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Bridging Borders: Navigating Cryptocurrency Regulations in the EU and Turkey

cryptocurrency

Introduction

The EU has adopted a comprehensive and innovative regulatory framework known as MiCA Regulation (Regulation (EU) 2023/1114 of 31 May 2023 on markets in crypto-assets) which governs crypto-asset markets. This regulation introduces a dedicated and harmonized framework at the European Union (EU) level, providing specific rules for crypto-assets and related services and activities. Its primary objective is to support innovation and fair competition while ensuring a high level of protection for retail holders and maintaining the integrity of crypto-asset markers.

MiCA Regulation establishes strict transparency and governance rules, as well as prudential rules applicable to financial institutions. Notably, the regulation places significant emphasis on stablecoins, which are crypto-assets that promise a “stable value” linked to official currencies or values.

According to a briefing by the European Parliament in September 2023, academics and international organizations have issued strong warnings about the potential destabilizing effects of stablecoins on the financial system. They emphasize the need for stringent transparency requirements, as well as effective international coordination and cooperation. However, stricter regulations within the EU, compared to those in third countries, could potentially hinder the development of crypto-asset markets.

In Turkey, the first comprehensive legal framework for cryptocurrencies was introduced through amendments to the Capital Markets Law. These changes, published in the Official Gazette on 2 July 2024, officially came into effect, establishing principles to regulate entities providing services relating to digital assets in Turkey. However, compared to MiCA Regulation, Turkish regulations still lack explicit provisions in key areas such as best execution, record keeping and IT system requirements.

EU vs Turkey

Cryptocurrency Regulations in the EU

Cryptocurrency is legal across Europe, as the EU does not prohibit the use, ownership, or trading of cryptocurrencies. However, specific regulations vary among EU member states, and activities involving cryptocurrencies are subject to financial and anti-money laundering regulations.  MiCA Regulation establishes a unified regulatory framework for crypto-assets in the EU. Its key objectives are to:

  • Protect consumers.
  • Prevent market abuse and fraud.
  • Ensure financial stability.

MiCA Regulation applies to crypto exchanges, wallet providers, and other service providers, requiring them to register with local authorities and comply with strict transparency and reporting obligations. Businesses dealing with cryptocurrencies, such as exchanges and wallets, must also comply with Anti-Money Laundering (AML) and Know Your Customer (KYC) requirements, which necessitate user identity verification to access these services.

It is important to note that member states may implement additional country-specific regulations in the EU. For instance:

  • Germany recognizes crypto currency as “private money.” Trading is legal but subject to regulation.
  • France imposes taxes on cryptocurrencies, and businesses must register with the Financial Markets Authority (AMF).
  • Italy and Spain have implemented their own licensing requirements for crypto service providers.
Cryptocurrency Regulations in Turkey

In Turkey, cryptocurrency is not banned, but its use is subject to specific restrictions and regulations. It is legal to own, trade, and to mine cryptocurrency. However, certain activities involving cryptocurrency are regulated or restricted:

  • Capital Markets Law Amendments: With the latest amendments to the Capital Markets Law, cryptocurrencies, referred to as “crypto assets”, are now classified as capital market instruments. This law applies to all parties engaged in cryptocurrency-related activities in Turkey. Individuals and businesses can buy, sell, and own cryptocurrency. Cryptocurrency exchanges must comply with local regulations and register with Turkey’s Financial Crimes Investigation Board (MASAK).
  • Registration and Licensing: Crypto-Asset Service Providers (CASPs), crypto exchanges and other service providers must register with the Capital Markets Board (SPK). They are subject to licensing requirements, operational standards, and regular audits. Companies operating in the crypto space as of 2 July 2 2024 were required to apply for a license by 2 August 2 2024, or cease operations.
  • Customer Contracts and Conduct: CASPs are required to establish written contracts with customers, that clearly outline the terms and conditions of the services being provided, including dispute resolution mechanisms. Transactions between CASPs and clients must be conducted in a “secure, transparent, efficient, stable, fair, honest, and competitive manner”.
  • AML and KYC Compliance: Cryptocurrency exchanges operating in Turkey are required to comply with AML and KYC regulations to ensure consumer protection and prevent fraudulent activities. Users are required to provide identification to trade on Turkish platforms.
  • Payment Restrictions: Since April 2021, the Turkish Central Bank has prohibited the use of cryptocurrencies, as a method of payment. As a result, cryptocurrencies cannot be used for direct or indirect payments for goods and services in Turkey.
  • Taxation: Currently, there is no specific tax law for cryptocurrencies in Turkey. However, profits from cryptocurrency trading could be considered taxable income under general tax rules. It is advisable to consult a local tax expert for guidance.
Comparison between EU Regulations and Turkish Regulations

As noted earlier, in comparison to MiCA Regulation, Turkish regulations still lack explicit provisions in key areas such as best execution, record keeping, and IT system requirements.

Best execution in the context of cryptocurrency trading refers to ensuring that trades are executed under the most favourable terms possible for the trader or investor. It involves finding the “best price”, “speed”, and “conditions” for buying or selling a cryptocurrency across available trading platforms. The latest amendments to the Capital Markets Law do not provide concrete provisions for best execution comparable to MiCA Regulation. However, some key provisions related to best execution in Turkish law are found 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 Capital Markets Board (CMB).”

This broad language is open to interpretation and allows the CMB to determine market abuse for any activity that cannot be reasonably and economically justified, potentially disrupting the safe and stable operation of transactions on a CASP.

It is also worth noting that there is a provision related to “best execution” in the capital markets regulation. Article 30 of the Communiqué on Principles Regarding Investment Services and Activities and Ancillary Services No. III-37.1requires investment firms to execute orders in a manner that provides the best possible outcome for their clients. This includes consideration of factors such as price, cost, speed, clearing, custody, counterparties, and other relevant elements, all in accordance with the firm’s order execution policy.

Recommendations relating to the transactions between European and Turkish Parties

When conducting transactions involving European and Turkish parties, consider the following recommendations:

  • Compliance with Both Jurisdictions: Ensure that the transaction complies with the cryptocurrency laws in both the EU and Turkey. If a Turkish party is involved, cryptocurrency as a payment method (either directly or indirectly) must be avoided, as it is prohibited in Turkey.
  • AML/KYC Concerns: Both parties must adhere to AML and KYC requirements in their respective jurisdictions. Non-compliance could lead to frozen funds or legal issues.
  • Agreements: When cryptocurrency is used for business or investment purposes, ensure that the terms are legally binding and compliant with the laws of both jurisdictions. The governing law and dispute resolution clauses in the agreement shall be clearly defined, and a neutral jurisdiction may be chosen to avoid conflicts. Detailed records of all transactions, contracts, and agreements should be maintained.
  • Tax Reporting: European parties should report cryptocurrency transactions in accordance with their country’s tax laws (e.g., capital gains tax). Turkish parties should keep clear records in case specific taxation rules are introduced in Turkey in the future.
  • Licensed Platforms: Transactions should be conducted on reliable cryptocurrency platforms registered and compliant with regulations in both the EU and Turkey. Ensure that the platform is licensed and legally operates in both jurisdictions. When transferring cryptocurrencies between jurisdictions, verify that the platform supports both currencies and adheres to local compliance standards.
  • Currency Conversion: Due to the restrictions on using cryptocurrency for payments in Turkey, converting cryptocurrency into fiat currency (e.g., TRY or EUR) may be necessary. Be aware that this might incur additional fees or taxes.
  • Monitor Legal Changes: Given the recent introduction of cryptocurrency regulations Turkey, it is critical to monitor legal changes and stay informed about evolving cryptocurrency regulations in both Turkey and the EU.

By following these precautions, cross-border cryptocurrency transactions between European and Turkish parties can proceed efficiently and remain compliant with applicable laws.