In this second article of our series on the Turkish technology ecosystem, we are taking a deep look into NFTs from a legal perspective.
We have all heard a lot about Non-Fungible Tokens ("NFTs") in recent years and mostly associated with modern pop and artworks of famous artists, such as the US$69.3m sale of Mike "Beeple" Winkelmann's Everydays: the First 5000 Days, the US$23.7m sale of Cryptopunk's #5822, the US$2.9m sale of Jack Dorsey's first Tweet, etc. But, most of us are wondering what the function of an NFT is and how it differs from other tokens?
From a technical perspective, NTFs, mostly operating within the Ethereum Blockchain under two main standards called ERC 721 or ERC 1155, are defined as cryptographic assets minted on a blockchain with unique identification codes and metadata that distinguish them from each other. Hence, they are interchangeable and unalterable tokens which differ from fungible tokens, like cryptocurrencies, as they cannot be traded or exchanged for another. This further differentiates them from fungible tokens, which are identical to each other and, therefore, can serve as a consideration method for commercial transactions like fiats. Except for rare cases, terms of NFTs are governed by smart contracts on a blockchain, which regulates the rights and liabilities such as ownership, transfer, ancillary rights and other topics associated with the relevant NFT.
Due to their unique nature in terms of identification, NFTs are preferred by artists as a new type of digital certification which enables right holders to ensure that the relevant NFT asset is single and unique. However, the use of NFTs is not definitely limited among artworks and there is an increased use of NFTs within numerous sectors including sports, fashion, real estate, gaming (such as in-form prizes), videos, etc., and also increased use by brands for the registration of trademarks to products in virtual platforms, such as Metaverse.
The whole blockchain and crypto assets terms, including the NFTs, are still fairly new concepts to the Turkish legal system. Therefore, the legal framework of the NFT is not yet precisely established apart from the possible considerations under the definition of crypto assets, security and artwork.
Evaluation of NFTs under the crypto payments regulation
The Regulation on Non-Use of Crypto Assets in Payments dated 16.04.2021 ("Crypto Payments Regulation") defines crypto assets as "intangible assets that are created virtually using distributed ledger technology or a similar technology and distributed via digital networks, but are not classed as fiat money, deposit money, electronic money, payment instrument, securities, or other capital market instruments." Based on that definition, it should be admitted that the NFTs can substantially be defined as a type of crypto assets under the Crypto Payments Regulation.
Although neither purchase nor trading of crypto assets are prohibited, there are certain restrictions applicable to the use of crypto assets under the said regulation. Accordingly, (i) crypto assets are prohibited from being used directly or indirectly in payments; and (ii) no services are allowed to be provided that involve the use of crypto assets directly or indirectly in payments. The Crypto Payments Regulation further prohibits payment service providers (i.e. banks, and electronic money institutions), payment institutions, and Turkish Postal and Telegraph Corporation to develop business models in a way that crypto assets are directly or indirectly used for the provision of payment services and electronic money issuing, nor can they provide any services related to such business models. In addition to foregoing, payment and e-money institutions are prohibited from acting as an intermediary to fund to or from platforms offering trading, custody, transfer or issuance services in relation to crypto assets.
In light of the Crypto Payments Regulation, currently crypto assets cannot be used as a consideration method for the purchase of an NFT in Turkey. Moreover, customers cannot benefit from the payment, and e-money institutions for the transfer of fiat to an NFT platform while performing the purchasing transaction.
Turkish capital markets laws have no expressed regulation on NFTs or any other type of crypto assets, though the Capital Markets Board of Turkey ("CMB") is expected soon to issue its long-anticipated legislation on the regulation of the blockchain and crypto assets sector.
In its Research Report on Cryptocurrencies and Bitcoin dated December 2016 ("Report), the Research Office of CMB ("Research Office") provided definition for, among others, digital currencies, virtual currencies and cryptocurrencies. Accordingly, digital currencies were defined as the currencies that can be stored and transferred electronically. Virtual currencies, on the other hand, were defined as the digital currencies which do not represent any physical asset (e.g. fiat). Lastly, cryptocurrencies were defined as the digital values that enable cryptographically/encoded secured transactions and initial coin offerings ("ICOs"). It should nevertheless be noted that these are not statutory definitions but rather were covered in a report prepared by the Research Office in 2016, when the CMB, like the majority of the population, could have been less familiar with the crypto sector. Therefore it would not be wrong to surmise that both the definitions and approach of the CMB against the crypto market might have changed over the last few years.
Following that, on 01.12.2017, CMB issued a letter to the Capital Markets Association of Turkey stating that there is no regulation or definition regarding cryptocurrencies and that they are not regulated as derivative financial instruments within the context of the Capital Markets Act No. 6362; accordingly, Turkish investment institutions should not engage in any spot or derivate transactions based on cryptocurrencies.
Furthermore, in its bulletin dated September 27, 2018, the CMB warned the community that ICOs are very risky and speculative investments and they are not subject to its regulations and supervision. Besides listing the risks of ICOs exhaustively, CMB further stated that token sales may have certain similarities with public offerings and crowdfunding activities; accordingly, the CMB will make an analysis on a case-by-case basis in respect of each token sale to determine whether the relevant sale hits the boundaries of the capital markets laws. It is worth highlighting that, following this statement of CMB in 2018, on November 27, 2021, the Communiqué on Crowdfunding, which regulates the terms and conditions of raising capital in return for equity or debt, entered into force.
Though we are not yet aware of a case where CMB has ever ruled that an NFT be considered as a security in terms of Turkish capital markets law, each token sale should still be analyzed to ensure whether the functions and rights associated with the relevant token being sold (e.g. utility, security, stable, payment, etc.) would be qualified as an equity or debt instrument and/or whether it is used as a method to raise capital like conventional securities.
IP law considerations
There have been contradicting opinions on the evaluation of NFTs under Turkish intellectual property laws, though it is now established by the majority that the NFTs would be deemed as an 'artwork' under the Turkish intellectual property laws; hence, NFTs would accordingly be protected as a copyright and/or in some cases other intellectual properties such as trademark(s) to the extent that the criteria under the Law on Intellectual and Artistic Works Numbered 5846 ("Copyright Law"), for copyrights, and the criteria under the Industrial Property Code Numbered 6769 ("Industrial Property Law") for other intellectual property types are satisfied.
An artwork is defined by the Copyright Law as any kind of intellectual and artistic product bearing the characteristics of its owner and which is considered a work of science and literature, music, fine arts or cinema. Copyright Law, provides the owner of artworks with two main rights, namely the financial rights and moral rights. There are several different moral and financial rights that the creators of a work have. Whereas the moral rights refers to the (a) right of presentation to the public, (b) right to indicate creator's name, (c) right to prevent changes to the work, and (d) creator's rights against the possessor and the owner; on the other hand, the financial rights refers to the (a) right of interpretation, (b) right of reproduction (c) right of distribution (d) right of representation and (e) right of transmission to the public by way of media used in the transmission of signs, audio, and video.
The authority to use the above listed copyrights belongs solely to the creator of the work. The financial rights granted to creators of works and their heirs may be freely transferred to others, whether with or without limitation as to duration, location, or content, whether reciprocal or not. If a person who has received a financial right or a license to use such right from the creator or his/her heirs, such person may only transfer these rights to a third party with the written consent of the creator or his/her heirs. In the event of the transfer of the interpretation right, the creator or his/her heirs must similarly approve the transferee in writing. Agreements and dispositions relating to the transfer of financial rights must be in writing and must refer specifically to each right, i.e. the rights subject to transfer or license should be specifically mentioned in the agreement.
Trademarks may consist of any signs such as words, including personal names, figures, colors, letters, numbers, sounds and the shape of goods or their packaging, provided that such signs are capable of distinguishing the goods or services of one undertaking from those of other undertakings and being represented on the register in a manner to determine the clear and precise subject matter of the protection afforded to its proprietor.
In terms of transfer of the registered intellectual property such as trademarks, agreements and dispositions relating to the transfer or licensing of the intellectual property must be in writing. As long as the transfer and/or license has not been entered in the relevant register at the Turkish Patent and Trademark Authority, the parties may not invoke the rights arising from the registration of the trademark against third parties acting in good faith.
Since the transfer of copyrights is subject to certain formal rules set forth under Copyright Law, and since the transfer of the registered intellectual property is subject to certain formal rules set forth under Industrial Property Law, it is arguable whether the sale of an NFT through a smart contract automatically grants any copyright or intellectual property right to the acquirer of the NFT and whether it automatically transfers the copyrights and/or intellectual property rights to the acquirer.
Accordingly, other than any personal use, the acquirer of the NFT may not be able to copy, distribute or alter the NFT or create derivative works (as well as new NFTs) based on the NFT or communicate the NFT to the public since the acquirer will not automatically own the copyright and intellectual property rights belonging to the NFT in terms of formalities explained above. If the seller of the NFT is the creator/owner of the copyright and/or other intellectual property which is included in the NFT, the seller of the NFT may also transfer such copyright and/or other intellectual property to the acquirer. However, it may not be possible to regulate the copyrights arising from the work through smart contracts since smart contracts may not always be deemed satisfactory as a valid contract fulfilling written form requirements.
It should be also noted, from a Turkish law perspective, that NFTs can be subject to copyright infringement or other intellectual property rights infringement claims since creation and offer of a NFT may infringe the intellectual property rights of the third parties under Copyright Law or under Industrial Property Law. Therefore, before acquiring an NFT which includes a copyright or any other intellectual property such as a trademark, it would be advisable to conduct research on whether the seller of the NFT is the creator of the NFT and whether such NFT includes any third party copyrights and/or other intellectual property rights.
Likewise, for the sellers of the NFT, if the NFT contains copyright or intellectual property of third parties it would be advisable to obtain a clearance from such third parties before minting and offering the digital work through NFT on a platform.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.