Fintech Laws and Regulations Turkiye 2023 - Part 1

1. The Fintech Landscape

1.1. Please describe the types of fintech businesses that are active in your jurisdiction and the state of the development of the market, including in response to the COVID-19 pandemic and ESG (Environmental, Social and Governance) objectives. Are there any notable fintech innovation trends of the past year within particular sub-sectors (e.g. payments, asset management, peer-to-peer lending or investment, insurance and blockchain applications)?

In Turkey, there are many different types of fintech service providers offering a very wide range of services such as payment/securities settlement systems, electronic money and payment services, digital banking, open banking, decentralised finance, banking technologies, service model banking, identity verification, insurance technologies, crypto services, digital wallets and capital markets.

The Turkish fintech market has been growing in recent years, with many new fintech startups emerging, as well as global leaders nesting in Turkey.  As at February 2023, there are reportedly 637 active fintech companies in Turkey (according to the 2023 Turkey Fintech Guide by the Presidency’s Finance Office).  Payments are the most prevalent fintech type in Turkey, followed by decentralised finance (blockchain and crypto asset startups) and banking technologies.

Despite the decrease in global risk appetite due to the pandemic, the trend of increasing fintech investments has continued in Turkey. The pandemic has accelerated the adoption of digital financial services and has led to increased demand for contactless payments and online banking.

There is also an increasing focus on sustainable finance in Turkey. The global trend towards sustainability has directed fintech startups to provide sustainable investment solutions. In 2020, the Capital Markets Board issued a circular setting the ESG principles for publicly traded companies and requiring them to disclose their ESG practices and risks as part of their regular reporting obligations. The Capital Markets Board continues to regulate the capital markets with the goal to increase the awareness of sustainable finance and integrate sustainability considerations capital market activities.

Regulatory agencies support the development of fintech and play a significant role in fostering innovation in the fintech sector. Turkey has regulated the fintech services that have accelerated the digital transformation in the financial industries.

• Digital banking, banking as a service and open banking was implemented.
• The API principles and rules for data-sharing services for payment services was published.
• The Istanbul Financial Center Law regulated certain benefits, exemptions and incentives for the participants who are operating in the Istanbul Financial Center.
• Payment and electronic money institutions were included in the FAST system.
• The first payment transaction was made on the Digital Turkish Lira Network.
• Remote identity verification rules eliminated the need for face-to-face interactions.
• The National AI Strategy 2021-2025 has been put into effect, which outlines the strategic priorities of Turkey in terms of AI. The strategies include increasing the number of AI experts and increasing employment in the field, supporting research, entrepreneurship and innovation, expanding access to quality data and technical infrastructure, and strengthening international cooperation.
• Fintechs can operate using the “Buy Now Pay Later” business model by obtaining a financing company licence.

1.2. Are there any types of fintech business that are at present prohibited or restricted in your jurisdiction (for example cryptocurrency-based businesses)?

Turkey is one of the most welcoming and diverse jurisdictions for fintech services. There is no legal regulation or administrative decision that prohibits the use of blockchain technology or crypto assets in Turkey. However, there are certain restrictions on the use of crypto assets in the country.

One of the most significant restrictions is the ban on using crypto assets for payments. Under the Regulation on the Prohibition of the Use of Crypto Assets in Payments (“Crypto Payment Regulation”), individuals and businesses in Turkey cannot use crypto assets directly or indirectly to make payments, and service providers cannot offer services that involve the use of crypto assets in payments. Additionally, payment and electronic money institutions are not allowed to facilitate trading, storage, transfer or issuance services related to crypto assets.

According to the Crypto Payment Regulation, crypto assets also cannot be considered as securities or other capital market instruments. Consequently, crypto assets cannot be constructed as a security.  However, the legal sanction for this is currently not set by the law and not certain. Additionally, the Turkish Capital Markets Association issued a general letter to banks and brokerage firms on December 1, 2017, stating that spot and derivative transactions based on virtual currencies should not be conducted, as virtual currencies do not constitute elements that can serve as a basis for derivative instruments.

2. Funding For Fintech

2.1. Broadly, what types of funding are available for new and growing businesses in your jurisdiction (covering both equity and debt)?

Equity

Angel investors: There are several angel investor networks in Turkey that provide seed funding to startups in exchange for an equity stake.

Venture capitals: There are several venture capital firms and venture capital funds in Turkey that invest in startups, such as Meta Venture Fund and Boğaziçi Ventures.

Crowdfunding: Crowdfunding is a relatively new and increasingly popular way for entrepreneurs and startups in Turkey to raise funds for their businesses by presenting their projects to a large number of individuals.  Crowdfunding in Turkey is regulated by the Capital Markets Board.  Crowdfunding platforms are required to register with the Capital Markets Board and comply with its regulations on disclosure, reporting and investor protection.

Initial Public Offering (“IPO”): Companies may offer capital market instruments such as shares, bonds, bills, etc. to the public through the Istanbul Stock Exchange.

Debt

Bank loans: Banks offer loans to businesses, typically requiring collateral.

Government loans: The Turkish government may offer various funding programmes. For example, the Small and Medium Enterprises Development Organization (“KOSGEB”) offers low-interest loans to small and medium-sized enterprises that meet certain criteria.

Factoring: Factoring companies in Turkey offer factoring services to businesses, allowing them to sell their outstanding invoices for immediate cash.

2.2. Are there any special incentive schemes for investment in tech/fintech businesses, or in small/medium-sized businesses more generally, in your jurisdiction, e.g. tax incentive schemes for enterprise investment or venture capital investment?

Turkey offers a variety of incentive schemes to encourage investment in technology and fintech businesses, as well as small and medium-sized enterprises, including mentorship, access to finance, access to international fintech networks, and advisory services. These incentives are designed to support the growth of innovative businesses, promote economic development and attract foreign investment.

Ministry of Industry and Technology incentives: The Ministry of Industry and Technology provides support for technology and fintech businesses.  Development Funds (e.g. Turkish Development Fund) and Development Agencies (e.g., Istanbul Development Agency) offer incentive programmes. The Ministry provides information and support services to domestic and foreign investors via the Investment Support and Promotion Agency of Turkey.  Also, R&D and Design Centers offer benefits for its participants. The Ministry offers support to companies located in Teknoparks by offering a range of infrastructure, services and support, including access to advanced research facilities, funding opportunities, networking events and training programmes. The Technology and Innovation Fund provides capital support to firms engaged in technology and innovation-based activities with growth potential and financing needs.

TÜBİTAK incentives: The Scientific and Technological Research Council of Turkey (“TÜBİTAK”) offers various support, funding and technology development programmes to promote R&D and innovation in Turkey.

KOSGEB incentives: KOSGEB provides financial and non-financial support to small and medium-sized enterprises in Turkey.

Istanbul Finance Center (“IFC”): The IFC aims to create an integrated ecosystem for the finance sector in Istanbul. The companies operating in the IFC benefit from several tax deductions. Istanbul Finance and Technology Base (“IFTU”), which will be located in the IFC, is designed to respond to the developments and needs in the financial sector and entrepreneurship. Support, training, mentoring, incentives and several other opportunities will be provided for the growth and sustainable structure of enterprises operating in areas such as digital banking, borrowing, asset management, payments, crypto assets, insurance technologies, capital markets and participation fintech.

2.3. In brief, what conditions need to be satisfied for a business to IPO in your jurisdiction?

To conduct an IPO, a fintech company must: be a joint-stock company established in Turkey with properly and suitably drafted articles of association; select its intermediary institution; select an independent auditor for its financial statements; and prepare the necessary documents for application. The existing paid-up or issued capital of the company whose shares will be offered to the public for the first time must be paid in full.

The application process is as follows:

• Preparation of a prospectus, a legal document that contains detailed information about the company’s business, financial condition, prospects and offered securities.
• Application to the Capital Markets Board and Istanbul Stock Exchange.
• Examination of the company by Capital Markets Board and Istanbul Stock Exchange specialists.
• Application to the Istanbul Settlement and Custody Bank, which acts as a central counterparty for all trades, and the Central Securities Depository of Turkey, which provides a central securities depository service.
• Decision of the Istanbul Stock Exchange regarding the company’s market segment.
• Listing and trading of capital market instruments on the Istanbul Stock Exchange.

2.4. Have there been any notable exits (sale of business or IPO) by the founders of fintech businesses in your jurisdiction?

Yes, there have been several notable exits by the founders of fintech businesses in Turkey.  One such example is the acquisition of iyzico, a leading payment services provider, by Amsterdam-based payments platform PayU in 2019.  Another example is the IPO of Tcell in 2020.  Some recent notable acquisitions include MikroYazılım’s acquisition of e-Mükellef. The consolidation of the Turkish fintech ecosystem is expected to continue in 2023, as fintech startups seek to become part of larger entities to compete globally.

As at March 2023, there are two decacorns and four unicorns in Turkey (i.e. Trendyol, Getir, Insider, Hepsiburada, Dream Games, and Peak Games).

3. Fintech Regulation

3.1. Please briefly describe the regulatory framework(s) for fintech businesses operating in your jurisdiction, and the type of fintech activities that are regulated.

Electronic money institutions, payment systems and payment institutions are regulated and licensed by the Central Bank of the Republic of Turkey; crowdfunding platforms and intermediary institutions are regulated and licensed by the Capital Markets Board; digital banking and service model banking/financing companies are regulated and licensed by the Banking Regulation and Supervision Agency; and insurance brokers and agents are regulated and licensed by the Insurance and Private Pension Regulation and Supervision Agency.

The Banking Law in Turkey is the primary law that governs all banking activities in the country, including those of fintech companies that provide financial services. Payment and Electronic Money Institutions and Payment Systems Laws set the regulatory framework for payment and electronic money institutions and payment systems in Turkey. They outline the requirements for obtaining a licence, as well as the conditions for conducting relevant transactions and issuing electronic money. The Capital Markets Law regulates capital markets in Turkey, including the activities of fintech companies that operate in the securities and investment markets.

3.2. Is there any regulation in your jurisdiction specifically directed at cryptocurrencies or cryptoassets?

In Turkey, there is currently no specific crypto currency or crypto asset regulation in place. The regulatory framework for crypto assets is currently under development.

Crypto currency trading platforms, which are also known as “crypto asset service providers” in Turkey, are allowed to operate in the country and currently they are not required to be registered or licensed by regulatory authorities. With that being stated, there are unofficially leaked plans for a Crypto Assets Legislative Draft that aims to regulate crypto assets and markets. If this draft is implemented, it is likely that licensing and registration requirements will be imposed on crypto asset exchanges in Turkey. However already established providers may be able to use their grandfathering rights.

The regulations that are directly applicable to crypto assets in Turkey are as follows:

Crypto Payment Regulation: The Central Bank of the Republic of Turkey’s ban on using crypto assets for payments apply to all types of payment and money transfers.

AML Regulations: Details regarding AML Regulations can be found at question 4.5.

The MASAK General Communiqué No: 21: Communiqué 21 stipulates that “crypto asset service providers” must take necessary measures to determine whether the customer or its real beneficiary is a politically exposed person (“PEP”). The Communiqué defines PEP as those who have been appointed or elected to an important public duty and senior managers of international organisations. These measures under the Communiqué shall also be applied to the PEP’s spouses, first-degree relatives and close associates. “Crypto asset service providers” must: obtain senior management approval prior to the establishment of a business relationship with subject persons; research the source of assets and funds; and conduct extra audits.

Crowdfunding Communiqué: The Crowdfunding Communiqué establishes rules and procedures related to the collection of money from the public through equity and/or debt-based crowdfunding, the establishment of crowdfunding platforms, the transfer of shares, management, the required qualifications, and the control and supervision of those companies. In accordance with the law, crowdfunding platforms in Turkey must obtain a licence from the Capital Markets Board.

3.3. Are financial regulators and policy-makers in your jurisdiction receptive to fintech innovation and technology-driven new entrants to regulated financial services markets, and if so how is this manifested? Are there any regulatory ‘sandbox’ options for fintechs in your jurisdiction?

The Turkish government has shown a positive attitude towards fintech innovation and technology-driven new entrants. The Turkish government’s vision to promote the growth of fintech in Turkey can be seen in the programmes issued by the presidency and relevant ministries. The Istanbul Financial Center will establish a Regulatory Sandbox to enable the testing of fintech products, services and business models in a real environment with real customers under regulatory supervision.

3.4. What, if any, regulatory hurdles must fintech businesses (or financial services businesses offering fintech products and services) which are established outside your jurisdiction overcome in order to access new customers in your jurisdiction?

In general, individuals in Turkey are open to using foreign products and services, which creates an advantage for foreign fintech businesses. Foreign fintech businesses may face challenges related to cultural and language differences, as well as differences in the regulatory environment and business practices.  Naturally, fintech businesses that want to access new customers in Turkey must comply with Turkish regulations and obtain the necessary licences.

Generally, all company shareholders may be of foreign nationality, and it is not necessary for a member of the board of directors to be a Turkish citizen or be based in Turkey. However, partnering with local firms or having a representative can offer several advantages.