New Regulations on Cryptocurrencies
Ece Özelgin, Special Counsel & Head of Public Policy
Berfin Ege Bulut, Associate
Until the Central Bank of Republic of Turkey’s (“CBRT”) new regulation published on April 16, 2021, the exchange of fiat currency for cryptocurrency was not regulated in the Turkey’s legal system. Even though certain financial authorities have made public statements regarding transactions with cryptocurrencies, there were no requirements anticipated by the lawmakers binding upon cryptocurrency exchange platforms and cryptocurrency traders up until recently.
With the effect of the rapid increase in the trade of cryptocurrencies since the beginning of Covid-19 pandemic, discussions of regulating the crypto assets were accelerated for the last couple of months. While the Ministry of Treasury and Finance has released a written statement in March 2021 noting the Ministry’s concerns about cryptocurrencies and stated that the developments on this matter were monitored closely and works will be carried out in cooperation with the Banking Regulation and Supervision Agency, the CBRT and other relevant institutions; Financial Crimes Investigation Board (“MASAK”) has requested user information from cryptocurrency platforms as per its duty with respect to anti-money laundering on April 1, 2021. The regulation of crypto assets was also included in the government’s Economic Reform Package announced in March 2021, which stated that the CBRT will form the economic, technological and legal basis of digital currencies.
With the high impact of the unexpected dismissal of the Governor of CBRT in March 2021; a rise in inflation, a sharp exchange rate depreciation and reduction in foreign reserves in recent years have led Turkish citizens to keep their savings in gold, foreign currencies, and cryptocurrencies in order to protect from the rapid depreciation of Turkish lira.
On the other hand, President Erdogan has urged the public to invest gold and savings of foreign currency back into the Turkish economy. In a way to implement this approach of the government, a regulation which anticipates a ban for cryptocurrencies as a form of payment has been enacted in April 16, partially in an attempt to combat a flight from the tanking Turkish lira. However, following the new regulation, the unpredictability in the future regulatory acts and uncontrolled boom in the market have caused collapses in major exchange platforms, which paved the way for the acceleration in the works on potential regulations on cryptocurrencies.
In light of these information, a detailed analysis of the new regulations and the incidents such as collapses of the exchange platforms are provided below.
Regulation on not Using Crypto Assets in Payments
As already known, the CBRT has issued the Regulation on not Using Crypto Assets in Payments (“Regulation”), which has been published in the Official Gazette dated April 16, 2021 and numbered 31456.
Although the Regulation reserves that the definition’s application scope is limited with the implementation of the Regulation itself, in its Article 3/1, the Regulation provides that crypto assets shall be deemed as “intangible assets that are created virtually using distributed ledger technology or a similar technology and distributed over digital networks, but are not qualified as fiat currency, fiduciary money, electronic money, payment instrument, securities or other capital market instruments”. In addition, the Regulation introduced the following prohibition for the use of crypto assets:
· Crypto assets cannot be used directly or indirectly for payments.
· No service can be provided for direct or indirect use of crypto assets in payments.
· Payment service providers cannot develop business models in a way that crypto assets are directly or indirectly used for provision of payment services and electronic money issuance, nor can they provide any services related to such business models.
· Payment and electronic money institutions cannot act as an intermediary for fund transfers from or to platforms that offer trading, custody, transfer or issuance services for crypto assets.
It may be evaluated that, with the Regulation, the CBRT has aimed for an early intervention necessary to establish a controlled market, especially in respect of payment sector by clarifying the status of crypto assets at provision of and utilization from payment services, until a more comprehensive regulation is enacted.
Fraud Claims in Connection with Cryptocurrency Platforms
Following the publication of the Regulation, and commencement of the law enforcement agencies’ investigation towards the fraud allegations committed via the cryptocurrency exchanges, an Istanbul-based exchange, Thodex, has suspended operations amid accusations of fraud. Following this incident, the Turkish authorities have raided offices in Istanbul associated with Thodex and arrested more than 60 people. According to the allegations, Thodex has nearly 400,000 active users, whose accounts were nominally worth a total of USD 2 billion. Another cryptocurrency exchange, Vebitcoin has also collapsed, as it has ceased all activities after facing a financial strain. According to CoinGecko data, Vebitcoin had almost USD 60 million in daily trading volumes prior to its collapse.
As the cryptocurrency market was heavily impacted due to the news, the increasing demand to withdraw money from the cryptocurrency exchanges revealed other problems. While it was noticed that the users were unable to access Sistemcoin, another cryptocurrency platform, for two months, the users voiced their complaints regarding another platform, Bitay, as they were not able to withdraw their money. Although Bitay ensured their customers by stating that the problems observed due to instant and increased demand for money withdrawal, the fact that Turkey has 40 cryptocurrency exchange platforms in different sizes has drawn attention to the correlation between the idleness at regulating such platforms and the potential of conducting fraudulent activities through them.
Besides, according to the Chainalysis 2020 Geography of Cryptocurrency Report, which is a research by a blockchain analysis company, Turkey has the highest volume of crypto transactions in the Middle East and the price of bitcoin against the Turkish lira has risen 95% since the start of the year. Hence, in case the money of the investors has vanished due to these frauds, it is viable to deduce that the losses will add another element of instability to Turkey’s already vulnerable economy.
In this regard, Turkish Capital Markets Association (“TCMA”) has established a working group to work on both current status of the market and potential regulation. Preparing a report, the TCMA has explained that since there is no regulation governing trade of cryptocurrencies, these transactions are not under the protection of any public institution and lack of supervision paves the way fraudulent activities. The TCMA warned that certain business models based on cryptocurrency are structured in the form of entities that promise large profits by abusing people's lack of information and causing significant financial losses and since the practices of enterprises that will conduct initial coin offering are not generally carried out under any regulation and supervision, they create a suitable ground for fraud. Upon these conclusions, the TCMA decided to initiate the works for preparation of a regulation.
As different problems and concerns were experienced in a very short period of time, the government also involved in search for fraudulent activities. While the government is channeling its forces to arrest the CEO of Thodex, who is allegedly escaped to Albania, people who lost their money due to collapsed platforms applied to the Petition Committee of the Grand National Assembly of Turkey (“Petition Committee”) and complained about lack of protection and claimed their losses. Nevertheless, the news revealing photos of Thodex CEO with Minister of Interior and his nephew, Minister of Foreign Affairs and the fact that Thodex CEO is a business partner with son of one of the MPs of the Nationalist Movement Party, the ally of AKP, have supported the claim for failure of the government, which is expected to accelerate the legislative procedure.
New Regulation of Financial Crimes Investigation Board
As the fraudulent activities have been discussed, an action has been taken by the government, which imposes strict obligation to crypto asset service providers. Accordingly, with the Regulation Amending the Regulation on Measures Regarding Prevention of Laundering Proceeds of Crime and Financing of Terrorism (“MASAK Regulation”) was published in the Official Gazette dated May 1, 2021 and numbered 31471.
With the MASAK Regulation, the crypto asset service providers have become one of the -institutions responsible for prevention of laundering proceeds of crime and financing of terrorism. Accordingly, in addition to other institutions, such as banks, financial leasing companies, payment service providers, asset management companies, crypto asset service providers will also have to comply with the measures introduced by the MASAK. In this regard, they will fulfill the necessary procedures regarding customer identification (KYC), suspicious transaction reporting, appointment of a compliance officer. While the crypto asset service providers will be subject to audit of MASAK, they will also be obliged to make detailed identification during every transaction above a certain amount and monitor transactions that do not have a reasonable legal and economic purpose. Although the reputable and multinational cryptocurrency exchange platforms were already implementing KYC procedures to some extent within their governance structure, MASAK Regulation will require more comprehensive procedure, which differs based on the legal nature of the customer, i.e., whether the customer is natural person, legal person registered to trade registry, association or foundation, trade union, etc. Moreover, during the audits of MASAK, they will be required to provide all kinds of information and document requested by MASAK.
Prospective Regulations on Cryptocurrencies
It has been reported that the Petition Committee, which received many complaints from the citizens, asked the response of the Capital Markets Board (“CMB”) for the cryptocurrency platforms, especially regarding recent developments. As a response, the CMB has underlined it does not have supervisory authority on cryptocurrency platforms, and according to the current regulations, it is not possible for the CMB to conduct an examination regarding the platforms and the contracts they have signed with their customers. In its response, the CMB has emphasized that cryptocurrency/assets do not have a legal basis in Turkey and the transactions carried out are not under the guarantee of any public authority and other public institutions have also warned the citizens on several occasions that they may suffer damage.
Moreover, according to the local news, the CMB also referred to the Financial Stability Committee, which is chaired by the Minister of Treasury and Finance and consisting of the heads of the CBRT, Banking Regulation and Supervision Agency, CMB and Savings Deposit Insurance Fund. Accordingly, with the instruction of the Financial Stability Committee, a special team focusing on cryptocurrencies was established and has been closely monitoring both crypto assets and platforms. The CMB has informed the Petition Committee that the Financial Stability Committee also emphasized that there has been high volatility in the values of cryptocurrencies and that certain negativities have come to the force and noted that a working group has been established in order to maintain the coordination and cooperation between the relevant public authorities on a more effective ground, as well as to closely monitor financial technologies and plan the necessary work.
The fact that the CMB has been working on a regulation regarding the cryptocurrencies and cryptocurrency exchange platforms, has been known by the sector for a while. However, with the announcement of the CMB regarding its authorization on cryptocurrency platforms and the statements in the Economic Reforms Action Plan and the Annual Program of the Presidency for the Year 2020, it is observed that the authority to regulate the use of this financial technology may has been shifted to CBRT. Accordingly, with the policy plans, the CBRT has been tasked with implementation of blockchain-based digital central bank money and establishing the economic, technological, and legal infrastructure of digital money.
Under this context, following the fraud charges explained above, the Governor of the CBRT, Şahap Kavcıoğlu has made an announcement by stating that there is an astounding flow of crypto money overseas, which is very distressing. The Governor Kavcıoğlu has underscored that even though several countries such as China have banned the use of cryptocurrencies completely, a complete prohibition does not serve to handle the current concerns. He has also stated that the government is planning to announce a comprehensive regulatory framework in the coming weeks with no intention of prohibiting cryptocurrency outright. In this regard, experts have stressed that in the regulation to be introduced, a license and capital requirement should be introduced and the storage obligations of crypto assets should be established.
Pursuant to the local news, prospective regulation may include the following matters:
· The company that the exchange is affiliated (the “Company”) shall have minimum paid registered capital in Turkey amounted to:
o TRY 2 million (for companies younger than 2 years)
o TRY 5 million (for companies older than 2 years)
o TRY 10 million (for companies older than 5 years)
· The domain of the address of the Company shall be registered in Turkey.
· Account approval procedures shall be made with the identity document and “selfie” procedure before customer acceptance.
· Company shall have instant and t-1 monitoring infrastructure.
· Company shall have a blockchain analysis infrastructure,
· Company shall have the audit report conducted by an independent audit firm.
According to the allegations, in addition to the obligations set above, a data localization requirement for cryptocurrency platforms is expected to be included in the prospective regulation. Currently, it is known that global sector players have been engaging communications with the responsible authorities for the exclusion of the said obligation, with respect of which, we will be closely monitoring the developments.