The Capital Markets Board ("CMB")
issued an announcement on September 27, 2018, on its website and addressed the
much-disputed status of digital tokens and Initial Coin Offerings ("ICO"). In this announcement, the
Capital Markets Board stated that it does not regulate or supervise ICOs, and also
noted that it does not regulate or supervise most practices in which blockchain
technologies are being used, such as cryptocurrency offerings and token
offerings.

By way of brief background on the matter: Simply put, ICO refers to the
creation and sale of digital tokens. It is perceived and used as an alternative
fundraising mechanism to traditional financial markets. In an ICO, a project
creates a certain quantity of a particular cryptocurrency, which are then sold
to investors in the form of "tokens" ("coins"),
in exchange for real currency or other pre-existing cryptocurrencies, such as
Bitcoin or Ethereum. The company holding the ICO uses these funds in order to
launch its product(s) or its digital currency and, in exchange, the investors
hope (and expect) that the tokens will provide them with a beneficent return on
their investment. In its recent announcement, the CMB, which is the regulatory
and supervisory authority in charge of the securities markets in Turkey, expressed
its view that, although some ICOs may involve clear and concrete commitments (such
as the financing of a company or a project), they usually include only vague promises.
In this respect, the CMB emphasized that ICOs are risky and speculative
investments, and warned investors to consider, recognize and acknowledge the risks
listed below when investing in ICOs, and advised them to ensure that they perform
a detailed analysis of their expected results:

- Most ICOs are not regulated or supervised by any regulatory bodies due
to their structure;

- Token values may be subject to excessive fluctuations, as is the case
with cryptocurrencies;

- The collected funds may not be used for the stated/communicated purposes
by the ICO holders;

- Sales documentation for the ICO may contain incomplete or misleading information;

- The investment project may fail or the investment funds may be lost completely,
as funded projects are usually at a premature stage.

In the same announcement, the CMB also provided an update on the legal
framework for crowdfunding activities. Back in December 2017, the CMB had taken the first step toward
introducing and regulating the concept of "crowdfunding" through an amendment to
the Capital Markets Law. Now, with the recent announcement, the CMB has
declared that the secondary legislation for crowdfunding is under way. It also indicated
that the status of ICOs (which is similar to IPOs and crowdfunding) and whether
or not they will fall under the supervision of the CMB will vary on a case-by-case
basis. Finally, the CMB emphasized that unauthorized transactions under the
name/pretext of "crowdfunding" that are carried out before the secondary
legislation goes into effect will be subject to administrative and penal
sanctions and warned investors to disregard and not participate in any potential
sales of cryptocurrencies that occur under the guise of "crowdfunding".

Authors:
Gönenç Gürkaynak, Esq., Ceren Yıldız and Nazli Gürün, ELIG Gürkaynak
Attorneys-at-Law

(First published by Mondaq
on October 3, 2018)