From a Legal Perspective: Crypto Assets

With blockchain technology, many new concepts came into our lives: cryptocurrency, token, NFT (non-fungible token), CBDC (Central Bank Digital Currency), and DAO (decentralized autonomous organization) are just a few of these concepts... Early on, this innovation was tempted only by the crypto community, but now it attracts many individuals, institutions, and even governments. In many countries around the world, many projects related to Central Bank Digital Currencies have been carried out. Studies on CBDCs in Turkey seem to gain momentum in 2023. Pilot programs have been launched in Thailand and India. In Iran and Singapore, some tests have already been completed.

Developments in the crypto asset ecosystem are not just limited to CBDCs. In the European Union, the process of the Markets in Crypt Assets (MiCA) regulation coming into force is about to be completed. MiCA, which includes a categorization of crypto-assets, also includes regulations on the provision of crypto-asset services, especially in the obligations of entities providing these services (e.g. cryptocurrency exchanges). 

In the Finance Office under the Presidency of the Republic of Turkiye, studies on the FinTech ecosystem have begun; projects using NFTs have become widespread. On the other hand, irregularities regarding crypto-asset platforms are attracting attention. The widespread use of crypto assets in our daily and business lives requires some regulations in the legal field, as well.

Legal Characteristics of Crypto Assets

There is no global, uniform categorization of crypto assets. Each country defines and names crypto assets differently. Generally, crypto assets are divided into three according to their economic purpose payment, service, and security tokens (including tokens representing assets such as a commodity, real estate, etc.). Also, each country categorizes stable coins and CBDCs differently. In addition to the economic categorization, the distinction between fungible and non-fungible tokens has brought new debates. This is because NFTs take a step further in record-keeping thanks to their uniqueness: As the Ethereum website states, "NFTs are giving more power to content creators than ever before". The features that distinguish NFTs from other tokens have raised new questions in terms of determining the legal characteristic of tokens. 

Since crypto assets are based on blockchain technology, people and organizations from different countries can become parties to crypto asset transactions. Therefore, it is important to adopt global and uniform definitions of crypto assets. Since the rules of law generally follow technology, it takes time to identify the problems that may arise and to take precautions in these matters.

Crypto assets have different characteristics from traditional physical assets or digital assets that are not supported by blockchain. For instance, they are not tangible assets. Nevertheless, crypto assets are recognized as assets that can be subject to proprietary rights by those who are making transactions in the crypto marketplaces. The recognition and protection of this acceptance by the legal system have great importance on the development of the crypto ecosystem. 

In this regard, especially in the last two years, countries such as the UK, the US, and some leading organizations around the world, have accelerated regulatory movements and legislative amendments focusing on digital assets. Towards the end of 2022, UNIDROIT which was established to provide uniformity in private law published a draft regarding digital assets. UNIDROIT aims to develop principles on the legal characteristics, transfer, and use of digital assets by working in coordination with another United Nations Organization called UNCITRAL.

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Crypto assets and the Rules of Law

Around the world, although the research on how to name and categorize crypto assets has gained momentum, it is not compromised yet. Moreover, the rights granted to the holder and the intended use of each crypto asset are different from each other. Therefore, crypto assets may be subject to different regulations by different authorities. 

Despite all these differences, the common point of crypto assets is that they are created based on DLT technology, verified by cryptography, and created virtually and stored in a digital record system. These records stored in a digital database represent assets or rights in the digital world in an irreproducible way. 

When crypto assets are seen purely as technology, it can be thought that this technology does not need law. However, the effects of crypto assets are not limited to the financial ecosystem. There may be errors, as well as illegal transfers in crypto-asset transactions. Crypto assets becoming a subject of contracts can create new problems. In such cases, people whose rights were violated will bring these disputes to national courts and the disputes will be resolved by the law.

Different Fields of Law, Different Questions

In the last three years, there has been an increase in disputes arising from crypto assets brought to court in countries that belong to the Common Law system, such as the USA, UK, New Zealand, and Singapore. In a decision of the Singapore Supreme Court in 2021, it is ruled that cryptocurrencies meet all the conditions in the classical definition of goods. Several judgments by the UK Supreme Court have ruled that crypto assets are commodities and that proprietary rights can be established on them and even notifies to made through NFTs.

Despite some provisions introduced by the Regulation on The Disuse of Crypto Assets in Payments, which came into force in 2021 in Turkish Law, there is still no commonly applicable definition of crypto assets. When we look at the decisions ruled by the Turkish courts, it can be observed that they are generally gathered around the inheritance and seizure of crypto assets.

Aside from the fact that crypto assets should be subject to a legal evaluation, we encounter various questions in many areas besides property: In which country's courts will rule the disputes arising from crypto assets be settled? Which law will be applied in this case? Is it possible to establish other limited real rights on these assets in addition to proprietary rights? Can crypto assets be the subject of intellectual or industrial property rights? Do crypto assets can be qualified as securities? Can crypto assets be seized? Can crypto assets be capital market instruments? What type of taxation should crypto assets be subject to?

Undoubtedly, it will take time to answer these questions. However, establishing concrete, clear, and compliant regulations regarding crypto assets will help reduce legal and financial risks and minimize risks for both companies and citizens.