Turkey’s new rules to regulate the crypto market are likely to focus on licensing and taxation, sector officials say, as the world’s fourth-biggest crypto-trading country seeks to get off an international financial crime watchdog’s “grey list”.
Ankara promised the regulations last month amidst a years-long boom in crypto trading, as soaring inflation and a plunging lira currency drives a demand for alternative assets.
Turkey is also seeking to address concerns raised by Paris-based financial watchdog The Financial Action Task Force (FATF), which placed the country on its so-called grey list of countries at risk of money laundering and other financial crimes in 2021.
“Introducing certain licensing standards will be one of the top priorities in the new regulation,” said Bora Erdamar, director at BlockchainIST Center, a research and development center for blockchain technology, adding it will “prevent abuse of the system”.
Regulations could also include capital adequacy requirements, measures to improve digital security, custody services and proof of reserves, Erdamar added.
Turkey ranked fourth globally in raw crypto transaction volumes, at approximately $170 billion over the last year, behind the United States, India, and the United Kingdom, according to a report by blockchain analytics firm Chainalysis.
It was 12th in the firm’s crypto adoption index, reflecting Turks’ desire to counteract currency devaluation and youths’ interest in new technology, the report said.
In October, Finance Minister Mehmet Simsek said Ankara would bring in new legislation covering crypto-assets as soon as possible to comply with FATF’s last remaining recommendation, which would allow Turkey to ditch its grey-list status, which can affect a country’s investment ratings and reputation.
Grey-listed countries are deemed to be doing too little to combat money laundering and other financial crimes and need to actively work with FATF to correct deficiencies.
In a July report, FATF said Turkey may not be able to properly regulate and identify Virtual Asset Service Providers and their shareholders because it does not require them to be licensed and registered.
It was the last of 40 recommendations in the report that Turkey needed to address to get off the grey list.
“We have been observing that the interest in crypto assets in Turkey is on a continuous rise. There is currently a lack of regulation in this area,” said Mucahit Donmez, chief executive of crypto currency exchange Binance Turkey.
“We think that ensuring the security of users’ assets and setting up certain criteria in terms of minimum capital requirements, listings and custody, and requirements for platforms to obtain operation licenses will contribute positively to the sector.”
Turkey’s digital currency boom was fuelled by years of double-digit inflation, which hit 85% last year and was at 61% last month, and a more than 80% drop in the lira versus the dollar over five years.
According to a survey by Binance Research, the majority of Turkish investors entered the crypto market around two years ago and some 27% of them arrived in the last year, signifying continued interest in the sector.
The government said work on regulation for crypto asset service providers and taxation of digital virtual assets will be on the agenda for 2024.
“Turkey has a great potential in blockchain technology and cryptoassets… A reasonable taxation policy, that will not scare off investors, will strengthen and reinforce trust for the sector,” BlockchainIST Center’s Erdamar said.
In 2021, authorities banned the use of crypto assets for payments after some local exchanges were investigated for fraud.
Users of some smaller cryptocurrency trading platforms also had issues accessing their accounts and withdrawing funds as the firms’ systems broke down and investors filed thousands of criminal complaints to courts.
Onur Altan Tan, board member at Futurance Finance Tech & Fexobit crypto currency platform, said that they are expecting the new regulation to detail out licensing criteria for platforms and bring taxation for users.
“There’s been more than two years of work done on this regulation, including consultation meetings with cryptocurrency exchange firms, so it should be ready to be submitted to the parliament.”