In May 2024, the Turkish government issued a draft bill that aims to regulate entities providing services relating to digital assets. It imposes broad obligations, such as licensing, the prevention of market abuses, and the requirement for formal written contractual agreements with customers. However, in contrast to MiCA, it falls short of issuing explicit provisions in areas such as best execution, record keeping or IT system requirements.
This article examines the requirements imposed by the bill, its future impact, and how CASPs serving Turkish customers can set themselves up for a compliant crypto asset service offering.
Turkey’s crypto bill and its bigger picture
The crypto draft bill comes as part of Turkey’s efforts to become compliant with Financial Action Task Force’s (FATF) requirements regarding the prevention of money laundering. Although still in draft stages, the bill is anticipated to pass the Turkish parliamentary process in summer 2024 – making it a piece of broad primary legislation, laying the legal groundwork for future laws.
An important point to note is that in 2021, the Turkish government issued a ruling that outlawed the treatment of crypto assets as monetary instruments. However, the new bill seems set to repeal the 2021 ruling thanks to its use of a new definition of crypto assets in common with other regulations – most notably the EUs MiCA regulation.
Therefore, Turkish law firms have also observed that this primary legislation appears to foreshadow secondary legislation that will ultimately seek to more closely align the Turkish digital asset regime with the EUs MiCA.
Terminology and definitions of Turkey’s crypto bill
The crypto bill lays down definitions relating to crypto assets and the provision of crypto asset related services.
Cryptocurrencies or cryptoassets are defined as “intangible assets created and stored electronically using distributed ledger technology or similar technology, distributed over digital networks, and representing value or rights.”
Wallets are “software, hardware, systems, or applications that allow the transfer and online or offline storage of cryptocurrencies and related private and public keys.”
The bill does not go as far as listing and defining each specific type of service provision relating to crypto assets. However, it does offer the following relating to the provision of crypto asset services:
- Cryptocurrency Service Providers: Platforms, entities providing cryptocurrency custody services, and other entities designated to offer services related to cryptocurrencies, including initial sales or distribution.
- Cryptocurrency Custody Services: Services for the storage, management, or other custody-related services of cryptocurrency assets or the private keys that allow transfers from wallets.
- Platforms: Entities conducting one or more operations such as cryptocurrency trading, initial sales or distribution, clearing, transferring, custody, and other specified processes.
Requirements for Crypto Asset Service Providers (CASPs)
The crypto bill imposes several obligations on banks operating as CASPs, some of which are dependent on the type of service being offered.
The biggest change affecting all CASPs is a new requirement to register with the Capital Markets Board of Türkiye (CMB) for permission to operate as a CASP in Turkey. Permission is granted based on the CASP demonstrating minimum internal controls, governance, and secure management, with the CMB applying rules and standards comparable with traditional financial institutions.
CASPs must conclude a written contract with each customer, which lays out clear terms and conditions of services being provided, including dispute resolution mechanisms.
A CASP listing assets for trading or sale must provide transparent information about listed assets and listing requirements.
Crypto asset transactions between CASPs and clients must be conducted in a “secure, transparent, efficient, stable, fair, honest, and competitive manner”. The draft bill also stipulates that CASPs must “establish mechanisms to detect, prevent, and report market-disruptive actions to the CMB.”
It’s required that CASPs maintain secure, accessible, and traceable records of client cryptocurrency transfers and financial transfers. All transaction records must be kept with integrity and confidentiality and comply with CMB and Financial Crimes Investigation Board regulations.
If customers don’t store funds in their own personal crypto wallets, custody services must be provided by banks, or other institutions authorized by the CMB under regulated conditions. Customer assets (cash and/or crypto) must be segregated from CASP assets.
The crypto bill also legally empowers the CMB to take action against CASPs that it deems fraudulent, unable to meet financial obligations to customers, or unauthorized to operate as a CASP – up to and including closing down operations entirely.
Finally, the crypto draft bill allows for transitional arrangements, where CASPs that have previously operated in Turkey will able to continue their existing operations until they’ve undergone the licensing process with the CMB. However, the bill doesn’t specify the duration of this transitional period.
The Turkey crypto bill vs. EU’s MiCA – Best execution and market abuse
The bill does not make any concrete provision for best execution in the same way as MiCA. However, the key provisions covering best execution in the Turkish draft bill are encapsulated in the following text:
“CASPs must ensure that transactions are conducted in a secure, transparent, efficient, stable, fair, honest, and competitive manner. They must also establish mechanisms to detect, prevent, and report market-disruptive actions to the CMB.”
This broad language may appear open to interpretation – but it also leaves scope for the CMB to make a judgement of market abuse on any activity that cannot be explained with a reasonable and economic justification and which could be deemed disruptive to the safe and stable operation of transactions on a CASP.
Adopting a robust approach to best execution, including policy and monitoring arrangements, can protect investors from market abuses and ensure transparency of information.
Therefore, Turkish CASPs taking steps to implement best execution also demonstrate a commitment to preventing market abuses and supporting their compliance with the crypto draft bill.
The Turkish crypto draft bill and its (future) implications
The crypto draft bill is considered primary legislation in Turkey, and as such, can be interpreted as a preliminary step to the creation of more explicit rules governing CASPs. It’s also reasonable to assume that such rules will be designed to be broadly aligned with MiCA, in light of Turkey’s geographical and economic ties to the EU.
Given the explicit provisions of MiCA regarding matters such as best execution and record keeping, it is therefore prudent for Turkish banks to consider these provisions when designing a future-proof compliant setup for digital asset trading.
Using the best execution guidance available from MiCA CASPs are well advised to implement a best execution policy that sets out their best execution arrangements, as well as how to monitor and evaluate those arrangements according to the policy. They must also ensure transparency by publishing pre- and post-trade data such as bid and ask prices, market depth, executed price, executed volume, and time of execution.
Ensuring true best execution across all factors can be challenging against the specific conditions of the digital asset markets. Liquidity is fragmented across countless venues, while fees can vary significantly between providers. Due to this volatility within fragmented markets, it is common to see variations in price for the same asset, particularly during periods of volatility.
The relative immaturity of the market and lack of a standardized methodology for determining price across fragmented markets means it is still challenging to find centralized data sources or a single point of truth for digital asset data.
Wyden helps banks, brokers, hedge funds and asset managers alike to overcome these challenges with its enterprise digital asset trade lifecycle technology covering the pre-trade, trading, and post-trade functions.
Overall, the Turkish crypto draft bill serves several purposes. It provides a minimum level of compliance required by the FATF, while also providing the primary legislative framework necessary for more comprehensive rules. Furthermore, in using definitions and wording similar to the EUs MiCA regulation, the Turkish bill signals an intent for alignment.
Therefore, while the Turkish crypto draft bill may not legislate to the same level of detail as MiCA, the latter can nevertheless be considered a valid framework for a compliance regime that will also satisfy the requirements of the draft crypto bill. Such a regime should include a best execution policy and arrangements that demonstrate a commitment to transparency, investor protections, and prevention of market abuse.
The draft bill also offers an indication of what to expect once it becomes enshrined into law. From the date the draft bill is brought into force, CASPs have a period of just one month in which they should formally notify the CMB of their intention to apply for an operating license by meeting the more detailed conditions that will be laid out in secondary legislation. The bill provides six months from the date of passing the draft bill for secondary legislation to become effective in law.
Therefore, CASPs should monitor the progress of the bill to ensure they comply with the timelines and the provisions of any emerging secondary legislation.