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The Turkish Technology Ecosystem: A Look Into NFTs Under Turkish Law – Fin Tech


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.

Securities

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.



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