorized banks (subject to Banking Regulatory and Supervisory Agency’s approval) or other institutions authorized by the CMB can provide custody services for crypto assets that customers do not hold in their wallets. 

  • Cash and crypto assets belonging to customers will be segregated from the assets of Service Providers and records will be kept accordingly. 

  • Furthermore, as is customary in the financial sector, the cash and crypto assets of the customers cannot be subject to any attachments, pledged, included in the bankruptcy estates, or precautionary measures in connection with the debts of the Service Providers, including public debts. 

  • The CMB will regulate the procedures and principles for investment advisory and portfolio management services for crypto assets. We believe that the CMB may impose additional restrictions or conditions regarding the copy trading method currently used by investors in the crypto assets market through secondary regulations. 


Measures Against Unauthorized Activities of Crypto Asset Service Providers 

  • The offences of “unauthorized crypto asset service provider activity” and “embezzlement in crypto asset service providers” will be incorporated into the offences regulated under the CML. The offence of unauthorized crypto asset Service Provider activity carries a penalty of imprisonment for 3 years to 5 years and a monetary fine, while embezzlement in crypto asset Service Providers is carries a penalty of imprisonment for 8 years to 14 years and a monetary fine. 

  • The Proposal introduces a new personal liability regime, which has not been regulated in the CML before. In the event that Service Providers’ activities and transactions are deemed as embezzlement, the members of the board of directors, other personnel, or controlling shareholder(s) can be held personally liable, limited to damages incurred by customers. Additionally, the CMB can request from the authorized courts to declare these persons as bankrupt to compensate the damages related to embezzlement incurred by customers. 

  • Pursuant to the Proposal, if the CMB determines that the financial structures of the Service Providers are seriously weakened or that their financial situation has weakened to the extent that they are unable to meet their commitments, the CMB may request the strengthening of their financial structures within an appropriate period of time not exceeding 3 months. Additionally, the CMB will be authorized to temporarily suspend the activities of the Service Providers, revoke their activity licenses and impose sanctions such as limiting or revoking the signing authority of the responsible managers and personnel. 


Activities of Foreign Platforms in Türkiye  

  • Activities conducted by crypto asset platforms residing abroad (not holding a CMB license) targeting customers residing in Türkiye or providing prohibited crypto asset activities under the CMB’s regulations to customers residents in Türkiye will be also considered unauthorized provision of crypto asset services. 

  • The following activities will be deemed to be targeting residents of Türkiye: (i) establishing a place of business in Türkiye; (ii) operating a Turkish-language website; (iii) engaging in direct and/or in direct promotional marketing activities related to offered crypto asset services through individuals; or (iv) institutions residing in Türkiye. We believe that reverse solicitation (transactions initiated with entities at the customer's request) will be permitted under this Proposal, a practice familiar in financial markets. 


Status of the Existing Service Providers 

The Proposal will become effective as soon as its adopted and published date, and those carrying out crypto asset Service Provider activities as at that date will be obliged to submit a declaration to the CMB within 1 month, providing one of the following: 

  • These service providers will apply to the CMB to obtain an activity license by fulfilling the conditions stipulated in the secondary regulations, along with the documents to be determined by the CMB; or 

  • These service providers will liquidate within 3 months without adversely affecting rights and interests of its customers, and such service providers will not accept new customers during the liquidation process. 


Conclusion 

While the Proposal represents the first comprehensive regulation for the crypto asset ecosystem, the regulations outlined in the Proposal broadly cover the main aspects, leaving the specifics and procedures to be determined in secondary regulations. However, we believe that the Proposal’s intention is to regulate rather than to ban which we believe a positive step towards contributing to the development of the crypto assets market. While the Proposal does not include regulation regarding taxation of crypto assets gains, we believe that this issue will also come up following the enactment of the Proposal. 

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