2024 Crypto Asset Regulations

In recent years, uncertainties in the global economy and high inflation rates have led individuals to seek diverse methods to protect and evaluate their assets. Traditionally, investment tools such as foreign currency, gold, and silver have been preferred, but recently, crypto assets have emerged as an attractive alternative.

Crypto assets can be generally defined as assets created, stored, and transferable in a digital environment using blockchain technology. Although the term "crypto assets" often brings to mind cryptocurrencies like Bitcoin and Ethereum, crypto assets are not limited to these currencies. New-generation digital values like NFTs, Tokens, and Metaverse assets are also part of the concept of crypto assets.

The value of crypto assets, especially cryptocurrencies, is determined by societal consensus. Over the past decade, with the decline in the use of paper money, credit cards, virtual POS, and digital transfers have become widespread; money has begun to be represented in a digital environment rather than in physical form. The assets of millionaires or billionaires now consist of digital numbers in bank accounts. In this context, crypto assets also eliminate the physical aspect of money, offering a virtual financial world. In daily life, the question of whether these digital assets can be trusted often arises. Here, societal consensus and regulatory mechanisms come into play.

Operating Principles of Crypto Assets and Blockchain Technology

Crypto assets operate on blockchain technology. This technology is a system where each transaction and relationship is recorded and verified by other users. Blockchain enables secure and transparent transactions without the need for a central authority. Each transaction forms a block, and these blocks are sequentially linked to one another. This structure makes it nearly impossible to alter or reverse transactions, creating a secure digital environment.

In addition to financial transactions, blockchain technology can be applied in a wide range of areas, from storing health data to property records. Crypto assets are one of the most well-known applications of this technology and have the potential to bring about revolutionary changes in financial systems.

Regulations Concerning Crypto Asset Service Providers in Turkey

The “Law on Amendments to the Capital Markets Law No. 7518” (“Law”), which was submitted to the Grand National Assembly of Turkey on May 16, 2024, was accepted by the General Assembly of the Grand National Assembly of Turkey on June 26, 2024, and was published in the Official Gazette No. 32590 on July 2, 2024. This law amendment regulates provisions and sanctions concerning crypto assets, crypto asset platforms, crypto asset custody services, and crypto asset service providers. Further secondary regulations related to the Law are expected to be made in the upcoming stages.

In accordance with these changes, definitions such as "crypto asset," "wallet," "crypto asset service provider," "crypto asset custody service," "platform," and "TÜBİTAK" have been added to the Capital Market's ( “SPK” )definitions article in line with international regulations. A licensing requirement has been introduced by the SPK for the establishment and operation of crypto asset service providers, and it is stipulated that the principles and rules that these providers must follow during their activities will be determined by the Capital Markets Board ("Board") through secondary regulations to be issued.

It is regulated that if crypto asset service providers fail to fulfil their obligations due to unlawful activities, they will be held accountable, and the members of the platform's board of directors will also be held responsible based on their fault and the circumstances, and they will be subject to the provisions on embezzlement within the scope of personal responsibility.

Crypto asset platforms are obliged to determine the crypto assets that will be traded on their platforms or offered for initial sale or distribution. In this process, it is mandatory to establish a written listing procedure regarding whether the relevant assets will continue to be traded. The Board may establish principles and rules on this matter when necessary. This regulation aims to ensure that platforms operate transparently and protect investors.

Crypto asset service providers must keep clients' cash and crypto assets completely separate from their own assets. This regulation is of great importance to ensure the safety of clients' assets. The regulation includes the provision that "these assets cannot be seized, pledged, included in the bankruptcy estate, or subjected to precautionary measures due to the debts of the service providers." Thus, clients' assets are protected against legal and financial risks.

Contracts between crypto asset service providers and clients can be concluded either in writing or using remote communication tools. These contracts must be established using methods that allow for identity verification of the client. The Board will be able to make regulations on the content of these contracts, their modification, termination, and the resolution of disputes that may arise between the parties. Furthermore, any contractual provision that eliminates or limits the service providers' liability to the clients will be considered invalid.

Crypto asset platforms are obliged to transfer 1% of their annual revenues to the Board and 1% to the TÜBİTAK budget for the development of blockchain technologies. This regulation aims to support innovative technologies in the sector and increase the effectiveness of regulatory oversight.

The activities of crypto asset service providers will be regularly audited by independent audit institutions determined by the Board. Additional rules regarding the audit of information systems will be determined by the Board, taking into account the opinions of TÜBİTAK and other relevant institutions. Moreover, personnel authorized by the Board will be appointed to audit the compliance of service providers' activities with the legislation. This audit mechanism will ensure regulatory compliance in the sector and allow for the early detection of potential risks.

Regulations on Sanctions

The Law imposes severe penalties to prevent unauthorized activities in the sector and encourage compliance with legal regulations. Accordingly, individuals or legal entities operating as crypto asset service providers without obtaining the necessary permissions from the Board will be sentenced to imprisonment for three to five years and a judicial fine of five thousand to ten thousand days.

The Board has the authority to temporarily suspend or completely revoke the operating licenses of service providers if they fail to fulfill their cash payment and crypto asset delivery obligations or if their financial structures are severely weakened. Additionally, the Board has the authority to restrict or suspend the signing authority of responsible managers and employees.

To strengthen the obligation of managers and employees to act lawfully and to increase the awareness of responsibility in the sector, crypto asset service providers are held accountable for damages resulting from unlawful activities. However, if these damages cannot be compensated by the service providers, the managers and employees of the service providers will bear personal responsibility proportionate to their fault.

Crypto asset service providers are responsible for the security of information systems and are directly liable for losses that may occur in the event of cyberattacks and information security breaches. If these losses cannot be compensated by the service provider, the members of the service provider will be held accountable proportionately to their fault. However, there is no liability foreseen for damages resulting from service interruptions that occur without the fault of the service provider.

The board members and other members of crypto asset service providers who embezzle money, valuable papers, or crypto assets entrusted to them will be sentenced to imprisonment for eight to fourteen years and a judicial fine of up to five thousand days. Furthermore, they will be obliged to compensate for the damages caused to the service provider.

It is also considered embezzlement when a real person partner who legally or de facto holds the management or control of a crypto asset service provider, whose operating license has been revoked, directly or indirectly uses the resources of the crypto asset service provider or its clients in a way that endangers the secure operation of the crypto asset service provider for their own or others' benefit. Individuals who commit such acts will be sentenced to imprisonment for twelve to twenty-two years and a judicial fine of up to twenty thousand days. However, the amount of the judicial fine cannot be less than three times the damage suffered by the crypto asset service provider and its clients. Additionally, it is stated that the damages will be jointly and severally compensated.

Regulations Left to Secondary Legislation

Although the general principles regarding crypto asset activities have been determined by the Board, it is expected that certain issues will be regulated by secondary legislation to be determined by the Board, which is the authorized body for crypto asset transactions.

Through secondary regulations, principles and procedures will be established regarding the process of obtaining operating licenses for trading platforms, the standards of custody services for crypto assets, and the minimum requirements for institutions that can provide custody services, as well as the application procedure. Additionally, principles and rules regarding investment advisory and portfolio management services for crypto assets will be determined.

According to Article 17 of the Amendment Law, it is regulated that secondary regulations to be issued in accordance with Articles 35/B and 35/C of the Board will be put into effect within six months from the effective date of the Amendment Law.

Conclusion

Although the Law introduces significant provisions to address legal gaps related to crypto assets, there are still many issues that need to be regulated. It is expected that secondary regulations will be issued in the near future concerning these matters. Due to the novelty and detail of these regulations, it is of great importance for service providers and organizations planning to enter the sector to develop comprehensive compliance policies with the support of expert legal professionals and specialists in the relevant sector to avoid any loss of rights.

References:

1. SPK’s Announcement Regarding Crypto Asset Service Providers [https://spk.gov.tr/duyurular/basin-duyurulari/2024/kripto-varlik-hizmet-saglayicilara-iliskin-duyuru]

2. Official Gazette dated 02.07.2024 and numbered 32590 [https://www.resmigazete.gov.tr/eskiler/2024/07/20240702-1.htm]