What does Türkiye’s new draft crypto legislation mean for foreign crypto asset service providers?
Türkiye's fintech sector, fueled by its young and unbanked population, has seen rapid growth in 2023, with Turkish fintech companies’ continuing to draw significant investment starting to change the M&A scene. This expanding market also includes Turkish crypto sector, which has been a particularly dynamic segment. Türkiye is about to introduce its first-ever legislation to regulate the cryptocurrency sector. This pioneering move is set to unfold through a series of amendments to the existing Capital Markets Law No. 6362 that will be supplemented later by subsequent secondary legislations.
The legislative push is driven by several factors. Primarily, Türkiye's position as a global leader in crypto adoption is noteworthy, with over half of Turkish adults aged 18-60 owning cryptocurrencies. However, this large investor group currently operates without any legal safeguards. Furthermore, the introduction of comprehensive crypto legislation is seen as a crucial step for Türkiye to exit the Financial Action Task Force's (FATF) grey list. The anticipated result of this legislation is a clearer, more stable framework for the cryptocurrency industry in Türkiye, expected to entice further investments and spur innovation within the sector.
Main highlights
The Proposed Law Amending the Capital Markets Law numbered 6362 (the Crypto Proposal), which is expected to enter into force very shortly, defines crypto asset service providers (CASPs) as “crypto asset trading platforms, institutions providing for crypto asset custody services and other institutions to be defined in the secondary regulation” and provides for details with respect to the requirements that must be satisfied by the shareholders of CASPs.
Under the new Crypto Proposal, the Capital Markets Board (the CMB) is set to become the main regulatory and supervisory authority for the cryptocurrency sector. The CMB's responsibilities will include the development and issuance of secondary legislation. This legislation will comprehensively cover a variety of essential areas, such as the setup and operation of cryptocurrency platforms, the roles and qualifications of managers and directors, staff requirements, capital adequacy and the necessary information technology infrastructure.
So far, the legislative focus has primarily been on anti-money laundering, financing of terrorism, and exchange control issues. With the implementation of the Crypto Proposal and the accompanying secondary legislation, the Turkish cryptocurrency market is expected to evolve into a well-regulated and sophisticated financial market, which is likely to draw increased investor interest.
Transition process
According to the Crypto Proposal, new crypto asset trading platforms cannot be established and cannot start their operations until the secondary legislation is enacted. Among other things, the requirements of the licensing regime will be set out in the secondary legislation. Hence, the entry of new CASPs into the Turkish cryptocurrency market will be postponed for a while after the enactment of the Crypto Proposal. Under the Crypto Proposal’s grandfathering provisions, existing cryptocurrency platforms will be permitted to maintain their operations until the secondary legislation is released. After the issuance of the relevant secondary legislation, these platforms will also need to apply to the the CMB for an operation license to ensure their compliance with the new regulatory framework.
Impact on foreign cryptocurrency platforms
The Crypto Proposal also prevents foreign platforms from providing services to Turkish customers without an operation license and further lists the activities that may result in targeting Turkish customers. It defines: (i) opening a workplace in Türkiye; (ii) creating a website in Turkish language; or (iii) engaging in promotional and marketing activities related to the offered crypto asset services either directly or through individuals or institutions residing in Türkiye, as activities targeting Turkish citizens and these activities will be subject to a license.
The CMB will have the authority to determine additional criteria for defining activities that target Turkish customers. Therefore, it is crucial for foreign platforms currently targeting Turkish customers to closely monitor the evolving legal framework for cryptocurrency sector in Türkiye. It is important to note that monetary fines, as well as potential imprisonment of up to five years, might be imposed on those conducting such targeting activities without a proper license.
Impact on new investments
The anticipated cryptocurrency legal framework is set to meet customer needs and establish a robust foundation for crypto assets, CASPs and cryptocurrency trading platforms. This is likely to generate compelling opportunities for foreign investors. Additionally, the increased regulatory oversight, particularly the requirement for the CMB approval for share transfers exceeding 10 percent, and specific conditions for shareholders, will introduce an added layer of complexity to future crypto M&A deals.
Moreover, this framework will incorporate additional compliance checkpoints, both in the due diligence process and within transaction documents. Ultimately, these investments will be underpinned by a comprehensive and sturdy regulatory structure, enhancing the overall security and appeal of the market.
