A Comparison Between the EU and Turkish Crypto-Assets Regimes: Key Differences

Artun Mimar, Legal Counsel, Bitexen

İbrahim Ethem Delen, Legal Intern, Bitexen

Introduction

Comparing the recently drafted Turkish bill on crypto-assets (“Turkish Bill”) with the European Union’s regime on crypto-assets embodied in the Markets in Crypto-Assets Regulation (“MiCA”) could contribute to the accurate understanding of the scope of the soon-to-be-introduced Turkish regime on crypto-assets. For this purpose, we would like to point out here key differences between the two regimes and thus offer a critical perspective on the Turkish Bill.

Key Differences Between the two Regimes

1. The Definition of Crypto-Assets: MiCA defines crypto-assets as “a digital representation of a value or of a right that is able to be transferred and stored electronically using distributed ledger technology or similar technology”. The Turkish Bill, on the other hand, defines crypto-assets as follows: “Intangible assets that can be created and stored virtually using distributed ledger technology or similar technology, that are distributed through digital networks and that can represent value or rights.”

One notices, as an important difference between the two definitions, that while MiCA determines “transferability” as an essential element of crypto-assets, the Turkish Bill does not. The importance of this difference can be grasped by reading paragraph 17 of MiCA, which states that

“Digital assets that cannot be transferred to other holders do not fall within the definition of crypto-assets. Therefore, digital assets that are accepted only by the issuer or the offeror and that are technically impossible to transfer directly to other holders should be excluded from the scope of this Regulation.”

MiCA thus makes a distinction between “digital assets” and “crypto-assets”, crypto-assets, characterized by their transferability, being a sub-category of digital assets. The Turkish Bill’s definition of crypto-assets, on the other hand, seems to contain such non-transferable digital assets. In this way, for example, loyalty schemes where the loyalty points can be exchanged for benefits only with the issuer or offeror of those points can, in principle, fall under the Turkish Bill.

2.   The Categorization of Crypto-Assets: MiCA recognizes five types of crypto-assets that are, in MiCA’s terms, the following:

a) e-money tokens, defined as “a type of crypto-asset that purports to maintain a stable value by referencing the value of one official currency”.

b) asset-referenced tokens, defined as “a type of crypto-asset that is not an electronic money token and that purports to maintain a stable value by referencing another value or right or a combination thereof, including one or more official currencies”

c) crypto-assets other than asset-referenced tokens or e-money tokens (no definition provided)

d) NFTs (no definition provided)

e) Crypto-assets that qualify as one or more of the following: financial instruments, deposits, funds, securitisation positions, non-life or life insurance products, pension products, officially recognised occupational pension schemes, social security schemes (each of which is defined in the relevant EU or national legislative act)

MiCA regulates the digital assets enumerated in points a), b) and c). While NFTs have been explicitly left outside MiCA’s scope, crypto-assets that are contained in point e) have been determined to be subject to the relevant EU or national legislative acts.

When it comes to the Turkish Bill, it recognizes, in its own terms, the following types of crypto-assets:

a) Crypto-assets that grant rights peculiar to capital markets instruments

b) Crypto-assets recognized as electronic money in regulations on electronic money and payment services

c) Crypto-assets aiming to provide access to a product or service offered, or representing such products and services

It should also be noted, in this connection, that, right after the above-indicated categorization, the Turkish Bill states the following;  “Without being limited to these [three categories], crypto-assets are subject to the applicable legislative provisions, according to the features they have and the rights they promise, in case they present the same elements in written, verbal or other ways.”

The importance of this categorization is that, as per paragraph 1 of Article 4 of the Turkish Bill, the Capital Markets Board is empowered to regulate crypto-assets in point a, the Central Bank those in point b and the Ministry of Trade those in point c. It is our understanding that only the Capital Markets Board is empowered, however, to regulate crypto-assets service providers, whatever the nature of the crypto-asset, as per paragraph 2 of Article 4. It should be noted that all these empowerments are very broad within their own scope.

Turning now to a comparison, the MiCA counterpart of the crypto-assets enumerated in point a) in the Turkish Bill would be “crypto-assets that qualify as financial instruments”.

The MiCA counterpart of the crypto-assets enumerated in point b) in the Turkish Bill, however, does not seem clear. The reason for this is because existing Turkish regulations do not recognize crypto-assets as electronic money. On the contrary, Paragraph 1 of Article 3 of the Central Bank’s “Regulation on the non-use of Crypto-Assets in Payments” explicitly states that crypto-assets are not electronic money. It would be expected then that the Central Bank gives life to the category b) of the Turkish Bill by amending its above-mentioned regulation and, to do this, relies on the category of e-money tokens as identified by MiCA.

At the first glance, crypto-assets mentioned in point c) in the Turkish Bill evoke the “utility tokens”, which MiCA defines as a “crypto-asset that is only intended to provide access to a good or a service supplied by its issuer” and which are explicitly placed in MiCA into the category of “crypto-assets other than asset-referenced tokens or e-money tokens”. One remarks, however, that point c in the Turkish Bill not only comprises utility tokens but also indicates in its latter part crypto-assets representing products and services. We hope to find out what is meant by crypto-assets representing products and services by further regulation.

When it comes to the general statement in the Turkish Bill providing, in mysterious terms so-to-speak, that crypto-assets other than the three categories will be subject to applicable legislative provisions, we understand this general statement to be the counterpart of point e) in the MiCA categorization. That is to say, if a crypto-asset can be “qualified as” something already recognized by Turkish Law, then the laws and regulations regarding that “something” shall apply. To give examples from MiCA, this could be “insurance products”, “pension products”, etc.

Finally, it should also be noted in this heading that, unlike MiCA recognizing “crypto-assets other than asset-referenced tokens or e-money tokens”, the Turkish Bill lacks such a “residual” category of crypto-assets. By residual we mean that category which applies as long as a crypto-assets does not fit into another category. So, for example, according to MiCA, while NFTs themselves are out of its scope, the fractionalized parts of NFTs, not being unique nor non-fungible, would be categorized within the residual category and be subject to the rules surrounding that category. According to the Turkish Bill, however, for a crypto-asset that does not fall within the three categories created, there willl be a regulatory gap, unless that crypto-asset can be qualified as “something” existing, which might lead the three above-mentioned authorities to widen their mandates by expansive interpretations, which in turn would lead to regulatory uncertainty.

3.   The Activities Involved: MiCA regulates the following activities by private entities in connection with crypto-assets:

a) The offering/issuing of crypto-assets

b) Seeking admission to trading on a trading platform of crypto-assets

c) The provision of services related to crypto-assets

The Turkish Bill, dealing mainly with the provision of crypto-asset asset services, contains only two rules governing the offering/issuing of crypto-assets, notwithstanding the three authorities’ empowerment to lay down further regulation. The first one (Article 2) empowers the Capital Markets Board, as the competent national authority, to regulate the issuing of capital market instruments as crypto assets. Needless to say, this provision addresses only those crypto-assets that may be qualified as capital market instruments. In MiCA, however, the issuing/offering of all the types of crypto-assets are regulated.

The second rule governing the offering/issuing of crypto-assets empowers the Capital Markets Board to regulate the sales and distribution (thus the offering), in the form of crowdfunding and without giving rise to partnership or indebtedness, of crypto-assets that develop the distributed ledger technology and that TÜBİTAK (Turkish Scientific and Technological Research Center) shall approve. Once again, the offering of only a limited number of crypto-assets is hereby regulated. It is also unclear which category of crypto-assets are involved by this second rule. At the first glance, utility tokens seem to be at stake, but further regulation would make it clearer.

When it comes to the activity of “seeking admission to trading on a trading platform of crypto-assets”, we do not see such category in the Turkish Bill. It has been commented that the reason for introducing the category of “seeking admission to trading” was to prevent token issuers/offerors from circumventing their regulatory obligations by having recourse to IEOs intermediated by exchange platforms.

Finally, another difference between the two regimes is that MiCA recognizes and regulates only a limited types of services provided in connection with crypto-assets. The Turkish Bill, however, does not follow such a numerus clausus principle: any crypto-assets related service may in principle fall under its purview, as the definition of “crypto-asset providers” is not limited to only certain activities.

Conclusion

To sum up, as we tried to indicate above, there is important differences between the EU and the soon-to-introduced Turkish Bill, when it comes to the definiton of crypto-assets , the categorization of crypto-assets and the rules surrounding each category, and the activities covered. However, the fact that the Capital Markets Board, the Central Bank and the Ministry of Trade have been broadly empowered to enact further regulation may approximate the Turkish Regime to MiCA.