The first cryptocurrency in the world emerged in 2008 when an individual or group known as Satoshi Nakamoto created a cryptographic proof-based payment system called Bitcoin, introduced as the first blockchain and a decentralized payment method. Cryptocurrencies offer many advantages, such as being intermediary-free, decentralized, and providing a fast, low-cost, and secure money transfer system. However, they also create a space that necessitates new economic and legal measures, the establishment of new systems, and regulation in all circumstances.

Cryptocurrency exchanges can facilitate cryptocurrency transfer transactions between user addresses within this network. To trade on cryptocurrency exchanges, user addresses are created, akin to opening a bank account. User addresses are always accompanied by recommended wallet software. By downloading the wallet software and completing the registration process, users can become part of the system. On cryptocurrency exchanges, investors have the opportunity to monitor in real-time how much trading each user can perform. In this system made possible by blockchain technology, while transactions can be tracked, the identities of users remain confidential. However, this also makes cryptocurrency markets susceptible to manipulation and speculation. Blockchain technology also allows investors to trade in altcoin exchanges that have not yet disclosed their value. In this regard, investors can invest in altcoins that have not yet been assigned any value until the maturity date of the respective exchange opens. (This system, known as ICO – Initial Coin Offerings, is a type of cryptocurrency funding system). Due to the susceptibility of these exchanges to manipulation, it is uncertain how much investors will earn or lose.

Cryptocurrency exchanges prefer to provide services to their users through trading operations via banks or other intermediary institutions. In this regard, preventing the double spending of a currency can only be achieved through a central system’s control mechanism established via the wallets created. In other words, for a cryptocurrency to have value, it must have the capability to prevent duplication using blockchain technology. Users should be able to perform a single, undeniable, and non-reproducible transfer during their transfer transactions.

This can be evaluated similarly to a traditional currency recorded by a central bank, where a transfer order is communicated to a single account, preventing the transaction from being communicated to another account and thereby preventing double spending. Thus, to the extent that duplication is prevented, cryptocurrencies are valuable and reliable. In cryptocurrency exchanges, since there is no central recording authority, records related to transfer transactions are maintained by the exchange investor or are validated through an API (Application Processing Interface) channel at a cooperating bank or payment institution, effectively registering them.

According to Article 3 of Law No. 6493 on Payment and Securities Settlement Systems, Payment Services, and Electronic Money Institutions, which was adopted in Turkey in 2013, electronic money is defined as: “monetary value issued against funds accepted by the issuing institution, stored electronically, used to perform payment transactions defined in this Law, and accepted as a means of payment by real and legal persons other than the electronic money issuer.”

However, the Regulation on the Non-Use of Crypto Assets in Payments, published in the Official Gazette on April 16, 2021 (“Regulation”), signals that crypto assets will be regulated much more strictly in Turkey and includes certain prohibitions during this transitional period. With this Regulation, the Central Bank of the Republic of Turkey (“CBRT”) completely banned the use of crypto assets as a means of payment starting from April 30, 2021. In this context, foreign cryptocurrency exchanges announced that they would impose restrictions on Turkish Lira withdrawals for players in Turkey through intermediary payment institutions. Thus, it was stated that while investments in cryptocurrencies and exchanges were not banned by the Regulation, they would not be able to facilitate transfer (deposit-withdrawal) transactions made through intermediary and payment institutions.

The Regulation defines crypto assets as intangible assets created virtually using distributed ledger technology or similar technology and distributed over digital networks, but not classified as fiat currency, registered money, electronic money, means of payment, securities, or other capital market instruments. However, the fact that cryptocurrencies are only understood as intangible assets and have not been brought closer to a definable legal value represents a gap in implementation. In this respect, determining whether the nature of cryptocurrencies can be seized in the future creates gray areas regarding which taxes could be feasible for users and investors due to the inability to categorize cryptocurrencies as property, financial value, money, electronic money, etc.

The Regulation does not impose a general ban on cryptocurrencies, and the prohibition can only affect intermediation and payment systems. Article 1 of the Regulation clearly states its purpose: “to determine the procedures and principles regarding the non-use of crypto assets in payments, the direct or indirect use of crypto assets in the provision of payment services and electronic money issuance, and the intermediation of platforms providing services for the trading, custody, transfer, or issuance of crypto assets or fund transfers to or from these platforms by payment and electronic money institutions.” In this respect, although the stated purpose may be perceived as a general transaction ban by users who trade on cryptocurrency exchanges and issue numerous transfer orders between wallets through payment institutions, leading players in the sector, such as BtcTurk, Icarus, and Paribu, indicate that the bans pertain to the intermediation activities of payment institutions and assert that cryptocurrencies themselves are not banned.

Cryptocurrency exchanges can provide their services under a trade company name and title. In our country, since cryptocurrency exchanges are not yet regulated by special laws, a requirement has been established to obtain a special license from the Capital Markets Board (CMB). As mentioned in our article, the legal status of cryptocurrencies and cryptocurrency exchanges in our legal system was definitively determined on June 27. Therefore, cryptocurrency exchanges cannot be classified as intermediary institutions, issuers under CMB legislation, or as currency exchange offices under the Banking Regulation and Supervision Agency (BRSA) legislation. According to central bank regulations, they cannot be classified as institutions that issue monetary bonds either.

The most important point that investors wishing to open a cryptocurrency exchange should not forget is that if they intend to seek capital investment at the project stage and subsequently move forward with plans for a public offering of company shares, they must complete the necessary permissions and procedures with the CMB. However, this should not be confused with the mechanism known as Initial Coin Offerings (ICO). ICO refers to the process of selling newly produced tokens or crypto assets in exchange for popular cryptocurrencies like Bitcoin or Ethereum to raise funds for projects. The purchased tokens or crypto assets can be used for various purposes, such as access to the products and services offered by the project, advantageous usage, or profit-sharing. Although the term “crypto asset issuance” is derived from the term “Initial Public Offering” (IPO), the process resembles both a public offering and a crowdfunding process. The tokens or crypto assets offered for sale can be purchased in exchange for popular cryptocurrencies like Bitcoin or Ethereum instead of fiat currencies such as Turkish Lira, Dollar, or Euro. However, unlike a public offering, the purchased tokens or crypto assets do not confer legal rights such as ownership in the company managing the project. Furthermore, the produced tokens can be bought and sold on cryptocurrency trading platforms that list these tokens.

In the CMB Bulletin dated September 27, 2018, it was stated that the applicability of “token sale” practices, which have similarities and differences compared to public offerings and crowdfunding activities, would vary based on whether they fall within the regulatory boundaries of the Board. A warning was issued that the Board may apply all necessary administrative and penal measures regarding activities conducted without permission under the guise of crowdfunding before secondary regulations come into force.

Due to the nature of digital assets and their ease of transfer, there is a global need for uniform regulation. However, there are currently countries that have not implemented regulations regarding digital assets, and Turkey is one of these countries.

In Turkey, the Regulation on Measures for the Prevention of Money Laundering and the Financing of Terrorism introduced the definition of “crypto asset service provider” for the first time. Although there are currently no legal regulations regarding crypto asset service providers or digital assets in our country, this regulation has established provisions under the framework of Anti-Money Laundering (AML) to monitor cryptocurrency exchanges that operate without a legal framework.

In addition to this regulation, the Financial Crimes Investigation Board (MASAK) published the “Application Guide for Crypto Asset Service Providers” on May 4, 2021.

Alongside these regulations, the annual program published in the Official Gazette on October 25, 2023, includes agenda items related to digital assets prepared by the Ministry of Treasury and Finance and the Presidency of Strategy and Budget. It is aimed that the relevant legislative work will be carried out by the Ministry of Treasury and Finance, the Revenue Administration, the Capital Markets Board, and all other public institutions and organizations, with the goal of completing it within 2024.

Current Legal Framework and Taxation of Crypto Assets in Turkey

Currently, the European Commission is working on the inclusion of crypto assets within the scope of the European Union’s Administrative Cooperation Directive (“DAC”), which includes the EU’s initiatives for automatic information exchange in taxation, in parallel with the OECD’s Base Erosion and Profit Shifting (“BEPS”) efforts. At the end of 2020, the European Commission published a roadmap regarding this matter as part of the DAC 8 discussions, and by March 10, 2021, the public consultation phase of the roadmap was reached. It has also been observed that a regulatory proposal has been made regarding the regulation of digital financial assets, and efforts are ongoing to ensure fair and sustainable taxation of these digital assets in EU member countries.

In Turkey, it is expected that the Central Bank of the Republic of Turkey (CBRT) will attempt to regulate this area with the published regulation and that concrete steps will be taken regarding taxation in the future. In this regard, it is clear that the taxation of crypto assets within the scope of a business’s activities will differ from individual gains. For those engaged in intermediary activities, despite the explicit prohibition imposed by the regulation, withholding tax and tax collection arrangements may apply to intermediary institutions later permitted. Individual users may be subject to capital gains tax, while legal entities may be liable for crypto income tax.

However, it should be noted that the legal nature of crypto assets and how they are classified is crucial in determining taxation. For example, in the UK, crypto assets are viewed as intangible investment assets, meaning that individual investors will be taxed on capital gains when disposing of crypto assets, while legal entities will face income tax. The income earned by crypto exchanges will be subject to corporate tax.

Regarding VAT, the law states that VAT applies to transactions, deliveries, and services conducted in Turkey’s commercial, industrial, agricultural activities, and freelance professions, as well as the import of goods and services specified in the law. Whether a crypto asset is classified as currency, security, or commodity will impact its VAT liability; if classified as currency or security, no VAT obligation will arise.

For Turkey, it is essential to first determine the legal nature of crypto assets and then establish the principles of taxation for crypto exchange owners, intermediary institutions, and individual and corporate investors. It is also important to consider the principles of legality and non-retroactivity in taxation.

In summary, how the income generated by investors, the commission income of intermediaries, and the profits earned by mining activities will be taxed is still unclear. Approaching the legal nature of cryptocurrencies towards a defined, legal economic value will be an important starting point for determining the applicable legal regulations and taxation criteria.

Finally, it should be noted that, as an extension of the principle of legal certainty, tax laws are subject to the principle of non-retroactivity, meaning that, as a rule, tax laws cannot be applied to periods prior to their effective date. The regulation of the legal nature and taxation of cryptocurrencies in law, while considering legal norms such as legal certainty and predictability, is crucial for keeping pace with the changing world and adapting to globally recognized economic values. This is of great importance for investors, intermediary institutions, and financial consumers.

The Council of the European Union (the Council) approved the draft MiCA regulation of the European Parliament on October 5, 2022. The MiCA bill was officially approved on May 31, 2023. The regulation is expected to come into force by the end of 2024.

The aims of the law and the legal situations it regulates are as follows:

• To provide legal certainty and clarity regarding crypto assets
• To protect consumers
• To support an open and fair competitive environment
• To ensure financial stability through precautionary measures
• Activities subject to permission and licensing
• Process for obtaining activity permission
• Definitions
• Required information for crypto asset applications
• Regulations regarding the obligations of those making offers and those wishing to trade crypto assets
• Sections concerning governance regulations
• Regulations regarding the tracking of asset-referenced tokens
• Crypto asset service providers
• Situations that may cause the revocation of the authority granted to crypto asset service providers
• Regulations regarding the requirements for the governing bodies of crypto asset service providers
• Regulations regarding the protection of customers’ crypto assets and funds
• Regulations requiring crypto asset service providers to design procedures for handling incoming complaints
• Regulations regarding the identification, prevention, management, and disclosure of conflicts of interest
• Regulations regarding the supervision and management of crypto assets on behalf of third parties
• Regulations for operating a trading platform for crypto assets
• Regulations for executing crypto asset orders (buy/sell) on behalf of customers
• Regulations for receiving and transmitting orders on behalf of third parties
• Regulations for providing transfer services for crypto assets on behalf of third parties
• Regulations prohibiting market manipulation
• Regulations regarding the powers of competent authorities
• Administrative fines and other administrative measures under the MiCA regulation
• Monetary fines

Turkey is one of the significant countries in the crypto ecosystem. Due to our country’s population density, age distribution, interest and knowledge level in technology, and existing projects, it is expected to maintain and even grow its importance in the upcoming periods.

We believe that ensuring the security of users’ crypto assets, establishing criteria for minimum capital requirements, listings, and custody services, and imposing licensing requirements on service-providing platforms will positively impact the sector. As our country generally develops its legal regulations considering European Union regulations, we believe that the MiCA, as a European Union regulation on crypto assets, will serve as a good example for Turkey.

In addition, important changes proposed in the draft law for amending the Capital Markets Law No. 6362 include the following:

• Definitions will be made for the concepts of wallet, crypto asset, crypto asset trading platform, crypto asset service provider, and crypto asset custody service.
• The Capital Markets Board (SPK) will establish principles regarding the issuance of crypto assets and their tracking in the electronic environment provided by service providers. Additionally, the compliance of information systems and technological infrastructures with operational conditions for granting permits will be determined by a technical report prepared by TÜBİTAK.
• Permission from the Board will be mandatory for the establishment and commencement of operations of crypto asset trading platforms, and platforms will only be able to carry out activities determined by the Board.
• It will be expected that the partners of crypto asset service providers will not have any criminal convictions for offenses specified in the law, even if they have been pardoned, excluding negligent crimes.
• Records regarding wallets where customer crypto asset transfers are conducted and bank accounts where cash transfers are made will be maintained securely, accessibly, and traceably by crypto asset service providers. The integrity, accuracy, and confidentiality of all transaction records are expected to be ensured.
• Cash and crypto assets belonging to customers will be kept separate from the assets of crypto asset service providers, and records will also be maintained in accordance with this provision.
• Any contractual terms that eliminate or limit the liability of crypto asset service providers towards their customers will be deemed invalid.
• Crypto asset platforms will be required to establish internal mechanisms to effectively resolve objections and complaints regarding customer transactions.
• Procedures and principles for providing investment advisory and portfolio management services regarding crypto assets will be determined by the Board.
• Financial audits of crypto asset service providers and independent audits of information systems will be conducted by independent auditing organizations listed by the Board. Staff from the Board and TÜBİTAK may accompany independent auditing organizations in information systems audits at every stage, without compromising the principle of auditor independence, to enhance their knowledge and skills.
• Any administrative or judicial requests related to measures, seizures, or similar actions regarding cash and crypto assets belonging to customers will be carried out exclusively by crypto asset service providers.
• Crypto asset service providers will be held responsible for damages arising from unlawful activities and failure to fulfill cash payment and/or crypto asset delivery obligations.
• Crypto asset service providers are expected to be held responsible for losses arising from the operation of information systems, any cyberattacks, breaches of information security, technical malfunctions, or any actions of personnel.
• Customer cash held in banks must be monitored in a separate account opened for investment organization customers, distinct from the investment organization’s own cash assets.
• The principles for the investment of customer accounts in banks will be determined by the Board.
• Regulations are expected to state that individuals and legal entities identified as operating as crypto asset service providers without permission, engaging in unauthorized crypto asset service activities, and providing unlawful investment advisory and portfolio management services can be punished with imprisonment from three to five years and judicial fines from five thousand to ten thousand days.
• Crypto asset service providers (platforms) will be required to pay the Board (SPK) a percentage of a maximum of ten percent of their total revenues, excluding interest income, from the year they obtain their operational license from the Board, at a rate determined by the Board (SPK).
• Crypto asset service providers (platforms) may continue their operations without requiring permission until the secondary regulations published by the SPK come into effect. However, those who have not commenced operations prior to the regulation will not be allowed to operate after the publication of the secondary regulations.

It is essential to note that the information shared above is only in draft form, and the final version of the law is expected to take shape with further changes and additions.

With the new regulation dated June 27, 2024, regarding the establishment and operation of cryptocurrency exchanges, there is a legal necessity to follow certain procedures and take necessary precautions within the framework of general legal rules.

COMPANY ESTABLISHMENT: WHAT TYPE OF CRYPTOCURRENCY COMPANY SHOULD BE FORMED?

It is advisable for companies operating in this field to be established as limited companies, but if possible, they should prefer to be formed as joint-stock companies. Although there is no definitive legal specification regarding the type of company in our legislation, it is evident that a cryptocurrency company established as a joint-stock company will find it easier to comply with future legal regulations and will retain the advantages of being a joint-stock company as per the Commercial Code during its operations. Therefore, it is preferable for such companies to operate as joint-stock companies.

OPENING A BANK ACCOUNT

Can a Bank Account Be Opened for a Company Operating in the Cryptocurrency Field?

There is no restriction on companies established in Turkey that operate as cryptocurrency exchanges from opening a bank account in the country; however, it has been observed that collateral is required in practice according to the Banking Regulation and Supervision Agency (BDDK) and banking practices, and this collateral is typically provided either as a deposit or in the form of a letter. Therefore, it is advisable to have a liquid asset available in varying amounts as collateral.

WEBSITE / MOBILE APPLICATION

User Contracts in Cryptocurrency Exchanges

The first and most important element when establishing a cryptocurrency exchange is the website. These platforms, which provide services over the internet, allow users to exchange and trade cryptocurrencies by becoming members. Those who use these platforms are referred to as users. If a legal agreement/contract is not executed with the users, there may be future problems related to the services provided. Therefore, it is crucial to meticulously prepare user contracts in a legally compliant manner, considering mutual rights and obligations, general terms and conditions, and the distinction between consumers and investors. Currently, user contracts often contain general terms and conditions, and invalid clauses are posted on the sites without considering the consumer-investor distinction. This can lead to adverse outcomes, especially in private law disputes, and can also negatively affect public law disputes. For these reasons, it is of great importance to prepare contracts carefully to meet the expected standards.

RISK DISCLOSURES IN CRYPTOCURRENCY EXCHANGES

In addition to user contracts, another crucial aspect due to the nature of cryptocurrencies is risk disclosure. Users can be evaluated as consumers or investors. Regardless of how they are evaluated, it is important to provide a risk disclosure that allows users to understand what they are purchasing, what they are paying for, and what they will not receive when they read it. This is essential as there are common occurrences of refund requests for losses.

THE STATUS OF PERSONAL DATA IN CRYPTOCURRENCY EXCHANGES

Even a potentially small-scale cryptocurrency exchange is subject to the obligation to register in the VERBIS (Data Controllers Registry). Necessary precautions must be taken concerning the mandatory provisions of the Personal Data Protection Law, ensuring that data security meets the desired conditions, that the VERBIS registration is completed accurately, and that the processes of determining and notifying which data will be collected and the storage durations for all data are conducted by a professional lawyer. Managing such a substantial operation with publicly available documents and forms poses significant risks. It is crucial that obtaining explicit consent from users, notifications, and similar documents comply with the procedure. After completing the VERBIS registration and KVKK compliance process, the ongoing monitoring of the process is also a legal requirement.

ADVERTISING RISKS

Cryptocurrencies inherently have a structure characterized by high volatility. Advertising for these assets can partially transfer this risk to the advertiser. The often-repeated phrase “This is not investment advice” arises from both regulatory concerns under the Capital Markets Board (SPK) legislation and the desire to avoid liability in any compensation claims. Therefore, it is advisable for any company operating in this sector to have its advertisements reviewed legally before publication.

BEING DYNAMIC

It is crucial for exchanges, where thousands of users pay commissions for services, to be prepared to respond dynamically to legal inquiries. Otherwise, the services may raise suspicions among governments and the judiciary. This is not an explicit legal obligation but a general legal duty. However, having UETS (Electronic Notification System) and KEP (Secure Electronic Signature) accounts and registering with the UYAP (Judicial Information System) for continuous monitoring is beneficial. Promptly addressing legal requests contributes positively to the brand image and to perceptions in front of users and the judiciary. Key considerations when establishing a cryptocurrency exchange include maintaining a technical system that constantly checks and audits security vulnerabilities.

Currently, there is no specific licensing process or collateral amount defined for operating a cryptocurrency platform in Turkey. However, platforms are required to comply with certain legal obligations and regulations. Here are the elements to consider when establishing a cryptocurrency platform in Turkey:

Required Documents

Company Establishment Documents:

• Commercial registration of the company
• Articles of incorporation

Manager and Partner Information:

• Identification documents of board members (TC ID number, passport)
• Residence documents

Business Plan and Financial Projections:

• Detailed business plan
• Financial projections and budget plans

AML and KYC Policies:

• Anti-Money Laundering (AML) policies
• Know Your Customer (KYC) procedures

Technical and Security Documents:

• Information about technical infrastructure and security systems
• Data protection policies

Risk Management Documents:

• Risk assessment reports
• Risk management policies

Application Authority

Currently, there is no specific licensing authority for cryptocurrency platforms in Turkey. However, platforms are required to comply with certain legal regulations. Relevant regulatory bodies may include:

• Central Bank of the Republic of Turkey (TCMB)
• Financial Crimes Investigation Board (MASAK)
• Banking Regulation and Supervision Agency (BDDK)

Licensing Process and Legal Regulations

Company Establishment:

• Completion of the establishment procedures for the company that will operate the platform.
• Registration with the commercial registry.

Establishment of AML/KYC Policies:

• Preparation of anti-money laundering and customer identification policies.
• Ensuring these policies comply with MASAK regulations.

Application and Notification:

• Making the necessary notifications to TCMB and/or MASAK.
• Providing the required information and documents related to the platform’s operations.

Audit and Compliance:

• Regular audits of the platform by MASAK and other regulatory bodies.
• Regular reporting.

Collateral Amount

Currently, there is no specific collateral amount determined for cryptocurrency platforms in Turkey. However, platforms are expected to have sufficient financial collateral to protect users’ assets and ensure security during their operations. This collateral amount may be determined by regulatory bodies in the future.

Summary

Currently, there is no clear licensing process or collateral amount established for setting up a cryptocurrency platform in Turkey. However, platforms are required to comply with legal requirements set forth by regulatory authorities such as the Central Bank of the Republic of Turkey (TCMB), the Financial Crimes Investigation Board (MASAK), and the Banking Regulation and Supervision Agency (BDDK). It is crucial to establish AML/KYC policies, make necessary notifications to regulatory bodies, and pay attention to ongoing audit and compliance processes. Seeking expert legal consultancy during the establishment phase and keeping abreast of current regulatory changes will be beneficial.