Understanding Web 3 Legal - New Draft Crypto Law - Issue 10

The much-anticipated "Crypto Asset Law" has finally been proposed to the Turkish Grand National Assembly (TBMM) with an amendment suggestion. Over the course of this process, numerous drafts were leaked, leading to a myriad of changes. However, it appears that a version very close to the document known in our ecosystem as the "November Draft" or "v.27" has been published. This draft addresses a wide array of issues, including the licensing of exchanges, the allocation of a portion of their income to the state, the positioning of foreign exchanges, the responsibilities of managers, the role of TüB?TAK in the crypto asset ecosystem, user identification rules, and the custody of crypto assets. This proposal has already caused significant excitement and concern within the ecosystem. It is important to note that the draft does not need to be accepted in its current form; it can legally be modified or even rejected during the legislative process.

From an investor's perspective, these regulations aim to protect against potential fraud and market manipulation, creating a safer investment environment. Regulatory clarity is vital for boosting investor confidence, which is essential for the growth and stability of the market. The distinction made in the rationale between securities, e-money, and utility tokens for crypto assets suggests an alignment with Europe’s new MICA regulation, which sets a high standard for regulatory frameworks in the digital asset space.

A key aspect of the draft is the requirement for crypto asset service providers to obtain a license to operate. This licensing approach aligns with international practices, ensuring consistency in regulation. This move is seen as an essential step in legitimizing the crypto industry within Turkey, providing a structured pathway for businesses to operate legally and transparently. However, the draft does not specify the capital adequacy needed for obtaining a license, the application and renewal fees, or the capital market licenses that may be required on the board of directors. These details will be determined by secondary legislation. Under the transitional provisions, existing service providers must either apply for permission within one month or liquidate within three months without causing harm. Unauthorized operations will face severe penalties, including imprisonment for three to five years and administrative fines. This stringent measure underscores the government's commitment to curbing illicit activities and ensuring compliance within the crypto industry.

The issue of taxing crypto assets has been one of the most significant questions surrounding this draft. The current draft does not impose any taxes on end-users, which is seen as a positive move for the ecosystem. By not burdening the end-users with taxes initially, the draft aims to encourage the adoption and use of crypto assets. The expectation is that tax regulations for end-users will follow once this law is enacted. For platforms, 1% of income, excluding interest, will be paid to the Capital Markets Board, and another 1% to TüB?TAK, totaling 2%. This dual allocation not only funds regulatory oversight but also supports technological advancements in the crypto space, reflecting a balanced approach to fostering innovation while maintaining control.

For crypto businesses, the new regulations present both challenges and opportunities. While the licensing requirements and compliance costs might be burdensome, they also provide a clearer framework for legal operations, reducing the risk of legal uncertainties and potential penalties. This proactive stance of Turkish authorities in addressing global concerns about the crypto sector signifies the urgency and importance of the matter.

The draft also emphasizes the principle of self-custody of crypto assets in user wallets while introducing the concept of crypto asset custody institutions. This approach, combined with the requirement for customers' cash to be kept in a bank, aims to minimize risks from negative behaviors by crypto asset service providers. By keeping crypto assets with the user or a custody institution, money in the bank, and records likely in the Central Securities Depository (MKK), platform risk is significantly reduced. This framework is designed to protect users' assets comprehensively, ensuring that funds are secure and accessible.

One of the most frequently asked questions is whether foreign exchanges are banned. According to the draft, if a service provider operates a Turkish website, has a workplace in Turkey, or advertises in Turkey, they must be licensed. This does not ban foreign exchanges; users can still trade on them, but those wishing to operate in Turkey must localize their services. This requirement is a strategic move to ensure that all exchanges operating in Turkey adhere to local regulations, thereby protecting Turkish users from potential foreign malpractice.

The draft also touches on the situation of crypto influencers or finfluencers. While it does not directly prohibit their activities, it acknowledges that capital market crimes will extend into the crypto space. With the Capital Markets Board overseeing crypto assets, issues such as insider trading, market fraud, and market manipulation will also be regulated. The guide published by the Advertising Board for influencers is expected to become more relevant in this ecosystem. This is a significant step in ensuring that information shared by influencers is accurate and reliable, protecting consumers from misleading or fraudulent advice.

Additionally, the role of TüB?TAK in fostering technological innovation within the crypto space cannot be overlooked. By supporting research and development, TüB?TAK will play a crucial part in advancing the technological infrastructure that underpins the crypto ecosystem in Turkey.

Taking a broader view, the need for this law has been strongly advocated by international organizations, underscoring its global significance. The rationale behind the law is also tied to our country's removal from the grey list, making these regulations crucial. Originally expected to be published in the third quarter, the draft has been released ahead of schedule. This early release not only signifies the urgency of the matter but also reflects the proactive stance of Turkish authorities in addressing global concerns about the crypto sector. Despite the possibility of changes to its content, the likelihood of its outright rejection is minimal.

In summary, the effort to establish legal foundations for the crypto asset ecosystem is a positive development. Defining the main rules is crucial in the ongoing battle between decentralization and regulation. This regulation is essential for creating a safer and more transparent environment for investors and users. The draft, while restrictive and challenging for platforms, includes many measures to protect end-users. Although it does not yet address all issues, such as types of crypto assets, taxation, license fees, and principles of crypto asset issuance, the draft is coherent and aligned with the ecosystem's approach. This law represents a significant step towards a more regulated and secure crypto environment in Turkey. Despite the possibility of minor changes during the legislative process, secondary legislation is likely to address any grey areas. This proactive approach to regulation not only stabilizes the market but also builds investor confidence, which is crucial for the growth and maturity of the crypto industry in Turkey. May this regulation, which has already energized the ecosystem, be beneficial to all of us!

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