Although it remains unclear whether cryptocurrencies will replace traditional money in the near future or ever, they have become a global phenomenon lately. Likewise, the economic turbulence in Turkey has led to a surge in swapping the local currency for cryptocurrencies despite their price volatility. According to a recent survey, Turkey has the fourth-highest rate of cryptocurrency use out of 74 countries1.
Background of Recent Developments
With the growing popularity of the crypto market in Turkey, the government’s concerns about using cryptocurrencies for illegitimate activities such as money laundering, terrorist financing, and tax evasion have gradually increased. As a response to all these matters, the signals of the legislative framework for the crypto-assets have been given under Turkey’s 11th Development Plan2. Turkey’s economic roadmap also unveils that the Central Bank of the Republic of Turkey shall foster the financial, technologic, and legal infrastructure of digital money by the end of this year3.
It is also known that the Financial Crimes Investigation Board of the Turkish Ministry of Treasury and Finance has recently requested certain user information from the cryptocurrency exchange platforms4. Besides, a Turkish enforcement court has ruled that application for a freezing order over cryptocurrency assets is enforceable under the Turkish legislation5.
First Regulation on Crypto-Assets
Finally, for the first time, legislation directly stipulating the matters as to crypto-assets was introduced in Turkey on 16 April 2021. The Regulation on Prohibition of the Use of Crypto-Assets in Payments (Regulation) that mainly bans the use of the crypto-assets in payments for goods and services was enacted based on the authority vested under the Law on Payment and Securities Settlement Systems, Payment Services and Electronic Money Institutions numbered 6493 (Law no. 6493) and the Law on the Central Bank of Turkey numbered 1211. The Regulation shall enter into force on 30 April 2021.
The Central Bank of the Republic of Turkey (Central Bank) has published a press release explaining the rationale behind the Regulation6. As per the release, crypto-assets may entail significant risks due to the facts that they are neither subject to any legislation and supervisory mechanism nor a central regulatory authority, their market value is excessively volatile, they may be used for illicit activities as a result of their anonymity characteristics, wallets may be stolen or unlawfully used without the authorisation of their holders, and transactions are irreversible. It is further stated that the use of crypto-assets as a payment instrument may cause non-recoverable losses for the parties to the transactions and may trigger trust vulnerability to the methods and instruments currently in use.
Outcomes of the Regulation
Crypto-assets are defined as intangible assets that are created virtually, relying on the distributed ledger technology or similar technology, distributed through digital networks, and are not qualified as fiat money, registered money, electronic money, payment instrument, security, or other capital market instrument for the interpretation of the Regulation.
The Regulation stipulates that the crypto-assets shall not be used in payments either directly or indirectly. Provision of services as regards direct or indirect use of crypto-assets in payments is also prohibited under the Regulation. Accordingly, the Regulation precludes the use of crypto-assets as a payment medium while it is silent on utilising the same as an investment instrument.
The Regulation further sets out that the payment service providers shall not develop business models facilitating direct or indirect use of crypto-assets in the provision of payment services and issuance of electronic money and provide any service relating to such business models. As per Law no. 6493, the term ‘payment service providers’ also comprises banks. Therefore, such prohibition is also applicable to the banks and prevents them from engaging with the crypto exchange platforms to develop more user-friendly business models.
Finally, the payment and electronic money institutions are prohibited from acting as an intermediary for the platforms providing purchase, sale, custody, transfer, or issuance services for crypto-assets or fund transfers to be made thereon. However, the users may still transfer funds to/from the crypto exchange platforms through the method of bank transfers.
Last but not least, the Regulation does not prohibit cryptocurrency trading. Accordingly, the users may continue to buy and sell the cryptocurrencies as an investment instrument on the crypto exchange platforms. However, open questions remain as to how the Turkish legal system will treat cryptocurrency assets. When considering the recent economic turmoil in Turkey, a clear and detailed regulatory framework as regards crypto-assets with a focus on monitoring, auditing, and risk management rather than imposing new restrictions is very much needed. At this point, it is crucial not just to examine the challenges but also the opportunities raised by crypto-assets.
So, what is next? Let’s wait for the upcoming regulations on crypto-assets while the trending topic nowadays around the globe is the official listing of cryptocurrency exchange platforms on Nasdaq as another crypto-industry milestone. Hopefully, Turkey will take a responsive approach to the recent developments around emerging technologies and new investment opportunities considering the transaction volumes of cryptocurrencies and alternative blockchain-based fundraising models such as initial coin offerings (ICOs) and stock token offerings (STOs). Since investments in cryptocurrencies have not been explicitly prohibited, a regulatory sandbox for the eco-system players as introduced with Turkey’s 11th Development Plan may nurture innovation and boost the economy.