Turkiye Enacts Cyrpto Regulation And Seeks FATF Gray List Removal

The Evolution of Cryptocurrency in Turkiye

Cryptocurrencies have revolutionized the financial landscape globally, and Turkiye is no exception. The adoption and regulation of these digital assets have become critical in shaping Turkiye's economic and legal framework. This article provides an overview of the recent legislative changes in Turkiye concerning cryptocurrency, focusing on the newly enacted regulations and their implications.

Legislative Changes in the Capital Markets Law

On June 26, 2024, the Turkish Grand National Assembly (TBMM) passed the long-awaited bill regulating the cryptocurrency market. This significant legislative change is part of a broader reform of the Capital Markets Law, comprising 19 articles dedicated to the regulation of crypto assets.

The Context of FATF and Turkiye's Grey List Status

The same period also marked the beginning of the Financial Action Task Force (FATF) meeting in Singapore, attended by the Turkiye delegation, including Turkish Finance Minister Mehmet Simsek. Turkiye, a member of the FATF, was placed on the grey list in 2021 due to deficiencies in preventing money laundering and terrorist financing. Despite efforts to address these issues in 2022 and 2023, the absence of comprehensive cryptocurrency regulations remained a sticking point.

FATF Recommendations and Compliance

FATF's Recommendation 15, "New Technologies," necessitates that countries regulate, license, or register Virtual Asset Service Providers (VASPs) to manage and mitigate risks associated with virtual assets. Turkiye's initial compliance in 2019 was deemed largely compliant, but by 2021, this rating had fallen due to stricter FATF standards driven by the increasing prevalence of cryptocurrencies. The new legislation aims to fulfill these enhanced requirements by establishing a robust regulatory framework.

Detailed Provisions of the New Cryptocurrency Regulation

The newly enacted law introduces several crucial definitions and regulatory measures for the cryptocurrency sector:

1. Licensing and Registration of VASPs:
2. • Mandatory Licensing/Registration: VASPs, including platforms, custodians, and other entities involved in the initial sale or distribution of crypto assets, must be licensed or registered to operate legally.
   • Corporate Transparency and Reputation: Legal measures are established to prevent criminals or their associates from having significant control or management roles in VASPs. The regulations mandate that significant shareholders and executives of VASPs must have a clear legal and financial history, free of criminal records, bankruptcies, or any financial misconduct.
   • AML/CFT Compliance: VASPs are required to adhere to Anti-Money Laundering (AML) and Counter-Terrorist Financing (CFT) regulations. This includes:
   • • Conducting Customer Due Diligence (CDD) for transactions exceeding USD/EUR 1,000, irrespective of whether it involves a continuous business relationship.
     • Maintaining accurate and complete records of sender and receiver information for all virtual asset transfers, ensuring that these details are securely and promptly shared with the receiving VASP and relevant authorities upon request.
3. Operational Requirements for VASPs:
4. • Security and Internal Controls: VASPs must implement robust security measures and internal controls to manage and protect user data and assets. This includes establishing secure storage solutions for private keys and other sensitive information.
   • Platform and Custody Services: The law defines a "platform" as any entity facilitating the buying, selling, initial sale, distribution, exchange, or transfer of crypto assets. Platforms must ensure the security and integrity of transactions and provide custody services for users who do not wish to manage their own private keys.
   • Record-Keeping and Transparency: VASPs are mandated to maintain transparent and accessible records of all transactions and user activities. These records must be readily available for auditing by regulatory authorities.
   • Technical Standards and Compliance: VASPs' technological infrastructure must comply with standards set by TÜBİTAK (The Scientific and Technological Research Council of Turkiye), ensuring that systems are secure, reliable, and capable of supporting large-scale operations.
5. Penalties and Enforcement:
6. • Criminal Penalties: Individuals and entities operating without the necessary licenses or registrations face severe penalties, including imprisonment for 3 to 5 years and fines ranging from 5,000 to 10,000 days.
   • Administrative Actions: The Capital Markets Board (SPK) has the authority to suspend or revoke licenses, impose fines, and take other necessary actions against VASPs failing to comply with regulatory requirements.
   • Misappropriation and Fraud: VASP executives and employees found guilty of embezzlement or fraud involving user funds or assets face imprisonment for 8 to 14 years and substantial fines.
7. Revenue Allocation:
8. • Platform Contributions: Platforms are required to contribute a percentage of their annual revenues (excluding interest income) to the SPK and TÜBİTAK. Specifically, 1% of revenues will be allocated to the SPK and another 1% to TÜBİTAK to support the development of blockchain and related technologies.
9. User Protection and Market Integrity:
10. • Client Asset Segregation: User assets must be segregated from the VASP's own assets, ensuring that user funds are protected from the VASP's financial obligations. These assets cannot be seized or encumbered, even in the event of the VASP's insolvency.
    • Dispute Resolution and Transparency: VASPs must establish effective mechanisms to address user complaints and disputes. Contracts between VASPs and users must be transparent, fair, and compliant with regulatory standards.
    • Fair Market Practices: Platforms must ensure that prices are formed freely and fairly, preventing market manipulation and ensuring transparent trading practices.
11. Technological and Regulatory Oversight:
12. • TÜBİTAK's Role: TÜBİTAK will provide technical guidance and establish criteria for VASPs' technological infrastructure. This ensures that VASPs use state-of-the-art technology to safeguard user assets and data.
    • Regulatory Coordination: The SPK will coordinate with the Banking Regulation and Supervision Agency (BDDK) for any regulatory measures affecting banks involved in crypto asset services. This collaboration ensures a cohesive regulatory environment for financial and technological services.

Conclusion

The regulation of cryptocurrency in Turkiye marks a significant milestone in the country's financial and legal evolution. The comprehensive legal framework not only addresses FATF's requirements but also lays the foundation for a secure and transparent crypto asset ecosystem, ultimately benefiting investors, service providers and the broader economy.

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