The Central Bank Regulation On Crypto Assets
Bank was published in the Official Gazette on 16 April 2021 and entered into force on 30 April
2021.
The Regulation is the first piece of legislation on crypto assets in Turkey.
Highlights:
1. Crypto Asset: The First Definition
As the Big Bang is the root cause of the entire universe, and eventually the life in it, we can easily put definitions into the same position in our own life. Everything starts with definitions; all political and legal systems are built on them, and we live with their results.
The Regulation is not an exception.
It has been speculated for a long time (for approximately the last three years to be more specific, which is indeed a very long time in crypto space) whether cryptocurrencies would be defined by the regulators as money (currency), securities, or a commodity.
The Regulation ushered in a new era in Turkey by bringing the concept of a crypto asset and then classifying it as an intangible asset.
Further, the Regulation added some reverse definitions on it, by saying the crypto asset is not securities nor a currency.
The Paragraph 1 of Article 3 of the Regulation reads “In the implementation of this regulation, a crypto asset means intangible assets that are created virtually and distributed over digital networks by using the distributed ledger or a similar technology; and (intangible assets) that are not considered as a fiat currency, scriptural money, electronic money, a means of payment, securities, or other types of capital markets instruments/derivatives.”
Accordingly, the only remained category is commodities for further definition as expected by the end of 2021 via a new law. Since laws prevail regulations, which are the secondary pieces of legislation in the norms of hierarchy, it would not be a surprise to see a more detailed definition for the crypto assets within the expected law.
2. Crypto Assets Cannot Be Used as a Means of Payment
We have witnessed various examples of new services so far in 2021 where payments can be made via cryptocurrencies around the globe. Leading financial business actors, such as PayPal, MasterCard, Visa, have been bullish in creating new services for the use of cryptocurrencies and expanding their networks with the crypto-related firms. So, obviously this is a global trend now.
That said, the Regulation introduced some ground rules contrary to this trend. Under the Paragraphs 2 and 3 of Article 3 of the Regulation, “crypto assets cannot be directly or indirectly used in payments”, and “any service for the purpose of the direct or indirect use of crypto assets in payments cannot be provided.”
There have been solid expectations since the effective date of the Regulation that these ground rules would have been superseded by a new law. The expected law will be put to the test from this standpoint, as well.
4. Ban on the Payment and Electronic Money Enterprises
Right from the beginning, some payment firms were heavily used by the crypto investors as intermediaries to deposit money to, or to withdraw from, their hot wallets stored at cryptocurrency exchanges. Papara was the leading example as a sole business partner of Binance International in Turkey.
Walking through this example, the investors used to wire their money (fiat currency) from their bank accounts to their Papara accounts in the first place, and then transfer the money to their hot wallets stored under their Binance International accounts. Finally, the cryptocurrency trade used to begin by the investors’ converting the fiat currency to stable coins and then stable coins to coins or tokens.
The Paragraph 2 of Article 4 of the Regulation bans the “payment enterprises and electronic money enterprises (practically, companies) from serving as intermediaries (i) for platforms that provide services for sale, purchase, custody, transfer or issuance of crypto assets, or (ii) in fund (money) transfers to such platforms.”
Due to this ban, as an example, Binance International had to terminate its partnership with Papara and chose to kill two birds with one stone by opening Binance Turkey (incorporated about four months before the Regulation), which is both a local cryptocurrency exchange and an intermediary, or a stepping stone, for the investors to transfer stable coins to, and withdraw them from, their Binance International accounts.
5. Ban on the Payment Service Providers
This part of the Regulation caused a stir among the crypto investors, cryptocurrency exchanges, and the banks, as the Central Bank this time set foot in the zone of big brothers on the block, i.e., the banks.
The Paragraph 1 of Article 4 of the Regulation imposed another ban on the “payment service providers”, where the banks fall under this definition along with payment service or electronic money companies, indicating that “(they) can not develop business models in a way that crypto assets are directly or indirectly used in issuing electronic money or in providing the payment services nor can they provide any services with regards to such business models.”
The first days of the Regulation passed with a little bit of a chaos with the confusions and discussions as to whether the banks were left fully inoperable in crypto eco-system. The reason is the confusion of the concepts of “payment enterprises” with “payment service providers”, which includes banks, too, as mentioned above. However, due to the different definitions and scopes of these two concepts and thanks to the later verbal statements by the Central Bank, the banks have continued to serve as intermediaries in the money transfers between the bank accounts of investors and the cryptocurrency exchanges.
In conclusion and with a bit of a bird-eye view, Turkey entered the cryptocurrency lawmaking with more Russian, Iranian, and Chinese style of regulations as we have seen similar examples in those countries. The Regulation embodies the “state first” approach with its protective nature. Given the ever-increasing numbers of cryptocurrency investors and crypto projects in Turkey, we believe Turkey’s crypto outlook will grow even stronger with more mature laws and regulations, to be drafted with the right and timely support of all stakeholders in the crypto eco-system.