Türkiye is one of the largest and fastest crypto adopters globally. It was estimated that over 5 million people currently own cryptocurrency in Türkiye according to the Crypto Currency Research Report published by the Information Technologies and Communication Authority of Türkiye in May 2020. Currently, there is no legal investor protection scheme for crypto assets. However, the government is working on an Unofficial Draft Legislation on crypto assets and crypto asset service providers (“Unofficial Draft Legislation”) amending Capital Markets Law No. 6362 (“CML”). Although there is no official press release regarding the timeline of the Unofficial Draft Legislation, it is expected to be submitted to the Grand National Assembly of Türkiye within the short term and will impose additional requirements for crypto asset service providers (“CASPs”) operating in Türkiye. In general, the Unofficial Draft Legislation aims to regulate crypto assets, crypto asset trading platforms, crypto wallets, crypto asset custody services and CASPs in Turkish legislation for the first time.
Please note that, at the time of writing, crypto assets are not qualified as “capital markets instruments” but defined as “an intangible asset representing a value or right that can be created and stored virtually through distributed ledger technology or any other similar technology and that can be distributed over digital networks” in the Regulation Prohibiting Payments Through Crypto Assets, which was issued by the Central Bank of the Republic of Türkiye and entered into force on April 30th, 2021 (“Central Bank Regulation”). This definition distinguishes crypto assets from capital markets instruments, making them subject to a different legal regime.
CASPs will be subject to a licence to be issued by the Capital Markets Board of Türkiye (“CMB”) for their foundation and operation and these trading platforms will be subject to the supervision of the CMB for their compliance with the relevant CML regulations.
The main expected principles of the Unofficial Draft Legislation are provided below:
CASPs are obliged to obtain operating licences issued by the CMB.
CASPs are defined as “crypto asset exchange platforms, crypto asset custodians and any other service provider providing services in relation to crypto assets”.
The CMB will be authorised to issue secondary legislation in relation to many issues ranging from the operation principles of CASPs to the designation of crypto assets to be traded on the CASPs and to decide on their termination and disposal. Additionally, certain securities determined by the CMB can be issued directly as a crypto asset.
After the enactment of the Unofficial Draft Legislation, the CMB will impose certain restrictions not only for unauthorised CASPs’ activities but also for the solicitation to Turkish residents by unauthorised CASPs.
Likewise, individuals and institutions (including, but not limited to, investment managers, investment advisors or fund managers and CASPs) that will be operating in the crypto asset industry without obtaining a licence or permission from the CMB would face criminal consequences due to unauthorised capital market activity.
CASPs will be subject to the supervision of the CMB in terms of compliance with the relevant CML provisions.
Crypto asset holders may enjoy the right to self-custody of their crypto assets. They may also store their crypto assets at banks that are deemed appropriate by the Banking Regulatory and Supervisory Authority (“BRSA”), or crypto asset custodians licensed by the CMB.
TÜBİTAK (the Scientific and Technological Research Council of Türkiye) will be authorised to evaluate the technicalities of crypto assets.
Similar to the directors of intermediary service providers, the directors of CASPs will also be subject to conditions set forth in the CML and the relevant communiques.
Framework agreements between customers and CASPs, which need to be written and can be concluded by means of online communication, will be governed by the CMB’s secondary regulation.
Except for transactions related to crypto assets that are also traded in foreign markets and whose prices are also formed in foreign markets, an activity that cannot be explained with a reasonable and economic justification and that may disrupt the safe and stable operation of transactions on a CASP may be deemed market abuse according to the Unofficial Draft Legislation Investor Compensation Scheme under Article 83 of the CML.
Moreover, while restricting new entries to the Turkish market without obtaining an operating licence, it is expected that the Unofficial Draft Legislation will provide an interim transition period, known as “grandfathering”, for CASPS that are active and already incorporated in Türkiye to pursue their activities until the secondary legislation is enacted. Unauthorised activities will be subject to sanctions provided in the CML.
Even though the first drafts of Unofficial Draft Legislation provided a closed environment for “un-hosted wallets”, this approach was strongly criticised. Therefore, the latest Unofficial Draft Legislation abandons the restrictive approach and allows citizens to freely transfer crypto assets from CASPs to “un-hosted wallets” in line with the anti-money laundering (“AML”) and counter-terrorist financing (“CTF”) approaches of the Financial Action Task Force (“FATF”).
Finally, considering the recent developments in the European Union (“EU”) regarding the conclusion of the trilogues between the Council and the European Parliament on Markets in Crypto-Assets (“MiCA”), it is observed that the Unofficial Draft Legislation does not provide a strict regulatory approach but constitutes a regulatory framework for future secondary pieces of legislation. In this vein, upon the entry into force of the Unofficial Draft Legislation or its amended version, it can be safely assumed that the CMB will seek to implement secondary pieces of legislation to reach regulatory harmonisation with the EU.
Currently, the Central Bank Regulation is the first and only regulation defining and directly governing cryptocurrencies. The Central Bank Regulation refers to cryptocurrencies as “crypto assets” and defines crypto assets as “intangible assets that are created virtually using distributed ledger or similar technologies and are distributed over digital networks, and that are not qualified as money, registered money, electronic money, payment instrument, security or any other capital markets instrument”. The reasoning behind the Central Bank Regulation is explained with several factors as follows: (1) the use of crypto assets in payments may cause non-recoverable losses for the parties to the transactions due to a lack of regulation and supervision mechanism for these assets and the probability of excess volatility; (2) there is no guaranteed mechanism to provide security for wallets; and (3) they may be used in illegal acts due to their anonymous structures.
Even though the purpose of the Central Bank Regulation is mainly to determine procedures and principles regarding the prohibition of the use of crypto assets in payments, the Central Bank Regulation can still be considered groundbreaking as it provides a definition of “crypto assets” for the first time in Türkiye.
Article 3.2 of the Central Bank Regulation explicitly prohibits any type of direct or indirect payment by means of crypto assets, followed by Article 3.3, which prohibits providing services for the use of crypto assets, directly or indirectly, in payments.
Furthermore, Articles 4.1 and 4.2 of the Central Bank Regulation provide that payment service providers (banks, payment companies, e-money companies) are not authorised to: • cooperate or build business models enabling the use of crypto assets, directly or indirectly; or
• provide any services to such business models to use crypto assets, directly or indirectly, in payment services or issuance of e-money.
Since the Central Bank Regulation’s prohibition only refers to payments, collaborating with CASPs remains possible for banks in Türkiye to provide the integration services for customer accounts to facilitate fiat-to-crypto and/or crypto-to-crypto transactions.
It is clear that the Central Bank Regulation in Türkiye introduced a strict restriction on payments in crypto assets and the use of crypto assets by payment service providers. However, some parties are expecting a more flexible approach with the upcoming legislation on crypto assets.
Furthermore, crypto assets are neither treated as money nor equated to fiat currency under Turkish law. However, it is essential to assess whether crypto assets are treated as “e-money”. The Law on Payment and Securities Settlement Systems, Payment Services and Electronic Money Institutions No. 6493 (“Law No. 6493”) defines e-money as “monetary value that is issued on the receipt of funds by an electronic money issuer, stored electronically, used to make payment transactions defined in Law No. 6493 and also accepted as a payment instrument by natural and legal persons other than the electronic money issuer”. In addition, the BRSA implicitly excludes4 Bitcoin when defining “e-money”.
Crypto assets whose prices are pegged to the value of fiat currency or any other external reference are known as “stablecoins”. Arguably, in the event that a stablecoin issuer fulfils the criteria set forth in Law No. 6493 and other applicable regulations, there might be a theoretical possibility that the issued (so-called) stablecoin can be treated as “e-money”. However, as explained above, the Central Bank Regulation strictly prohibits payments with crypto assets. Therefore, currently, it could be safe to say that crypto assets are neither treated as “money” nor “e-money”.
Taking into the account the disasters in the stablecoin ecosystem (such as the Terra/Luna collapse) and recent developments on the regulatory framework of stablecoins to protect investors and preserve financial stability (such as the reached provisional agreement on MiCA by the European Parliament), additional legal developments on these issues in Türkiye can be expected.
There is no regulation concerning government-/central bank-backed crypto assets. However, in a press release numbered 2021/40 of September 15th, 2021,5 the Central Bank of the Republic of Türkiye announced that it had signed bilateral memorandums of understanding with ASELSAN,6 HAVELSAN7 and TÜBİTAK-BİLGEM (the Informatics and Information Security Research Center) and established the “Digital Turkish Lira Collaboration Platform”, and plans to carry out tests that may diversify the coverage of the Digital Turkish Lira R&D Project into areas such as blockchain technology, the use of distributed ledgers in payment systems, and integration with instant payment systems. The Central Bank Digital Turkish Lira R&D Project would be accepted as an initial step to establishing a government-backed stablecoin in Türkiye.
Although there are no crypto assets that are backed by the government or a central bank, the crypto asset BiLira, which is a private initiative, was established as the first stablecoin backed by the Turkish Lira and is transferable on the blockchain.
As explained above, the Central Bank Regulation defines crypto assets as “intangible assets that are created virtually using distributed ledger or similar technologies and are distributed over digital networks, and that are not qualified as money, registered money, electronic money, payment instrument, security or any other capital markets instrument” and it is accepted that the Central Bank Regulation prohibits only direct or indirect use of crypto assets as payment instruments, excluding the purchase, sale, offering, transfer or custody of crypto assets and the crypto asset exchange platforms providing such services.
Despite the definition of crypto assets provided in the Central Bank Regulation, the Istanbul Enforcement Law Court ruled that crypto assets are seizable by comparing their nature to securities with the following explanation: “...such currencies are evaluated within the scope of commodities/securities and are considered as a type of digital currency or virtual money. In terms of Enforcement and Bankruptcy Law, crypto assets fulfill the criteria that having an economic value on its own in order for a property or right to be seized regardless of how it is defined in the economic field.”
Although the definition made by the Court contradicts the definition in the Central Bank Regulation, debates regarding the definition and nature of crypto assets both in academic and economic fields constitute the initial steps of legal recognition by the Republic of Türkiye. For instance, following the Central Bank Regulation, Presidential Decree “The Amendment to the Regulation on Measures Regarding Prevention of Laundering Proceeds of Crime and Financing of Terrorism” (“Amendment to the Regulation on Measures”) was published in the Official Gazette dated May 1st, 2021 and entered into force on the same day. The Amendment to the Regulation on Measures imposes specific obligations on CASPs within the scope of Law No. 5549 on the Prevention of Laundering of the Proceeds of Crimes (“Law No. 5549”). However, no statutory definition of CASPs was found in the Amendment to the Regulation on Measures until the Financial Crimes Investigation Board (“FCIB”) published the Guide on Main Principles Regarding the Prevention of Money Laundering and Financing of Terrorism for CASPs (“AML Guide”). According to definition under said Guide, CASPs “intermediate the trading of crypto assets through electronic trading platforms”.
There is currently no specific regulation dedicated to the sale of crypto assets or tokens, which are thus covered by the more general Turkish Code of Obligation No. 6098, the CML and commodity regulations (please see “Government attitude towards crypto assets” above). However, in its bulletin numbered 2018/42 on September 27th, 2018, the CMB provided that initial coin offerings/sales (“ICOs”) are the sales of virtual (crypto) assets in exchange for fiat currency of other crypto assets in order to finance a project. While stating that ICOs are speculative, highly risky, and generally advertised with a “white paper”, which relates to a prospectus, the CMB further evaluated that the structure of “white papers” differs in accordance with various utilities and applications of the crypto assets issued by ICOs, including, but not limited to, crypto assets that represent: a share in a company; a stake in a project; a right to access a service; and/or a tangible asset/product. Moreover, the regulatory treatment of any business models involving crypto assets and each offering must be assessed on a case-by-case basis, considering the diversity, complexity and rapid evolution of business models and the technical and economic design of the instruments offered.
Furthermore, in the abovementioned bulletin, asserting that ICOs that fall under the jurisdiction of the CMB might be associated with the crime of “unauthorized capital markets activity”, the CMB provided that ICOs resemble public offerings and crowdfunding activities. However, although the Crowdfunding Communique (III-35/A.2), published in the Official Gazette dated October 27th, 2021 and numbered 31641, was recently introduced, its scope does not apply to ICOs. Therefore, there is currently no applicable law on the sale of crypto assets by means of an ICO.
It is worth mentioning that a debate regarding the legality of providing and/or selling different usages/products of crypto assets (derivates and staking) and crypto-backed services in Türkiye is currently held between the participants of the ecosystem. Even though it is not crystal clear, there is a strong belief in the ecosystem that, since derivative instruments are defined as “instruments the values of which depend on the price or return of a security, commodity or an underlying asset and/or depend on an index level which is formed by items or on changes in this index level”, the CMB may consider derivative transactions on crypto assets as a “derivative instrument” under Article 3.1(u) of the CML and classify them as a “security” under Article 3.1(ş) of the CML. In the event that the CMB acts in accordance with the aforementioned approach, CASPs providing customers with derivative products may be regarded as committing the crime of “unauthorized capital markets activity” and may be charged with “imprisonment from two years up to five years and be punished with a judicial fine from five thousand days to ten thousand days” in accordance with Article 109.2 of the CML.
The third paragraph of Article 73 of the Turkish Constitution frames the principle of the legality of taxation by stating that taxes, fees, duties, and other such fiscal obligations shall be imposed, amended, or revoked by law. In Turkish tax law doctrine, it is also accepted that not only the main elements of the tax but also the duties and procedural issues, such as the assessment, notification, accrual, and collection of the tax, and sanctions arising from the taxation, should be regulated by law. In this regard, there is no tax regime regarding taxation of crypto assets in Türkiye as there are no specific tax regulations in force concerning crypto assets and the exchange of crypto assets.
In principle, the taxation of crypto assets depends on the nature of these assets and how they are acquired or exchanged. Therefore, the definition of crypto assets is significant for understanding how they fit within Türkiye’s current tax regime. Considering the definition under the Unofficial Draft Legislation, it is hard to accept that crypto assets will be qualified as a commodity since they are defined as “an intangible asset representing a value or right that can be created and stored virtually through distributed ledger technology or any other similar technology and that can be distributed over digital networks”. Furthermore, the principle of the legality of taxation requires that no tax can be levied without that tax having been enacted by the legislative branch. In this regard, the uncertainty as to whether crypto assets meet taxation requirements should be clarified by law.
However, on September 23rd, 2020, the Edirne Tax Office published its official opinion (“Official Opinion”) that “Bitcoin assets should be declared with an inheritance and transfer tax return because the term commodities refer to all other rights and receivables that can be subject to movable and immovable property as per the Article 3.1 of the Inheritance and Transfer Tax Law No. 7338”. As it is understood from the Official Opinion, it can be deduced that the definition of commodity covers crypto assets pursuant to Article 3.1 of Inheritance and Transfer Tax Law No. 7338. However, from our perspective, reaching such conclusion without enacting the specific rules as to how crypto assets are treated for the purposes of taxation contradicts the legality principle of taxation and prevents to accept that crypto assets are qualified as a commodity.
According to the Income Tax Law, all types of income, regardless of their nature, are subject to income tax. In this regard, all economic value generated from crypto assets may also be subject to income tax. However, there are no specific provisions in the Income Tax Law governing the taxation of income generated from crypto assets. Therefore, there is no legal regulation on the declaration of crypto asset holdings or funds and revenues generated therefrom for personal income taxation.
From a corporate tax point of view, the nature of crypto assets should be determined for the taxation of income generated from crypto assets. In the event that crypto assets are qualified as securities, they will be subject to the same taxation principles as securities. So, the income derived from the increase in the value of crypto assets will be taxed as commercial income. In the light of the opinions and practices of the tax authorities, taxpayers are able to utilise losses from crypto asset trading to offset such profits. Please note that tax is levied only when income is realised from the sale of crypto assets. Holding crypto assets will not create tax liability until the realisation of income.
In the event that crypto assets are considered commodities, the continuity of the activity realised with crypto assets will change the nature of the gain, which will be taxed according to the Corporate Income Tax Law. If there is no continuity component in the commercial activity, the gain acquired by crypto assets will be accepted as incidental gain. On the other hand, the profit will be commercial gain if the purchase and sale transactions are performed continuously to benefit from an increase in value of crypto assets.
On the other hand, value-added tax (“VAT”) is an indirect consumption tax that is levied on both the supply and the importation of goods and services listed in Article 1 of Value Added Tax Law No. 3065. Similar to the explanation on the corporate tax perspective above, VAT liability and the procedures and principles regarding VAT treatment will depend on how crypto assets are classified. In principle, from a Turkish taxation perspective, crypto asset proceedings are not covered by VAT if they are exchanged for other virtual currencies or fiat currencies, which will likely be deemed a money remittance transaction since it is not listed in Article 1 of Value Added Tax Law No. 3065. However, commission received by CASPs due to the provision of wallet services, which are defined as a software program that allows crypto asset users to store crypto assets, send, and receive crypto transactions, and clearing services for crypto assets offered to third parties, are taxable within the scope of Value Added Tax Law No. 3065.
Law No. 5549 and the Regulation on Measures Regarding Prevention of Laundering Proceeds of Crime and Financing of Terrorism (“Regulation on Measures”), published in the Official Gazette dated January 1st, 2008 and numbered 26751, provide the legal standards on AML/CTF. The competent authority to supervise the application of Law No. 5549 is FCIB, operating under Ministry of Treasury and Finance of the Republic of Türkiye. It is important to note that FCIB may initiate ex officio investigations regarding CASPs to monitor their compliance with AML/CTF requirements without receiving a complaint and may impose monetary sanctions on CASPs when it is detected that they fail to comply with such requirements. For instance, FCIB imposed total administrative fines of approximately €1,125 million on well-known CASPs within the scope of an ex officio audit due to their failure to fulfil its AML/CTF requirements on February 17th, 2022.
In order to prevent the risk of laundering the proceeds of crime and financing terrorism through crypto assets, Presidential Decree No. 3941 was published8 in the Official Gazette dated May 1st, 2021 and numbered 31471 and amended Article 4 of the Regulation on Measures, which determines the term “obliged parties”. With this amendment, the scope of application of the Regulation on Measures has been expanded to ensure that the obligations defined therein are also applied to CASPs. Therefore, CASPs are considered “obliged parties” under the Regulation on Measures and shall be responsible for the prevention of laundering proceeds of crime and financing terrorism.
According to the Regulation on Measures, CASPs should also comply with prevention measures and obligations stipulated under the said Regulation and shall be subject to investigation by FCIB. The current obligations foreseen for CASPs are as follows:
conducting due diligence proceedings for their customers and identifying and verifying them (Know-Your-Customer (“KYC”));
assessing and reporting suspicious transactions to FCIB;
providing information and documents when requested;
retaining customer transaction documents, books and records for eight years and submitting them upon request; and
reporting transactions that exceed the amount determined by the Ministry of Treasury and Finance of the Republic of Türkiye.
In order to implement these obligations, FCIB has published two guides detailing the obligations of CASPs.
To clarify, the obligations of CASPs provided under the Regulation on Measures, FCIB, the competent authority regarding measures for the prevention of money laundering and financing terrorism, published the AML Guide. Without any prejudice to the provisions of simplified measures for the KYC procedure (please see “Simplified KYC procedures for the customers of CASPs” below), the important requirements for CASPs regulated in the AML Guide are briefly provided below:
The main obligations of CASPs are (1) customer identification (KYC), (2) reporting suspicious transactions, and (3) providing information and documents.
KYC processes must be completed before entering a contract (establishing a business relationship) or making a transaction. The accuracy of an individual’s name, surname, date of birth, T.R. identification number (for Turkish citizens), and the type and number of identity documents must be verified with documentation.
After originals or notarised copies of identity documents subjected to verification are submitted to CASPs, their photocopy or electronic image shall be received or information regarding the identity shall be recorded for submittal to the authorities when requested.
The accuracy of an address declared in a permanent business relationship must be verified through (i) a certificate of residence, (ii) an invoice under the individual’s name related to a subscription-based service such as electricity, water, natural gas, or telephone issued within three months of the transaction, or (iii) other documents and methods deemed appropriate by FCIB.
Reporting suspicious activity to FCIB is another important principle to prevent money laundering and terrorist financing. CASPs are also obliged to provide continuous information to FCIB, in addition to reporting suspicious transactions as described above. Therefore, in cases where the CASPs report a suspicious transaction while providing continuous information, they shall still be obliged to report such suspicious transaction separately from the report that is continuously submitted to FCIB.
In cases where a suspicious transaction is encountered, CASPs must report the related information to FCIB by filling out the Suspicious Transaction Reporting Form as per the information and evidence it obtained to the extent possible.
It should also be emphasised that:
the term “transaction” in “suspicious transaction” is not limited to a single transaction and can include more than one transaction; and
a single Suspicious Transaction Reporting Form must be completed for transactions that raise suspicion when multiple transactions are considered together.
Submissions must be made by a legal representative of the related CASP, either physically or via an online system known as EMIS.ONLINE. The procedure for reporting a suspicious transaction is confidential and may not be disclosed to any party other than an FCIB inspector or the Court if the ongoing procedure is pending. The procedure to report suspicious transactions is further explained in FCIB’s Suspicious Transactions Guide.
The latest guideline, which entered into effect on April 18th, 2022, is titled the “Guide for Suspicious Transaction Reports of Crypto Asset Service Providers” (“Suspicious Transactions Guide”), in which FCIB sets out the principles and requirements to report suspicious transactions.
Aligning with the AML Guide, the Suspicious Transactions Guide also requires CASPs to report suspicious transactions to FCIB within 10 days at the latest, or immediately in the event of a non-delayable case. In cases where new information and findings concerning the reported transactions are obtained following the submission of the Suspicious Transaction Report, an additional Suspicious Transaction Report shall be filed and sent to FCIB without delay by addressing that the latter form is an additional report to the previous one. Furthermore, the Suspicious Transactions Guide provides more details on the procedure of submitting a customer’s suspicious transaction to FCIB.
Accordingly, suspicious transactions must be reported by the legal representative of the obliged legal entity using the Suspicious Transaction Reporting Form, which includes the amounts concerned, the name/title of the transaction owner and the justification of the suspicion. In cases where FCIB authorises the relevant CASP, these Suspicious Transaction Reports can also be submitted via EMIS.ONLINE, FCIB’s online operating system. Otherwise, they must be submitted via wet-signed papers or the registered email address. To gain authorisation and access to the EMIS.ONLINE system, the legal representatives of the obliged legal entity must prepare the Suspicious Transaction Reporting Commitment Form attached to the Suspicious Transactions Guide and submit it to FCIB with the documents specified in the form. Whether sent in paper form or electronically, a copy of the suspicious transaction notifications shall be preserved by CASPs for eight years.
In the event that CASPs believe that there are serious indications supporting the suspicion, the relevant CASP can send the Suspicious Transaction Report with a postponement request. However, the justifications should also be demonstrated.
Finally, considering that the FATF updated the interpretive note to “Recommendation 15” in its updated guidance for a risk-based approach in October 2021 and clarified the international standards on the “travel rule” of virtual (crypto) assets, one might expect the Republic of Türkiye, as a member of the FATF since September 24th, 1991, to adopt new regulations and guides in line with recent developments in the ecosystem. Keeping in mind that the “travel rule” of crypto assets in the EU provides a stricter approach to achieve higher standards on AML/CTF9 by means of traceability, threshold limits and verification requirements of “un-hosted wallets” by CASPs, in order to achieve regulatory harmonisation between the European and the Turkish market, provisions mirroring the standards of the “travel rule” of either the EU or the FATF are expected to be implemented in Türkiye as well.
Pursuant to Article 26 of the Regulation on Measures, the obliged parties, including CASPs, may be allowed to take simplified measures in terms of obligation on KYC principles under Law No. 5549. Simplified measures to be complied with by the obliged parties within the scope of KYC have been clarified by FCIB General Communique No:5 (“Communique No. 5”) published in the Official Gazette dated April 9th, 2008 and numbered 26842. CASPs that are “required to carry their activities exclusively in electronic environment” may benefit from simplified measures regarding the KYC principle, in cases where they meet the following conditions of Article 2.2.10 of Communique No. 5:
Executing an agreement with a bank located in Türkiye under which collection and payment transactions for goods and services are conducted in an electronic environment.
Making all collections and payments through a bank account or credit card account that is compatible with the identity of the person whose membership has been accepted upon verified identity information.
During the membership applications of the customer received in an electronic environment, verifying the natural person’s (i) name and surname, (ii) nationality, (iii) date of birth, and (iv) T.R. identification number (foreign identification number for foreigners) through the identity sharing system database of the Ministry of Internal Affairs, General Directorate of Population and Citizenship Affairs (“NVI”).
Pursuant to Article 2.2.10 of Communique No. 5, “for the confirmation of customer’s identity information, obtaining a signature sample in accordance with the procedure set forth in article 6 of the Regulation” is not obligatory. Within this scope, in a simplified method for the KYC procedure, the documents listed above and stipulated in Article 6 of the Regulation on Measures shall be verified without the need for a signature sample. Therefore, CASPs who meet the conditions mentioned in Communique No. 5 shall benefit from the simplified method while fulfilling the KYC and identification obligations provided by Law No. 5549, and obtaining the signature sample of the customer and the documents envisaged in the Regulation on Measures, such as identity card, driver’s licence and passport, shall not be necessary for the verification procedure if the information is verified through the NVI database. However, most CASPs operating in the Turkish market still collect the documents stipulated in Law No. 5549 from their customers to fulfil the KYC identification procedure without taking full benefit of the simplified measures.
On the other hand, some CASPs continue to collect the documents listed in the Regulation on Measures for fulfilling the identification obligations as a precautionary application while they apply the simplified measures for the KYC procedure. Since the documents collected contain personal data of the customers, obtaining such documents may raise liability issues for CASPs under Personal Data Protection Law No. 6698. We believe that such CASPs might be under obligation to acquire explicit consent of the customers rather than utilising the “collection of personal data based on the legal reason” as fulfilment of legal obligations or legitimate interest stipulated by law. Because their personal data process activities would be challenged by the data minimisation principle, this means that personal data shall be adequate and limited to what is necessary in relation to the purposes for which they are processed.
It is important to point out that Article 2.2.10 of Communique No. 5 does not govern the identification procedure of non-residents. Therefore, one might state that the simplified KYC procedure should not be applicable if the customer concerned is a foreign and non- resident person.
Currently, there is no “sandbox” or other incentive to promote research and investment in crypto assets. However, considering that the legal background of the Istanbul Financial Center entered into force on June 22nd, 2022 with Istanbul Financial Center Law No. 7412, in the last quarter of 2022, the Republic of Türkiye aims to establish the Istanbul Financial Center, creating an innovative hub for future fintech development. Most importantly, in its 2021 Annual Report on the Fintech Ecosystem of Türkiye, the Finance Office of the Presidency of the Republic of Türkiye provides that a regulatory sandbox, aiming to improve fintech products, services and business models to revitalise the sector and identify and transform improvement areas in regulations, will be located in the Istanbul Financial Center. The Finance Office of the Presidency of the Republic of Türkiye expresses that, with this structure, it will be easier to develop innovative financial products, trigger competition and innovation, and develop policies based on outputs.
Currently, there is no specific provision in capital market regulations regarding investment managers owning crypto assets for investment purposes. However, collective investment funds, including alternative investment funds, are prohibited from investing in crypto assets or crypto asset-backed products, and exchange traded funds that have crypto assets in their portfolio and shares of CASPs according to the CMB Decree dated November 27th, 2021.
Furthermore, according to the Unofficial Draft Legislation, which was first brought to public attention in December 2021 without any official press release, the CMB will have the authority to determine the procedures and principles regarding investment advisory and portfolio management for crypto assets.
Once the Unofficial Draft Legislation comes into force, individuals and institutions (including, but not limited to, investment managers, investment advisors or fund managers, and CASPs) that operate in the crypto asset industry without obtaining a licence or permission from the CMB will face penalties and administrative measures, since they will be subject to the supervision of the CMB in terms of compliance with the CML.
Currently, the mining of crypto assets is not regulated. Mining in itself does not fall under the definition under the CML.
Since ecological threats are escalating day by day, various blockchain projects are being established in a proof-of-stake (“PoS”) consensus rather than a proof-of-work (“PoW”) consensus or migrating to a PoS consensus (such as ETH 2.0). Therefore, a different assessment may be conducted on blockchains with a PoS consensus.
Regarding staking on blockchains with a PoS consensus, even though the rewards generated with staking activities may be regarded as an “interest” of a “deposit account” and claimed as an activity of “accepting deposits” under Article 4.1/(a) of Banking Law No. 5411 (“Banking Law”), Article 3.1 of the Banking Law defines “deposit” as “money accepted by announcing to the public, verbally or in writing or in any manner, in return for or without a consideration or to be returned on a certain date of maturity or whenever it is called”. Therefore, considering that crypto assets are not treated as money in accordance with the Central Bank Regulation, the rewards generated by staking crypto assets should not be regarded as banking activity.
Additionally, there should be a different approach between on-chain staking and custodial staking activities. At this point, it should be emphasised that on-chain staking activities are performed on a (so-called) decentralised network with a PoS consensus directly by the users (validators) without providing their private keys to a third party. Therefore, in our opinion, differentiation between on-chain staking and custodial staking activities is a must, the latter being a customer activity, by providing their crypto asset private keys in exchange for an “interest” rate determined by the relevant CASP rather than the rewards being the natural product of participation in a PoS consensus mechanism.
However, it should be stated that there is not yet a clear approach that differentiates between on-chain staking (staking on blockchain) and custodial staking (staking with products provided by CASPs). In this vein, it is not crystal clear whether custodial staking activities will be subject to the CML, the Banking Law or another legislation.
There are currently no border restrictions or obligations to declare crypto asset holdings under Turkish law.
The AML Guide (please see “Money transmission laws and anti-money laundering requirements” above) provides that, since CASPs and their customers enter into agreements and customer transactions are carried out based on these agreements, business relationships between CASPs and their customers are regarded as “continuous business relationships”. In this regard, CASPs are also obliged to provide continuous information to FCIB considering the relation between CASPs and their customers, accepted as “continuous business relationships”.
Therefore, a CASP must submit a report by filing to FCIB if a suspicious transaction is detected under the AML/CTF regulations discussed above (please see “FCIB’s Suspicious Transactions Guide for CASPs” above) while providing continuous information. Other than reporting suspicions transactions, there is no specific provision regarding the reporting requirement for crypto asset payments for either CASPs or parties of the transaction.
There is no established law with respect to the treatment of crypto assets under Turkish inheritance law. Given the fact that there is no consensus on the definition of crypto assets from a legislation perspective, there is ambiguity when determining whether crypto assets will be a part of the deceased’s estate. Considering the anonymous nature of crypto assets, the identification and collection of crypto assets as inherited property would be a material issue, unless the relevant private key or password is known to the deceased even though it is accepted that crypto assets will be succeeded to by the deceased.
On the other hand, on September 23rd, 2020, the Edirne Tax Office accepted under the Official Opinion that: “Bitcoin assets should be declared with an inheritance and inheritance tax will be imposed upon the estate of a deceased person in respect of Bitcoin that were held by such person.” According to the mentioned Official Opinion, “Bitcoin” can be accepted as a commodity because, as per Article 3.1 of the Inheritance and Transfer Tax Law, the term “commodity” refers to all other rights and receivables that can be subject to movable and immovable property. As explained under the “Taxation” section above, reaching such conclusion without enacting the specific rules as to how crypto assets are treated for the purposes of taxation shall contradict the legality principle of taxation and prevents to accept that crypto assets are qualified as a commodity.
Moreover, the Central Bank Regulation and the Unofficial Draft Legislation define crypto assets mainly as “intangible assets”. In this regard, theoretically, crypto assets can be included in the heritage similar to other assets of the deceased person and can be subjected to estate planning and testamentary succession. However, the legal framework and the statutory definition must be implemented so that issues related to inheritance law can be properly explained.
Lastly, it is important to mention that, on November 13th, 2020, the term “digital asset” was defined for the first time by the 6th Civil Chamber of the Antalya Regional Court of Justice10 as “other assets that are solely available in digital form and stored electronically such as videos, photos, emails, personal social media accounts” and the Court ruled that a number of digital assets were part of the deceased’s estate as digital heritage, “passing down of the digital assets to inheritors; being subject to inheritance”. In the event that crypto assets are qualified as “digital assets”, it would be possible to open the door for crypto assets to be included in succession and inheritance.
This article is also reviewed by and published in Global Legal Insights Blockchain&Cryptocurreny Regulation 2023.
Please click here to read the full article: https://www.globallegalinsights.com/practice-areas/blockchain-laws-and-regulations/turkey-trkiye
-Att. Alper ONAR, Att. Emre SUBAŞI