In the ever-expanding world of finance and technology, crypto assets have emerged as a prominent player, captivating the attention of investors, regulators, and enthusiasts alike. However, defining what constitutes a crypto asset has been a subject of debate in its early stages. Today, with the growing consensus among regulatory authorities worldwide, a clear understanding of these digital assets has been established.
This article aims to explore the concept of crypto assets, their functionalities, and their regulatory frameworks, with a specific focus on the European Union, the United States, and the Republic of Türkiye.
In the early stages of their emergence, there was a lack of consensus regarding the definition of crypto assets. However, today, numerous regulatory authorities have provided definitions for crypto assets, and it is possible to say that there is international consensus on "what they are".
In its simplest form, crypto assets are a digital representation of value that you can transfer, store, or trade electronically. These assets leverage blockchain technology to enable ownership, transferability, and trading in a secure and transparent manner. They are created through a process called tokenization, where a real-world asset or digital entity is represented by a digital token on a blockchain. The token serves as a digital representation of the asset and contains specific information about its ownership and attributes. They can take various forms and serve different purposes within the blockchain ecosystem.
Some of the most common types of crypto assets include:
Crypto assets often utilize smart contracts, which are self-executing contracts with predefined rules and conditions encoded on the blockchain. Smart contracts enable automated and thrustless transactions, as they execute the terms of an agreement once the specified conditions are met. Ownership of crypto assets is recorded on the blockchain through the use of cryptographic keys. The owner of a crypto asset holds the private key associated with the digital wallet where the asset is stored. Transferring ownership of a crypto asset involves a secure digital signature using the private key, which allows the asset to be transferred to another digital wallet.
The regulatory landscape surrounding crypto assets varies across jurisdictions. Countries regulate crypto assets to combat money laundering and illicit activities facilitated by anonymous and large-scale transactions. They also aim to mitigate risks associated with the high volatility of crypto asset markets, which can lead to substantial investor losses. Additionally, regulators are concerned about the potential systemic risks that could arise from the widespread adoption of crypto assets followed by a market collapse, which could cause financial instability and extensive losses across the financial system.
Compliance with applicable regulations is essential for entities involved in crypto asset activities to ensure legal compliance and maintain the integrity of the ecosystem.
The European Union reached a policy consensus in October 2022 on the Regulation of Markets in Crypto-assets (“MiCA”). MiCA is the first comprehensive regulatory framework for crypto assets worldwide. It encompasses provisions that pertain to both issuers and service providers, with the primary objective of safeguarding the interests of consumers and investors, while also fostering financial stability and promoting innovation. The effective date of this regulation is projected to fall within the timeframe spanning from mid-2024 to early 2025.
MiCA classifies crypto assets into three types:
It is important to state that NFTs, including digital art and collectibles, are excluded from MiCA. However, whenever issued in a large series or split into fractional parts, these tokens may be considered to be fungible and fall within MiCA (or possibly MiFID II).
On the other hand, MiCA imposes a number of requirements on crypto asset issuers and service providers, including:
Cryptocurrency exchanges are considered legal in the United States and are subject to regulation under the Bank Secrecy Act (“BSA”). According to the BSA, cryptocurrency exchange service providers are required to register with FinCEN (Financial Crimes Enforcement Network), establish an anti-money laundering and counter-terrorism financing program, maintain appropriate records, and report information to the relevant authorities.
The US Securities and Exchange Commission (SEC) has expressed its view that cryptocurrencies should be treated as securities. Consequently, securities laws are applied comprehensively to digital wallets and exchanges operating within the cryptocurrency space. On the other hand, the Commodities Futures Trading Commission (“CFTC”) has adopted a more permissive approach, emphasizing a "do no harm" principle. The CFTC regards Bitcoin as a commodity and has allowed for the public trading of cryptocurrency derivatives.
There is currently no legislation or regulation specifically addressing cryptocurrencies and the rights of their users in Türkiye. However, a regulation titled " Regulation Prohibiting Payments Through Crypto Assets" (“Regulation”) was published in the official gazette on April 16, 2021.
Under this Regulation, crypto assets are defined as intangible assets that are created virtually using distributed ledger technology or similar technologies and are distributed over digital networks. These assets are not classified as fiat money, registered money, electronic money, payment instruments, securities, or other capital market instruments.
The Regulation imposes certain prohibitions, which include:
Except above, it’s important to note that the Regulation does not outrightly prohibit the use of crypto assets, nor does it prohibit the purchase, sale, offering, transfer, or custody of crypto assets or the platforms that provide such services, such as crypto asset exchanges.
It is important to note that these prohibitions are outlined in the Regulation to ensure compliance and control within the crypto asset ecosystem. For more information, you can review our detailed article here.
Furthermore, the “Regulation on the Measures for Prevention of Laundering Proceeds of Crime and Terrorist Financing” (“Measures Regulation”) underwent amendments on May 1, 2021. As a result, crypto asset service providers and saving finance companies are now categorized as obligated entities under the legislation aimed at preventing money laundering and the financing of terrorism. These service providers are now responsible for fulfilling the obligations outlined in the Measures Regulation and other applicable laws. These obligations encompass conducting thorough know-your-customer procedures, reporting suspicious transactions, submitting regular reports, and maintaining and providing information to the Financial Crimes Investigation Board of Türkiye (“FCIB”). Consequently, the regulation surrounding cryptocurrencies in our country has become more stringent.
In order to implement these obligations, FCIB has published two guides detailing the obligations of crypto asset service providers. For more information, you can review our detailed article here.
Crypto assets have gained significant attention and recognition in the financial world, with various forms serving different purposes within the blockchain ecosystem. Cryptocurrencies, utility tokens, security tokens, NFTs, and stablecoins are among the prominent types of crypto assets that have emerged. These digital assets leverage blockchain technology to enable secure and transparent ownership, transferability, and trading.
The regulatory landscape surrounding crypto assets varies across jurisdictions. As the global financial landscape continues to evolve, the regulation of crypto assets plays a crucial role in ensuring investor protection, financial stability, and the prevention of illicit activities. Market participants, including investors, businesses, and service providers, should closely monitor regulatory developments and comply with the applicable regulations in their respective jurisdictions. This proactive approach will foster the continued growth and integration of crypto assets into the broader financial system, enabling innovation and unlocking new opportunities in the digital economy.