April 2021 – On 16 April 2021, the Central Bank of the Republic of Turkey (“CBRT”) published the Regulation on the Prohibition of Crypto Assets to be used in Payment" (“Regulation") in the Official Gazette (no. 31456). The Regulation, which takes effect on 30 April 2021, is Turkey’s first crypto asset regulation and marks the first time crypto assets have been defined and considered as an “asset” under Turkish law. It also marks the first time that the CBRT has recognised crypto assets. In this article, we address the general issues that may arise within the framework set in the Regulation, which restricts the use of cryptocurrencies for payments in Turkey.
The Regulation states that within the framework of Law No. 6493 on Payment and Securities Settlement Systems, Payment Services and Electronic Money Institutions ("Payment Services Law"), crypto assets cannot be used directly or indirectly as a method of payment, nor can they be exchanged for services; electronic financial institutions cannot mediate platforms that offer trading, custody, transfer or issuance services for crypto assets, or fund transfers to be made from such platforms.
The Regulation introduces a definition of a crypto asset only in terms of the implementation of the Regulation. In the definition set out in Article 3/1 of the Regulation, "intangible assets created virtually using distributed ledger technology or a similar technology and distributed over digital networks" are considered as crypto assets; fiat money, deposit money, electronic money, payment instruments, securities or other capital market instruments are excluded from this definition.
Articles 3/2 and 3/3 of the Regulation include provisions stating that "crypto assets cannot be used directly or indirectly for payments" and that "no service can be provided for the direct or indirect use of crypto assets in payments."
In this context, the Payment Services Law does not define the term “payment”; however, a "payment transaction" is defined within the framework of the law and refers to "the activity of depositing, transferring or withdrawing funds on the order of the sender or the recipient". The term “funds” refers only to banknotes, coins, cash and electronic money within the scope of its definition in the Payment Services Law. In this regard, it can be said that crypto assets are only prohibited from use in the infrastructure of payments to be made within this scope. However, the determination of the transactions affected by the article is directly related to the interpretation of the definition of "payment." Consequently, as the provisions of the Regulation lead us to an interpretation closer to the definition of "payment transaction," further explanations will be required from the CBRT to clear the air.
According to Article 4/1 of the Regulation, payment service providers cannot develop business models such that crypto assets are used directly or indirectly in the provision of (I) payment services and (ii) electronic money issuance, nor can they provide any services related to such business models.
Within the scope of Article 4/2, there is a provision that, "payment and electronic money institutions cannot mediate platforms that offer trading, custody, transfer or issuance services for crypto assets or the fund transfers to be made from these platforms." Thus, in accordance with Article 4/2 of the Regulation, payment institutions and electronic money institutions are prohibited from mediating the transfer of funds from platforms that offer crypto asset trading services, and as of 30 April 2021, i.e., the effective date of the Regulation, traders will not be able to benefit from payment and electronic money institutions when sending money from platforms that provide crypto asset trading services.
In conclusion, it can be implied from the text of the Regulation that the intermediation of fund transfers from platforms that provide crypto asset trading services can be undertaken by other institutions. In other words, it can be said that the inflow and outflow of funds to crypto asset exchanges via banks will not be affected by the Regulation, as banks do not fall under the definition of "payment institutions and electronic money institutions.”
Given that crypto assets have not been subject to any regulation and supervision mechanism in Turkish law until now, a regulatory instrument in this field had been highly anticipated. The legal reasoning behind this regulation can be based on the grounds that (I) the addressees cannot be easily determined, (ii) the market values of cryptocurrencies show excessive volatility, (iii) crypto assets can be used in illegal activities due to their anonymous structure, (iv) wallets can be stolen or used illegally without the knowledge of their owners, and (v) transactions are irreversible. Although it is beyond dispute that there is a need for regulation in this field, it is important to note that the recently issued Regulation eliminates the payment function of crypto assets in Turkey altogether and suggests that crypto assets may be used speculatively or only as a value storage tool. Consequently, the Regulation is expected to stifle technological development in Turkey and trigger several other problems, including creating a technological impediment that encourages Fintech initiatives to move abroad.
The regulation is also detrimental to many start-ups in Turkey that operate in this field. As an example, Digilira—a platform that allows users to transact in international markets with Turkish lira by converting their Turkish lira into cryptocurrency—recently announced that they had enabled customers to pay for accommodation at approximately 15,000 hotels in Turkey using cryptocurrency, which is now prohibited by enforcement of this Regulation. Moreover, on 14 April, of Rolls Royce Turkey (Royal Motors) had announced that they will be accepting payments in the form of crypto assets, which unfortunately only lasted a day with the announcement of this Regulation. Subsequently a number of CEO’s of cryptocurrency exchanges in Turkey have been arrested and accused of fraud.
While a total ban on crypto currency is anticipated by some, the future of crypto currency in Turkey remains unclear. According to a recent public opinion survey across several countries, 20% of respondents in Turkey own/use cryptocurrency, the highest rate among the countries surveyed.