Crypto Conundrum: Navigating the Maze of Assets & Regulations Across Borders

TLDR

Coins and fiat currencies often draw comparisons, with the latter operating on closed, government-controlled ledgers, leading to non-transparency and potential misuse. In contrast, cryptocurrencies use open, people-governed ledgers, preventing monopolization and offering transparency. Many crypto assets are designed with limitations to curb inflation, contrasting with the overproduction of fiat currencies.

Blockchain technology can be used to exchange ownership or possession of many assets, from money to movable property, from a motor vehicle to any intellectual and artistic work. The concepts of “Coin” and “Token” are frequently encountered in these transactions. Although these two concepts and tools have different meanings and functions, they are used in a close sense that is difficult to distinguish from each other, especially in initial coin offerings (“ICO”), and sometimes intersect in terms of meaning and function.

One other type of classification mainly depends on the nativity of the underlying blockchain technology of a crypto asset. Layer 1 blockchains like Bitcoin, Ethereum, and Cardano are examples of foundational blockchains. A Layer-1 blockchain uses cryptocurrencies to cover transaction fees and validates and supports its own network without the aid of another network. The main crypto assets of L1 blockchains, such as Bitcoin and Ethereum, are coins, and the derivative and secondary crypto assets are regarded as tokens.

On the other hand, their conceptual characteristics include technical, legal, and operational differences. The type of token, the rights, and authorizations it provides change and affect the rules of law to which the ICO will be subject and the regulatory and supervisory authority under whose supervision it will be considered.

Comparison Between Coins and Fiat Currencies

Coins and fiat currencies like the Dollar and Euro are often compared. Public frustration exists regarding central banks’ practices, sometimes leading to monetary inflation.

Closed Ledgers of Fiat Currencies

Fiat currencies operate on closed ledgers controlled by governmental institutions such as the U.S. government and the EU, making transactions and additional printing non-transparent and inaccessible for ordinary people to track and oversee.

Open Ledgers of Cryptocurrencies

In contrast, cryptocurrencies like Bitcoin, Ethereum, and Cardano operate on open ledgers, enabling transparency and participation. Unlike fiat currencies, these ledgers are people-governed and aren’t monopolized by a single entity.

Government Control and Misuse

Governments can exploit their control over financial systems, leading to inflation and impacting the public negatively. They possess the unilateral right to print money, often resulting in overproduction.

Limitation of Crypto Assets

Many cryptocurrencies are technologically designed with a cap to prevent inflation due to excess printing, in stark contrast to fiat currencies.

Types of Coin and Possibly Adhered Regulations

a. Bitcoin

Bitcoin is the first cryptographic coin and the first crypto asset. For the last decade, it has been the most talked about concept and asset in banking and finance technologies, both because it is the first cryptocurrency created with cryptography and because it is a payment system. Bitcoin’s decentralized nature is the main reason for this interest. The main function and feature of Bitcoin is its usage as a means of payment, which brings it closer to the Banking Law and other relevant applicable laws.

b. Altcoin

Altcoin, as the name suggests, is a generic name for alternative coins that were launched after the success of Bitcoin. These crypto assets generally present themselves as a better alternative to Bitcoin. Altcoins are coin projects that aim to replicate and follow the success of Bitcoin as a peer-to-peer (P2P) cryptocurrency. Most Altcoins aim to circumvent or avoid technical or legal restrictions. Thus, new alternatives to Bitcoin are emerging. As a term, “Altcoin” is used for all crypto assets that are not Bitcoin.

In April 2011, the first Altcoin appeared with NameCoin, followed by the launch of numerous crypto-asset exchanges to broker the trading of BitCoin and Altcoins. Today, these exchanges function as platforms where Bitcoin and other altcoins can be traded, allowing the price of Bitcoin to be determined in the free market. Thus, today, the price of Bitcoin is at least theoretically determined by the free market. Supply and demand create the price. Bitcoin trading platforms, namely crypto asset service providers, match buyers and sellers.

The platforms are independent of each other, not interrelated. Cross-platform transactions are also possible, and cross-platform transactions ensure that the market price is in line with each other. Differences in value between platforms, or more accurately, between crypto asset service providers for the same crypto assets, may lead to arbitrage and transactions focused on this. As a matter of fact, the legal institutionalization of crypto assets requires a governance principle and system that will ensure that value differences are kept to a minimum. The impact and appropriateness of such a principle and system on the interest in the crypto asset market or the nature of this market is open to further discussion.

As a conclusion, possibly adhered regulations regarding Altcoins shall be closely examined and determined according to its functions and nature. The more they are close to becoming a means of exchange, the possibility of being subject to the Banking Law respectively increases. On the other hand, if an Altcoin has some features that are eligible to fall into the scope of capital market instruments and rules, then, it is more likely for them to be subject to Capital Markets Laws.

Sad Fact:

The creation of a value transfer system based on cryptography allows parties to transact directly with each other without the need for a reliable third party, which can result in a significant reduction in transfer fees. According to the World Bank’s data, the transaction fee spent for money transfers was $575 billion in 2016, $548 billion in 2019, and $540 billion in 2020. For comparison, according to the World Bank’s data, the Gross Domestic Product (GDP) of the Republic of Turkey was $869 billion in 2016. As can be seen, the fee paid to intermediary financial institutions for money transfers corresponds to 66% of the GDP of the Republic of Turkey in 2016 alone.

Financial institutions place a huge burden on the shoulders of the ordinary people for simple monetary transactions. Therefore, many people naturally ask the rightful question of which side the regulators are really on when it comes to adversely regulating the crypto asset ecosystem.

c. Stablecoin

Stablecoin is a type of coin whose value is indexed to a precious asset such as gold or a stable currency such as the Dollar, Euro, Pound, where the underlying asset is held by the issuer for the value attributed to the issued coin. The opposite of this type of coin is the unstable coin, which is a coin with a floating value. The value of unstable coins varies depending on the form and quantity of their supply, whether they are centralized or not, their mining structure, and the projects in which they will be used.

It would be appropriate to consider the legal nature of Stablecoins and the legal framework they will be subject to according to the underlying asset. This is because the legal regime to which the underlying asset is subject is generally suitable to be applied to the Stablecoin in an instrument-independent manner according to asset-backed securitization regulations.

Possibly Adhered Regulations

a. Security Token

In Turkish law, the concept of securities is regulated by the Capital Markets Law (“CML”). One of the most significant effects of crypto assets is the introduction of a payment instrument outside of banking law with its money feature, and the other feature is the creation of an alternative and unregulated market and product to capital market instruments.

As mentioned below, crypto assets, which have the characteristics of investment instruments or securities in the Markets in Financial Instruments Directive (“MIFID”) and Markets in Crypto Asset Regulation (“MiCA”) axis, tend to be considered as financial products or instruments, leaving aside the technology or instrument in their issuance.

In the US, the Howey Test attempts to shed light on this issue. Thus, it is concluded that if a token meets the characteristics in the definitions of securities or other capital market instruments, this crypto asset will be accepted as a security. In this case, it is concluded that transactions such as the issuance, offering and custody of the Token in question will be subject to the CML and such crypto assets will be accepted as securities tokens.

Ultimately, Security Tokens, as mentioned above, should not be the first choice for launching a token due to its nature and strict worldwide regulations that are subject to legal risks related to it.

Furthermore, it is essential to state that the possibility of defining a coin as a security, consequently, may result in consideration of accepting every token developed on the same blockchain as the main coin as a security. Since the tokens are the derivative products of the blockchain and the main coin, its success may directly affect the value which may inevitably result in considering said tokens as securities.

b. Payment Token

A Payment Token is a type of token that is used for payment transactions and has a dominant role as a means of payment. Tokens in this category are the closest in type to Coins. Deciding whether a coin or token can be used as a payment instrument in a particular country or region, such as the EU, is generally the prerogative of the bodies of that country or region that have the authority to regulate it.

The general tendency is not to accept the use of crypto assets for payment purposes. Although such assets have the effect of improving and developing the existing financial system, the fact that the legal regime to which they will be subjected has not been established and their relationship with existing financial instruments has not been defined leads to a prejudiced view of their positioning as payment instruments.

c. Utility Token

These tokens, referred to as Utility or Service Tokens, offer their holders the right and opportunity to benefit from a particular product or service. They are not securities, capital markets or payment instruments. They can be used within the ecosystem in which they are issued, enabling a product, service, or privilege to be utilized in the usage areas listed in this limited network. This includes those that are used for crowdfunding purposes, such as DAO Tokens, which give the right to benefit from and purchase products that will be produced with this funding.

Characteristic examples of this group are Fan Tokens issued by sports clubs that provide the right to participate in decision-making processes regarding their team’s anthems, uniforms, regular and substitute players, and transfers. Compared to other token types, they are currently the most distant from the binding, mandatory terms and rules of banking and capital market law.

The general characteristic of Utility Tokens is that they are generated, issued, and used for non-financial purposes. MICA’s distinction classifies this type of token as a utility crypto asset, pointing out that they are assets that have no financial purpose and are not used for that purpose, and that the issuance or treatment of such assets does not require any special authorization provided that the offered utility exists or is in operation during its offering to the public.

The issuance of such assets may also be in the form of an ICO, as they are generally produced, offered, and used for the purpose of providing benefits and privileges to their owners, such as utilizing a certain service or having an advantage.

d. NFT (Non Fungible Token)

NFTs are perhaps the newest, but no less popular, of crypto assets. Legally, there is no widely accepted definition. Given its characteristic structure, an NFT can be described as a unique cryptographic asset. NFT differs from other assets produced by blockchain cryptography in that it has no duplicate. While other cryptographic entities can be substituted for each other, NFTs are unique and singular. Therefore, one cannot replace the other. NFTs are produced in conjunction with or integrated into intellectual products such as games, paintings, photographs, etc.

NFTs are commonly perceived only in relation to intellectual property. However, any entity can be expressed in NFT form. Since uniqueness and originality are the characteristics, most needed by intellectual and artistic works, producers of intellectual property products are much more interested in NFTs. This is expected to increase further. This is because NFTs ensure and protect the authenticity of a work with the blockchain. In this case, the work-as-creation character of the NFT itself and the effect of the NFT registration in proving authorship are other noteworthy legal effects.

e. Asset-Based Token

An asset-backed token is the token version of Stablecoin. As a type of crypto asset, it is issued based on either another crypto asset or a physical asset. They usually refer to a legal tender, a currency, one or several commodities, one or several other crypto assets, with the aim of maintaining a fixed value. However, they may later be used as a means of payment or a medium of exchange for the purchase of goods or services.

In the MICA classification, such assets are characterized by the function of storing a fixed value, and a whitepaper is required to explain the underlying asset and its functions in issuance and offering transactions.

Examples include the need for the underlying assets to be available and maintained by the issuer, equity coverage, and a certain provisioning requirement. Unlike utility-based crypto-assets, in MICA the supervision and oversight of such assets are assigned to the European Securities and Market Authority, in cooperation with the European Banking Authority.

Understanding the SEC’s Perspective on Crypto Asset Qualification

The SEC, governing securities transactions, scrutinizes tokens based on the Howey test, a criterion originating from a dispute over real estate contracts for citrus groves. This test classifies an ‘investment contract’ as an investment of money in a common enterprise, with profits solely from others’ efforts. Though comprehensive, Bitcoin exemplifies its limitations, fulfilling the investment aspect but lacking a ‘common enterprise’ and deriving value from speculation, not managerial efforts. Consequently, Bitcoin isn’t considered a security.

Despite covering various assets, the Howey test leaves over half of the crypto market outside SEC jurisdiction. It applies to tokens sold with expected returns and might extend to secondary sales, but a token’s qualification can change with decentralization, as seen with Ether. The SEC faces criticism for relying on a 1946 case to regulate a market born in 2008, providing unclear guidance, and seemingly favoring early tokens, raising questions about its adaptability to technological advancements.

The DAO and SEC Examination

The US SEC scrutinized The DAO, Slock.it UG, its founders, and intermediaries for potential federal securities law violations. Created by Slock.it for profit-making, The DAO aimed to fund projects through selling DAO Tokens, which were investigated to determine if they were securities under U.S. law. The Commission concluded that they were, requiring registration or exemption adherence.

Launched in April 2016 on the Ethereum Blockchain, The DAO was promoted through various platforms, emphasizing its secure, audited code and participatory features. The Commission, recognizing the growing use of distributed ledger technology for capital, stressed the applicability of U.S. securities laws regardless of organizational form or technology.

The laws prohibit unregistered securities offers or sales and encompass “investment contracts,” adaptable definitions focusing on transactional economic reality. In conclusion, compliance with federal securities laws is mandatory for all securities transactions, regardless of currency, form, or issuer type, emphasizing investor protection and informed decision-making. Additionally, entities facilitating securities exchanges must register or qualify for exemption.

SEC Allegations Against Coinbase

The SEC filed a complaint against Coinbase Inc. and Coinbase Global Inc., accusing them of violating the Securities Act of 1933 and the Exchange Act of 1934 by operating their crypto asset trading platform.

The SEC alleged that Coinbase acted as an unregistered exchange, broker, and clearing agency, thereby breaching various sections of the Exchange Act. Additionally, the complaint highlighted Coinbase Global Inc.’s role as the controlling entity, participating in the alleged violations. A significant point of contention was the SEC’s lack of a clear definition of coins, raising questions about its consumer protection intentions. Lastly, Coinbase was accused of violating Sections 5(a) and 5(c) of the Securities Act through the offer and sale of the Coinbase Staking Program without proper registration.

SEC Files Comprehensive Complaint Against Binance

On June 5, 2023, the SEC filed a comprehensive complaint involving 13 claims for relief against Binance Holding Ltd and its U.S. subsidiary, BAM Trading Services Inc., operating Binance.com and Binance.US respectively, and their founder, Changpeng Zhao. The SEC accused both entities of operating as unregistered exchanges, broker-dealers, and clearing agencies, alleging intentional avoidance of registration to sidestep regulation. Binance was further accused of violating Sections 5(a) and 5(c) of the Securities Act by offering and selling BNB, BUSD, Simple Earn, and BNB Vault without proper registration. Additionally, BAM Management and BAM Trading were charged with making false statements, engaging in fraudulent practices, and violating the Securities Act and the Exchange Act by not registering the offer and sale of its staking program.”

SEC v RIPPLE: Overview of Legal Action

In December 2020, the SEC filed action against Ripple Labs, its executives Bradley Garlinghouse and Christian A. Larsen, alleging that they raised over $1.3 billion through an unregistered digital asset securities offering, violating Sections 5(a) and 5(c) of the Securities Act. In early 2023, both parties filed for summary judgment.

The court examined four categories of XRP transactions to determine if they constituted investment contract security according to the Howey Test and evaluated the defendants’ claim of “fair notice”. The categories included Institutional Sales, Programmatic Sales, Other Distributions, and sales by Larsen and Garlinghouse.

The court found that Institutional Sales satisfied the Howey Test elements, with Ripple’s actions creating a reasonable expectation of profits for investors based on Ripple’s efforts. However, for the other XRP sales categories, the court did not find sufficient evidence to satisfy the Howey Test elements. The court also rejected the fair notice claim, asserting that existing Howey case law provided clear standards and sufficient notice for compliance.

Stance of Commodity Futures Trading Commission

The Commodity Exchange Act (CEA) defines a commodity as any basic good, raw material, or other entities in which contracts for future delivery are dealt with. This broad definition encompasses various products, including new technologies like crypto assets. The CFTC, responsible for regulating commodities, gained jurisdiction over crypto assets through key cases like CoinFlip (2015) and My Big Coin (MBC).

In the My Big Coin case, developers were charged with defrauding users by falsely claiming the virtual currency was backed by gold. The main issue was whether the CFTC had authority over MBC under the CEA, despite it not being a subject of futures trading. The defendants argued that MBC was not a commodity as futures trading was necessary for the classification under the CEA.

In 2018, the court ruled in favor of the CFTC, establishing that virtual currencies are considered commodities even without futures contracts. The decision broadened the definition of commodities and affirmed the CFTC’s authority over virtual currencies, paving the way for future regulation and enforcement against deceptive acts involving digital assets. This case was a turning point, clarifying the CFTC’s power and how traditional commodity rules apply to emerging financial technologies.

CTFC v. Ooki DAO

In the case of CFTC v. Ooki DAO, the CFTC accused bZeroX of developing and marketing a blockchain protocol functioning like a trading platform, which facilitated margin and leveraged retail commodity transactions from June 2019 to August 2021. Ooki DAO faced three counts of violations: first, for engaging in illegal over-the-counter leveraged transactions; second, for conducting activities requiring registration as a futures commission merchant; and third, for failing to implement customer information, KYC, and Anti-Money Laundering programs. After Ooki DAO missed the response deadline in January 2023, US District Judge William H. Orrick ruled in favor of the CFTC in June, ordering a shutdown of Ooki DAO and imposing a $643,542 fine. This case established a precedent, affirming CFTC’s jurisdiction to regulate DAOs and their activities.

What Regulations Should Be Adhered Relating Each Crypto Asset?

As mentioned above, the main distinction amongst crypto assets is as Tokens and Coins. Accordingly, Coins are split into categories as Bitcoin, Altcoins and Stablecoins. On the other hand, Tokens are classified amongst each other as Security Tokens, Payment Tokens, Utility Tokens, NFTs and Asset-Based Tokens.

Coins in General

As a matter of fact, Bitcoin and other coins that followed it are mainly designed to be a substitutive of fiat money and instruments of the classic financial system. Their main feature and aim are to be a means of exchange for transactions of economic value. When it comes to deciding which regulation will be applicable to a particular type of coin, the features and nature of the coin is determinant.

Since the main objective of coins to be a substitutive of fiat money, relevant laws on banking, finance and payments systems will be most probably applicable to coins. For example, in terms of Türkiye, crypto assets which constitute a monetary feature are considered by the Central Bank of Türkiye. Accordingly, the Central Bank issued a regulation with which it prohibited the usage of crypto assets as a means of exchange and further bans the development and usage of direct or indirect payment systems of any kind that uses crypto assets. As a conclusion, Coins that mainly function as a means of exchange will most probably be subject to laws relating to banking and finance law.

Tokens in General

When it comes to Tokens, determining which regulation to be adhered to may be quite tricky due to the variety of the tokens. Therefore, feature and nature of each token shall be closely examined and adhered regulation shall be determined accordingly.

Security Tokens

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 that term is used in conventional finance. Also, the governance tokens that are commonly used by Decentralized Autonomous Organizations fall into the category of security tokens.

Security tokens shall be specifically created to comply with security laws, which makes them stand out from other token kinds like utility tokens or payment tokens. This may involve clauses requiring investor identification, trading limitations, and other legal obligations. Because traditional securities rules and cutting-edge blockchain technology are combined, the legal environment around security tokens is complicated.

Tokens are not entirely equivalent to securities. The categorization is determined by the token’s characteristics and intended use. For instance, to evaluate whether a transaction qualifies as a “investment contract” and, thus, a security, the Securities and Exchange Commission (SEC) in the U.S. utilizes the Howey Test, a test drawn from a 1946 U.S. Supreme Court case.

Payment Tokens

Payment tokens are a subset of tokens that are primarily used as a means of exchange or as a store of value. They are also frequently referred to as crypto assets. Since Payment Tokens are closest to the coins, they mainly fall into the scope of regulations relating to banking and finance law. However, it is worthwhile to note that adhered regulation may vary depending on the jurisdiction, but it is safe to say that Payment Tokens generally fall into the scope of either securities law or banking law. With, relevant Know Your Customer, and Anti-Money Laundering laws and regulations shall be carefully considered.

Utility Tokens

Utility tokens generally serve as a means of gaining access to a certain good or service on a platform or in a specific blockchain-based project. Utility tokens give consumers access to a future good or service, 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 Initial Coin Offering (ICO) with the hope of making money afterwards. To classify a token, regulators in different countries 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 dramatically increases accordingly. Despite all that, Utility Tokens are currently considered the safest bet for the crypto ecosystem.

NFTs

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 another one exactly, unlike fungible crypto assets like Bitcoin or Ethereum.

Since the originality, uniqueness and singularity is mostly valued and needed in terms of intellectual and industrial property, the main legal discussion evolves in this area.

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 the right to duplicate, distribute, or profit from the artwork.

While it is doubtful that the majority of NFTs will be categorized as securities, there may be circumstances in which an NFT’s structure and the claims attached to it cause it to fall within the scope of the securities laws.

As a conclusion, 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, in the event of tokenization of a security as a NFT may be subject and in fact in violation of securities law. The adhered regulation shall be determined in accordance with the nature and feature of each NFT in accordance with the underlying tokenized asset.

How Do You Share The Tokens and Legal Implications

ICOs, or Initial Coin Offerings, are a means for new projects to raise funds by selling tokens or coins, resembling IPOs but offering crypto assets instead of stocks. The classification of these offerings as securities, assessed through tests like the Howey Test in the U.S., influences the applicable regulations. Countries differ in definitions and regulations, and understanding the nature of the token is essential to determine its security status.

AirDrops involve sending crypto assets to multiple wallet addresses, often for free, for promotional purposes or to reward loyalty. Despite their seemingly gratuitous nature, airdrops have legal implications. Regulatory bodies may classify airdropped coins as securities, subjecting them to strict laws, and recipients might incur taxes based on the asset’s value at the time of receipt, as indicated by agencies like the IRS in the United States.

TLDR

ICOs raise funds by selling crypto assets, and their classification as securities determines their regulation, varying by country. Airdrops, while often free, can have legal ramifications, potentially being classified as securities and incurring taxes based on value upon receipt.

Staking and Its Legal Implication

Within Turkish law there are a few regulations to consider when determining staking and its legal implications. First, the regulation on Non-Use of Crypto Assets in Payments, defines crypto assets as assets that are created virtually using distributed ledger technology or a similar technology and distributed over digital networks. Thus, crypto assets are not characterized as fiat money, dematerialized money, electronic money, payment instruments, securities, or other capital market instruments. Ultimately, this Regulation does not prohibit crypto assets in principle but aims to prevent their use in payments.

Likewise, Law №1567 on the Protection of the Value of Turkish Currency and Decree №32 on the Protection of the Value of Turkish Currency do not prohibit the creation of a crypto asset account. Law №1567 and Decree №32 have a list of prohibited transactions in foreign currencies. However, it is not legally possible to include crypto assets within “prohibited transactions in foreign currency” as these provisions are numerus clausus.

In addition, the activity of creating a foreign currency/foreign currency deposit account, which we can liken to staking activity, is not prohibited under Law №1567 and the Decree №32. Therefore, it should be concluded that the staking of crypto assets is not prohibited by the legislation. In private law, anything that is not expressly prohibited is permitted. Therefore, all crypto assets, from stable crypto assets to crypto assets denominated in foreign currency or gold, can be subject to staking today.

Using Token as a Payment Method

With the introduction of blockchain technology and decentralized platforms, the practice of using tokens as a means of trade inside a particular platform has grown in popularity. In this situation, tokens serve as in-house crypto currencies that help with transactions or provide access to particular platform features or services.

The rules and laws for crypto assets vary greatly between countries, and even within different areas. This can make it very difficult for crypto asset users to understand and comply with the legal system. Governments and central banks are primarily worried about crypto assets being used for transactions between any global accounts, regardless of whether they are anonymous or not.

Regulations like know-your-customer (KYC) and anti-money laundering (AML) procedures have been implemented by centralized authorities to address the barriers hindering the broader acceptance of crypto assets. Countries are quickly adopting regulations to benefit from the expansion and potential of crypto assets.

Here are some countries and their positions on crypto assets in general.

El Salvador has become one of the first countries in the world to accept Bitcoin as a legitimate form of currency. The country’s Congress, under President Bukele, passed a bill in 2021 that declared crypto assets as a legal means of exchanging value and allowed citizens to use it for buying products and services.

The Central African Republic is one of only two countries in the world that consider Bitcoin to be a legitimate form of currency. It officially recognized Bitcoin as legal tender during the second quarter of 2022.

In the US, people and companies that store, or trade Bitcoin are considered money services businesses and are regulated by the Bank Secrecy Act. The Treasury has classified Bitcoin as a currency that can be exchanged and used as a substitute for real money. There are specific regulations for investigating illegal activities or financial misconduct related to certain crypto assets, but regular people and businesses can still use crypto assets for making payments.

The European Union considers tokens to be a type of asset and does not view their usage as illegal. The European Union has a varied approach towards crypto assets, with several member countries implementing laws to facilitate their usage.The European Banking Authority has expressed concerns about the dangers of crypto assets and does not have authority over crypto asset activities. The European Union has introduced a proposed law for regulating crypto assets in 2022.

In Canada, crypto assets are treated as commodities for tax purposes and exchanges are categorized as money service businesses. In Canada, there are laws and regulations in place to prevent money laundering and terrorist financing when it comes to using crypto assets. As long as individuals comply with these rules, they are allowed to use and trade crypto assets in the country.

Israel is a country that accepts and utilizes crypto assets, such as Bitcoin, with numerous crypto ATMs and merchants accepting them as payment. Although Bitcoin is not classified as a currency, security, or asset by Israeli tax authorities, sellers are required to pay a 25% capital gains tax when selling Bitcoin.

Australia, like Canada, views crypto assets as taxable digital assets. If an individual engages in activities such as buying, selling, gifting, or converting crypto assets into regular currency for spending purposes, they will incur a taxable event in terms of capital gains. However, if they typically hold onto their crypto asset to profit from its increasing value, they will generally not be required to pay taxes. The individuals must maintain records of their transactions, although this task is often automated by wallets and exchanges.

Several countries have permitted the use of crypto assets in financial transactions and are developing regulations to integrate them into their financial systems.

India’s position on crypto assets is multi-faceted and has changed over time. The Finance Minister has expressed a commitment to combat the illegal use of Bitcoin and other virtual currencies in India, but also recognizes the potential of blockchain technology in payment systems. The Reserve Bank of India initially prohibited entities under its regulation from buying and selling crypto assets, but this ban was later lifted.

In Japan, Bitcoin is allowed to be used but it is seen as a type of asset held in a digital form, rather than a recognized currency. In 2014, the Japanese government declared that Bitcoin is not considered as money or a bond, which meant that banks and securities firms were prohibited from engaging in crypto asset transactions. This ruling highlighted that there are no specific laws prohibiting individuals or organizations from accepting crypto assets as payment for their products or services. However, businesses involved in crypto asset exchanges must be registered and comply with certain regulations since April 2018.

In Mexico, Bitcoin has been authorized since 2017 and the country intends to regulate it as a virtual asset under the FinTech Law.

The regulatory authorities in Singapore have said that businesses can decide whether or not to accept crypto assets, but they have also cautioned users about the risks of using Bitcoin.

Saudi Arabia has issued a warning to financial institutions about the risks associated with using Bitcoin, stating that the government does not provide protection or rights to companies involved with it. While it is deemed legal, there is a banking ban on it.

In the United Arab Emirates, the Dubai Financial Services Authority within the Dubai International Financial Centre initiated the regulation of investment tokens in September 2021, and has been implementing substantial modifications to its regulatory structure for acknowledged cryptocurrency tokens starting from November of 2022.

There are several other countries where crypto assets are considered legal, including Angola, Costa Rica, Ecuador, Lebanon, Türkiye, Iran, Argentina, Brazil, Pakistan, Chile, South Korea, Malaysia, the Philippines, Thailand, Vietnam, New Zealand, and many others.

The following countries have implemented complete bans on crypto assets: China, Qatar, Egypt, Algeria, Morocco, Nepal, Bangladesh, and Tunisia.

Finally, in Türkiye, crypto assets which constitute a monetary feature are considered by the Central Bank of Türkiye. Accordingly, the Central Bank issued a regulation with which it prohibited the usage of crypto assets as a means of exchange and further bans the development and usage of direct or indirect payment systems of any kind that uses crypto assets.

Governance Tokens and Their Legal Implications

Governance Tokens generally either fall into the scope of Security Tokens or Utility Tokens. In practice, the common practice is to name the Governance Tokens as a Utility Token. However, the mere act of naming a token as a Utility Token actually does not mean that much. Especially in the USA example, SEC and other relevant governmental authorities do not really care what the name of the token is. Governmental authorities prefer to examine the token or the coin by themselves rather than the way the coin or token is stipulated by its issuer.

Governance Tokens may in fact have some features such as voting rights that may result in the token being subject to capital markets law or commercial law. Therefore, it is crucial for the issuer to carefully consider the legal implications arising from the specific features of a token. For example, if a governance token provides its holder to have a voting right in a company or ordinary partnership or entitles its holder to have a profit from the revenue generated by the relevant project of the token, then, it is quite possible or even inevitable for the token to be subject to capital markets or commercial law.

In the event of considering a governance token as a security, the issuers will most probably be in violation of relevant legislation. For example, in Türkiye and the USA and generally all around the world, issuance of securities is strictly regulated and subject to permission from relevant authorities. It is important to eliminate or reconstruct a project in a way that does not intersect with the regulations of capital markets or commercial law. In conclusion, it is vital to consult with an experienced lawyer before even starting a relevant project.

LEGAL DISCLAIMER

THE INFORMATION PROVIDED IN THIS PAPER PROVIDES GENERAL INFORMATION AS TO THE POSSIBILITIES IN MULTIPLE JURISDICTIONS. PLEASE KEEP IN MIND THAT LAWS THAT APPLY TO THE SUBJECT HEREIN MAY DIFFER IN EACH JURISDICTION. THUS, NOTHING CONTAINED HEREIN CONSTITUTES ANY LEGAL OPINION OR SUGGESTION OF ANY KIND. PLEASE CONSULT TO LOCAL EXPERTS IN RELEVANT AREAS BEFORE TAKING ANY ACTION BASED ON ANY INFORMATION CONTAINED HEREIN.