Assoc. Prof. Dr. Tevetoğlu works as a legal expert in Istanbul and is a specialist in Blockchain Law.
It is common to see new technologies and their products challenge the legislation in force. The driving factor is that these new technologies generally lack specific regulation. This absence may lead to the misunderstanding that since there is no specific legislation, there are no laws that govern blockchain technology and crypto assets. However, this approach is far from true and may give rise to severe legal consequences.
To provide some basic information and background, we will first divide crypto assets into two categories, namely tokens and coins, and then sub-divide these further. As we examine these categories, we will try to clarify the possible legislation that applies to crypto assets. It is worth noting that these categorizations are arbitrary and may be subject to change from time to time.
The concepts of ‘coin’ and ‘token’ are frequently encountered in the blockchain and crypto asset ecosystem. Although these two concepts and tools have different meanings and functions and may sometimes intersect, they are used in a similar sense, making it difficult to distinguish one from the other, especially in initial coin offerings (ICOs). The main distinction between coins and tokens is whether they have a separate blockchain or not. Noting that there are rare exceptions, coins do have a blockchain of their own, whereas tokens are generally issued and operated on a blockchain of a coin. In determining which legislation is applicable to a specific crypto asset, the nature and feature of the asset must be closely examined.
Bitcoin is the first cryptographic coin and the first crypto asset that we know of. For the last decade, it has been the most addressed concept and asset in banking and finance technologies, both because it is the first digital currency created with cryptography and because it is viewed as a payment system. Bitcoin's decentralized nature is the main reason for this interest. Since the main function and feature of Bitcoin is its usage as a means of payment, this function brings it closer to the banking law and other relevant laws.
Altcoin, as the name suggests, is a generic term for alternative coins that were launched after the success of Bitcoin, and, in general, present themselves as a better alternative to Bitcoin. The regulations that could apply to Altcoins should be closely examined and determined according to their functions and nature. The closer they get to becoming a means of exchange, the greater the possibility of their being subject to banking laws. On the other hand, if an Altcoin has some features that fall within the scope of capital market instruments and rules, then it is more likely for them to be subject to capital markets laws.
Digital or cryptographic tokens known as security tokens reflect ownership in tangible assets like stocks, real estate, or even fine art. They get their name from the fact that they are regulated as securities and are related to securities as used in conventional finance. Security tokens must specifically comply with security laws, which makes them stand out from other tokens such as utility or payment tokens. This may involve clauses requiring investor identification, trading limitations, and other legal obligations. Since the traditional securities rules and cutting-edge blockchain technology are combined in this case, the legal environment around security tokens is complicated. The categorization is determined by the token's characteristics and intended use. For instance, to evaluate whether a transaction qualifies as an "investment contract" and, thus, a security, the Securities and Exchange Commission (SEC) in the United States of America utilizes the “Howey Test”, a test drawn from a 1946 US Supreme Court case.
Utility tokens generally serve as a means to gain access to certain goods or services on a platform or in a specific blockchain-based project. They give consumers access to future goods or services, as opposed to security tokens that represent an ownership interest or investment return, or payment tokens that serve as a means of exchange. Utility tokens are primarily intended for consumption, although they can occasionally resemble securities, particularly when offered in an ICO with the hope of making money afterwards. To classify a token, regulators in different countries may look at its nature, intended use, marketing, and selling environment.
As the utility tokens’ nature and features get closer to the general features of securities, the possibility of being subject to the securities law increases accordingly. Despite this, utility tokens are currently considered the safest option for the crypto ecosystem.
The blockchain and digital art communities are very interested in NFTs, or non-fungible tokens. They stand for a separate digital asset that can only be confirmed through blockchain technology, making sure that each NFT has a unique value and cannot be exchanged for an identical one, unlike fungible crypto assets like Bitcoin or Ethereum.
Since originality and uniqueness are mostly valued and needed in terms of intellectual and industrial property, the main legal discussion revolves around this. When purchasing an NFT, the customer often only receives ownership of the one-of-a-kind token and not the rights to the actual digital product or artwork. Confusion can result from this distinction. For instance, unless expressly indicated, holding an NFT of a digital artwork does not automatically provide the owner with the right to duplicate, distribute, or profit from the artwork. Consequently, NFTs are evaluated mainly in terms of intellectual and industrial property law. Unauthorized tokenization of an asset may result in copyright infringement. On the other hand, the tokenization of a security as a NFT may be subject to securities law and, in fact, be in violation of these laws. The pertinent regulation shall be determined in accordance with the nature and feature of each NFT in accordance with the underlying tokenized asset.