Blockchain and Cryptocurrency Law Part I

1. General Overview of Blockchain and Cryptocurrency Law

Blockchain and cryptocurrency law constitute a legal discipline that regulates the legal aspects of blockchain technology and cryptocurrencies, in a legal framework that is not yet entirely defined. Blockchain can be defined as a distributed database technology that enables the secure storage and sharing of digital data. Blockchain technology allows for the verification and recording of data without the need for a central authority or intermediary. Essentially, it functions as a chain system comprised of data groups referred to as blocks.In a blockchain, each block contains data from the previous block, which is referred to as a cryptographic hash value, and the method for calculating this value can vary from chain to chain. For example, Bitcoin uses SHA-256, while Ethereum uses Keccak-256, which is considered more robust. This value is called a digest. As a result, each block is connected to the previous block. These connections form a chain and prevent manipulation or alteration of blocks in reverse order. Additionally, "miners" filter out incompatible blocks by verifying the compliance of each new proposed block with the chain's rules. This technology enables reliable and transparent storage and sharing of data.

Cryptocurrencies, on the other hand, are digitally created and encrypted virtual assets. These assets transact on blockchain technology. Bitcoin, first introduced in late 2008, is the most famous cryptocurrency, but there are numerous different cryptocurrencies, each with distinct features.

2. Smart Contracts

An important technology emerging alongside blockchain and cryptocurrency is smart contracts. Smart contracts are digital agreements that automatically enforce all the rules specified in the contract (these rules could involve the performance of an obligation or the prevention of digital content copying, such as NFTs, land titles, etc.). These contracts operate without reliance on a central authority or institution and are executed by distributed miners on a distributed database known as blockchain technology. Smart contracts, working in tandem with blockchain technology, track the fulfillment of obligations arising from the contract and automatically provide payment to the party fulfilling the obligation upon completion. Miners reject blocks that do not comply with the rules of the smart contract. In this context, smart contracts can be characterized as a type of contract that ensures the automatic fulfillment of promises defined through code.

The legal status and recognition of smart contracts as "contracts" is a globally debated issue. While it is argued in countries such as the United States and European Union member states that smart contracts can be evaluated as "contracts" based on the legal acceptance of electronic signatures, the absence of any specific regulatory provisions in our country and in other countries negatively affects the legal acceptability.

Furthermore, the development and widespread adoption of smart contracts may give rise to various issues, including compliance with personal data protection regulations, oversight of general transaction conditions, how secondary elements of a contract are to be filled due to the innovative nature of smart contracts, the enforcement of specific contract provisions, the impact of excessive performance difficulty on smart contracts, the inability to rectify possible material errors retroactively, challenges in implementing precautionary measures in the context of smart contracts, and uncertainties regarding the choice of law in contracts requiring the application of foreign law, all of which constitute fundamental challenges arising from the proliferation of smart contracts.

3. Use of Blockchain Technology in Land Registry, Notary, and Cadastre Operations

Another topic under discussion is the applicability of blockchain technology in land registry, notary, and cadastre operations. Although the inclusion of such transactions in blockchain law is not expected in the short term, it is possible for processes that slow down over time to integrate with blockchain technology due to its ability to eliminate intermediaries, ensure data integrity, transparency, and security while reducing costs, increasing speed, and efficiency. Examples from various countries, including Sweden, South Korea, the United States, Estonia, India, and the United Arab Emirates, reflect global interest in the applicability of blockchain technology to real estate transactions and land registry records. While the pace of integrating these technologies into existing real estate transactions, notarial services, and cadastres may vary from country to country, the increasing prevalence of blockchain technology in such applications is seen as a likely trend.

4. Blockchain Technology in the Context of Personal Data Protection

As blockchain technology rapidly advances, questions arise about the relationship between blockchain technologies and the law on the protection of personal data. Although "anonymity" is the most significant promise offered by Blockchain to its users, users of Blockchain have also been victims of data theft in the recent past. Blockchain being a technology entirely based on data makes the potential harm caused by data theft in this sector substantial in financial terms.

One of the most fundamental questions being discussed is whether data on the blockchain can be considered as personal data. According to Turkish Personal Data Protection Law (KVKK) Article 3(1)(d), personal data is defined as "any kind of information related to an identified or identifiable natural person." This definition is similar to the personal data definition in Article 4(1) of the General Data Protection Regulation (GDPR). The information contained in the Block Header is not related to the identities of users but only contains information about how the block is defined on the network. Therefore, the information in the Block Header cannot be considered as personal data.

However, the situation is not as clear when it comes to the data in the Block Contents. When looking at the data in the Block Contents, even though Public Keys and Public Transaction Data are encrypted, it is possible to establish a connection with the relevant individuals. Block Contents are recorded as plain text, with encryption or cryptographic hashing, and connections can be established with individuals. Some applications and service providers require Know Your Customer (KYC), so users voluntarily write their identity information on the blockchain and associate all their transactions (including transactions made in other applications) with the wallet they used for KYC, both in the past and in the future. Private Keys may be kept separate from the data in the Block Contents because they provide access to encrypted content on the blockchain. These keys are unique to individuals, and users must keep their Private Keys confidential.

Additionally, due to the nature of blockchain technology, data is recorded on the blockchain network in an immutable and tamper-proof manner. Therefore, if personal data were to be stored on networks using blockchain technology, it is likely that various difficulties would be encountered in changing, updating, and deleting this data.

Another important issue is that data is recorded by anyone entering the system. In other words, the data controller, data processor, or the person involved in data processing could be located anywhere in the world. It is a matter of debate which activities fall within the scope of data processing, and determining which data protection legislation applies can be a challenging task due to the ubiquity of data.

We will be addressing the issues regarding the cryptocurrencies and the taxation of the cryptocurrencies in Part II.