Turkish Central Bank’s (“TCB”) regulation on “not using crypto-assets” in payments (“Regulation”) was promulgated in today’s official gazette and shall enter into force on 30th April 2021.
Regulation is comprised of 6 Articles. Articles 1, 2, 5, 6 regulate typical issues of purpose and scope, grounds, effective date on which the Regulation shall enter into force, and the authority responsible for enforcing the Regulation, respectively. With 4 of its 6 Articles being typical boiler-plate provisions, the Regulation might seem insignificant at first glance, but this could not be further from the truth as the remaining 2 articles implement a practical ban on using crypto-assets for payments in Turkey.
Article 3 and 4 of the Regulation read as follows:
“Article 3: Not Using Crypto-assets in Payments
(1) For the purposes of this Regulation, crypto-assets (“kripto varlık” in Turkish) means intangible assets that are created virtually using the distributed ledger technology or a similar technology, distributed through digital networks, and not classified as fiat money, bank money, electronic money, payment instrument, security or capital market instrument.
(2) Crypto-assets cannot be used in payments either directly or indirectly.
(3) No service can be provided for direct or indirect use of crypto-assets in payments.
Article 4: Not Using Crypto-assets in the Provision of Payment Services and the Issuance of Electronic Money
(1) Payment service providers cannot develop business models involving direct or indirect use of crypto-assets for the provision of payment services and the issuance of electronic money, and cannot provide any services related to such business models.
(2) Payment institutions and electronic money institutions cannot act as an intermediary either for the platforms providing services of crypto-asset trading, storage, transfer, issuance or for the fund transfers made from these platforms.”
Definition of Crypto-assets
A) Distributed Ledger Technology
The definition set forth in Article 3 of the Regulation is comprised of different elements. Firstly, it requires the asset to be based on the distributed ledger technology (DLT). Although crypto-assets are mainly associated with blockchain technology as it is the underlying technology of the most popular crypto-asset Bitcoin, it must be emphasized that DLT is a broader term than blockchain. In other words, every blockchain is a distributed ledger while not every distributed ledger is a blockchain. A popular example of DLT other than blockchain is the Hashgraph technology or Directed Acyclic Graph which is the underlying technology of IOTA.
Distributed ledger indicates a database technique where the data is stored on multiple nodes. Though there is some level of confusion on the use of words “distributed” and “decentralized”, it must also be stated that these are also different terms. Distributed nature indicates the existence of multiple nodes while decentralization means that there is no central decision-making authority. A distributed network can be centralized if there is a central decision-making authority despite the fact that the data is stored on multiple nodes. The Regulation refers only to the distributed ledger but not to the centralization element.
The Regulation refers also to “similar technologies”. It is not clear what type of similarity TCB will be looking for here given that most crypto assets are based on distributed ledger technologies for practical and security purposes. The abovementioned difference between distributed and decentralized systems may play a role here to argue that decentralized systems are similar to distributed systems but such a comparison should be made meticulously.
B) Distribution over Digital Networks
Another element of the definition provided under Article 3 of the Regulation is the distribution through digital networks. In light of the current practice, this seems like a more straightforward and easy requirement to satisfy as, to my knowledge, all crypto assets are already distributed and transferred through digital networks given that digital network is a broad term that could cover almost all digital connection and communication techniques.
A possible question here might be whether the crypto-assets stored in a cold wallet fall within the scope of the Regulation. This question should be answered positively since the creation and transfer of most crypto-assets are conducted digitally in principle regardless of the medium on which the key to such assets are stored at a specific single point of time.
C) Not Qualifying as Certain Assets
Maybe the most important part of the definition is a negative requirement which states that for a certain digital asset to be considered as “crypto-asset” under the Regulation it must not be classified as (i) fiat money, (ii) bank money, (iii) electronic money, (iv) payment instrument, (v) security, or capital market instrument.
(i) Fiat money is not defined under Turkish law but it is a term that is used in the Turkish Code of Obligations and it is almost uniformly accepted that it refers to the money issued by established governments. The implication of this asset included in the provision is that state-backed crypto assets would fall not within the scope of the prohibition.
(ii) Bank money is not a defined term under Turkish law either. Pursuant to Article 3 of the Law No: 6493 on Payment and Security Settlement Systems, Payment Services, and Electronic Money Institutions (“PSEL”) the term “funds” is defined as to cover bank money among others. In practice, this term is used to indicate both credit and deposit money that is digitally held by banks. This reference might make it possible for crypto-assets held by banks to be used in payments if banks are permitted to open such crypto-based accounts in the future.
(iii) Electronic money is defined under Article 3 of PSEL which stipulates that electronic money means the monetary value that is issued on the receipt of funds by an electronic money issuer, stored electronically, used to make payment transactions defined under PSEL, and also accepted as a payment instrument by other natural and legal persons in addition to the electronic money issuer. In 2013, the Banking Regulation and Supervision Agency (“BRSA”) stated in a press release that Bitcoin and “other similar virtual currencies” do not qualify as electronic money pursuant to PSEL as they are not backed by assets and not issued by a central authority . With an amendment made in 2019, the enforcement of PSEL has been taken from BRSA and left to TCB.
BRSA’s statement may be considered as valid as far as Bitcoin concerned. However, when examining other crypto-assets a specific point must be made for stablecoins which might be structured in a manner to satisfy the conditions provided for electronic money. Indeed, this is confirmed by the European Banking Authority in a report dated 2019 with respect to the European definition of electronic money, which is the source and verbatim translation of the term adopted in PSEL. In other words, some crypto-assets, most likely stablecoins, may qualify as “electronic money” under PSEL and, thus, may not qualify as “crypto-asset” for the purposes of the Regulation.
iv) Payment instrument is another term defined under Article 3 of PSEL according to which payment instrument means card, cell phone, password, and similar personal instruments determined between the payment service provider and user and used by the payment service user to initiate a payment order. Payment order, payment instrument, and payment transaction are defined with reference to one another under PSEL and these are linked to the transfer of funds through the term payment transaction. Although it requires an in-depth analysis and differentiation between some specific terms to provide an accurate response as to whether crypto-assets may be classified as payment instruments, for the purposes of this analysis, it would be relatively safe to assume that the reference to payment instrument would not be problematic at the early stages of the enforcement of the Regulation.
v) Security and capital market instruments are governed by the Capital Markets Law (Law No: 6362) (“CML”) according to which securities means:
With the exception of money, cheques, bills of exchange and promissory notes;
1) Shares, other securities similar to shares and depositary receipts related to these shares,
2) Debt instruments or debt instruments based on securitised assets and revenues as well as depository receipts related to these securities,
whereas capital market instruments (“CMI”) means:
Securities and derivative instruments as well as other capital market instruments designated in this context by the [Capital Markets Board of Turkey], including investment contracts
The Capital Markets Board of Turkey (“the Board”) has not classified any crypto-asset either as security or CMI so far. Although the issuance of shares is subjected to quite formal rules under the Turkish company law, the issuance of crypto-assets that would qualify as derivative is possible in theory.
Additionally, investment contracts are neither defined under CML nor used in practice ever but they share the verbatim title with the tool used under the US securities law to classify crypto-assets as securities using the so-called “Howey Test”. This resemblance is caught by Turkish scholarship as well but has not been used or referred to by the Board so far.
In light of these explanations, despite the fact that using crypto-assets in payments are banned in general, crypto-assets that may be qualified as electronic money or CMI (as an umbrella term covering securities as well as investment contracts) could avoid such prohibition. Given that the scope of these terms is determined by the practice of the Board and TCB; the Regulation might not be considered as a blanket ban for payments but as a very radical step to put crypto payments under the radar of financial institutions.
Usage of Crypto-assets in Payments
Article 3(2) and 3(4) of the Regulation prohibits direct or indirect use of crypto-assets in payments and provision of services directed to such uses. It must be noted that crypto-assets could not manage to spread and gain public acceptance as a means of payment. Still, as a “de facto” means of payment with increasing acceptance worldwide, albeit in a limited number of sectors, this cannot be considered as a positive step towards innovation and financial growth.
The more practical ban is set forth under Article 4 of the Regulation, which prohibits payment service providers from developing business models involving crypto-assets with a broad scope. Payment and electronic money institutions are also banned from acting as intermediaries again in a wide range of crypto-involving transactions. Payment institutions and electronic money institutions have been the forerunners of FinTech acceleration in Turkey probably due to the working culture and agile nature that is difficult to see in banks and other regulated financial institutions. They provided access to crypto-exchanges for people who are not in the banking system or afraid of using the banking system to engage with such novel and “foreign” transactions. One of the biggest crypto exchanges in the world, Binance, has teamed up with an electronic money institution in Turkey to allow residents in Turkey to transact on Binance. Removing payment and electronic money institutions from the equation would disrupt the crypto-exchange market, which already suffers from oligopolistic actions and high commission rates, in favor of established actors and banks
What About Other Uses?
The Regulation prohibits the use of crypto-assets only in payments. Two important questions at the early stage would be whether such prohibition covers (i) crypto-asset trading practices and, on a related but different note, (ii) holding crypto-asset for investment purposes.
Regarding the first question, even though the precise legal definition of the term “payment” requires another in-depth analysis from the perspective of Turkish law of obligations, it would be practical to say that fiat-to-crypto or crypto-to-crypto transactions made through crypto-exchanges would not be qualified as “payment” since payment obligation is mostly interpreted as to indicate a monetary obligation in the sense of payment of money in exchange of a good or service. Still, there is a gray area to dig in if TCB prefers to do so.
With respect to the second question, the answer would be a more straightforward “no” as the Regulation refers only to payments but not merely holding crypto-assets for investment purposes. However, taking one step further, one may ask when and under what circumstances transfer or purchase of crypto-assets could be classified as an investment and not payment, the answer of which touches again to the gray area explained above.
In light of the above, despite that there are uncertain points that would allow using crypto-assets even in payments, the Regulation can be considered as a hard hit to the Turkish FinTech industry that is bound to experience a chilling effect on its innovation and growth without having crypto-assets in their arsenal.
: This is a mot-a-mot translation of the title of Article 3. Semantically, it implies a ban on using crypto-assets, which is explicitly stated in Article 3. However, due to the fact that the title does not contain any specific prohibition word like “ban” or “prohibition”, we preferred the direct translation.
: The exact translation of this term would be “dematerialized money”. Despite the fact that Turkish civil aviation regulations refer to the Special Drawing Rights as a type of this money, considering that the Regulation is issued by the Turkish Central Bank and its main target is the banking industry, it would be reasonable to understand the term as it is used by the banking sector rather than the civil aviation regulation.
: For details of this press release and other previous development under Turkish law related to the regulatory framework of crypto-assets see here.