The continuing spread of the COVID-19 pandemic at an unpredictable pace affects economies as well. Despite the pandemic, the public’s money concept has not yet changed, but many people invest in gold, stocks, or cryptocurrencies as they do not trust legal tenders. While the discussions on whether cryptocurrencies are currency, investment instruments, or commodities continue, they are still trendy, with bitcoin having a value exceeding USD 25,000 as of 30 December 2020.

Well, is it possible to pay in cryptocurrencies as a capital contribution to a company? Let us discuss ordinary partnerships and joint-stock corporations under Turkish law. These two company types are poles apart. Ordinary partnerships have quite a flexible structure, whereas joint-stock corporations are just the opposite.

What Can be a Capital Contribution?

Partners and shareholders can provide the below assets as a capital contribution (Turkish Code of Obligations (“TCO”) Article 621; Turkish Commercial Code (“TCC”) Article 127):

So, a capital contribution should consist of assignable assets that have economic value. Even though unofficial, cryptocurrencies have value, and they are assignable. This issue is particularly evident for cryptocurrencies such as bitcoin and ethereum. The public has been trading these for years. Some transactions even take place on licensed cryptocurrency exchanges in some countries. Moreover, even labor, a peculiar asset, can be a capital contribution. So, there is no reason why cryptocurrencies cannot be.

However, today, cryptocurrencies are not money, receivables, or negotiable instruments, under the law. So, partners or shareholders cannot pay them in as a monetary capital contribution. How about contribution as capital in-kind?

In Ordinary Partnerships

TCO Article 620 et al. regulates ordinary partnerships. Partners can design the partnership as per the freedom of contract principle (TCO Articles 26 and 27). Joint ventures, consortia, and business partnerships are common forms of ordinary partnerships. Partners can provide any assets as capital (TCO Article 621). These assets can be money, receivables, goods, or labor, but they do not have to be one of these. The capital should support the realization of partnership purposes, and partners should agree on capital contributions, as well.

Thus, partners can provide cryptocurrencies, which are digital goods, as capital in-kind. Capital in-kind cryptocurrencies will belong to all partners (TCO Article 638(1)), as ordinary partnerships do not have a legal personality that can own things. But this is a problem; how can the partners enjoy joint ownership rights over cryptocurrencies? The discussions on whether cryptocurrencies are property will not help. Partners can solve this problem and others only through an explicit agreement.

So, partners should agree on at least the below matters to avoid potential disputes:

• A valuation method for capital contributions,
• The terms of returning the capital contributions in case:
  • A partner exits the partnership,
  • The partnership dismisses a partner, or
  • A dissolution takes place,
• The terms of accessing the cryptocurrencies’ digital wallets, public and private keys, and
• A written agreement, considering the rules of evidence (Civil Procedural Law (“CPL”) Article 200).

As to creditors of an ordinary partnership, partners’ financial strength matters. Partners are primarily, personally, and jointly liable for partnership debts (TCO Article 638(3)). The type or amount of capital contributions does not change this rule. So, a capital consisting of cryptocurrencies will not pose an additional risk for the creditors.

In Joint-Stock Corporations

TCC Article 329 et al. regulates joint-stock corporations. There are detailed rules on incorporation and other corporate matters. For instance, incorporators should execute corporate articles, of which the TCC specifies the mandatory contents (TCC Articles 339 and 340). Incorporators, among other matters, must stipulate in the corporate articles:

• The rights and items that shareholders will provide as capital in-kind,
• Values of these rights and items, and
• The number of shares corresponding to these rights and items (TCC Article 339(2)(e)).

Moreover, capital in-kind assets should have the below qualifications:

• A limited right in rem, seizure, or injunction should not restrict the assets,
• The assets should be redeemable and transferable (TCC Article 342), and
• Court experts should prepare an expert report on the valuation of the assets (TCC Article 343).

During incorporation, the trade registry office checks all legal requirements (TCC Article 32).

Well, how can the incorporators prove that there are no restrictions on cryptocurrencies? The transaction records of cryptocurrencies are digital, generally on a blockchain. A seizure on cryptocurrencies may have occurred. For instance, the US government recently seized more than USD 1 billion worth of bitcoin after tracking them for some time. How can the trade registry office check this? Perhaps a cryptocurrency exchange may confirm that there are no restrictions on the cryptocurrencies. However, this will not have any legal effect. These exchanges do not have any legal authorities as banks or other financial institutions do.

Besides, can court experts value cryptocurrencies under current accounting and financial reporting standards? The accounting-related uncertainties may cause disputes that will extend the incorporation process. In practice, even the valuation of receivables has resulted in many conflicts. Will court experts assume legal and criminal liabilities (CPL Articles 284-287) for such a matter?

For these reasons, it is unlikely that cryptocurrencies can be a capital contribution in joint-stock corporations.

This result is in line with the capital maintenance principle in joint-stock corporations (e.g., TCC Articles 391(1)(b) and 447(1)(c)). Joint-stock corporations themselves are liable for their debts with their assets. However, the shareholders are mainly responsible for their capital contributions towards the corporation (TCC Article 480(1)). Cryptocurrencies’ volatility and cybersecurity violations may cause the melting of corporate assets. So, a capital consisting of cryptocurrencies can be risky for the corporations’ creditors.

To tolerate such a risk, the corporation would take the required measures if the capital has melted (TCC Article 376). The shareholders could assume liability for covering the balance-sheet losses, as well (TCC Article 421(2)(a)). Still, these remedies are far from practical. Consider the pace of business life and the bureaucracy required for corporate matters. Also, the need for legal assets that should follow the above rules howsoever!

Av. Müge Önal Başer, LL.M., LL.B.

References

1. Thanks to Erhan Ertürk, CPA, for our brief talk on the valuation of cryptocurrencies.
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3. Turkish Commercial Code No. 6102, published in the Official Journal dated 14 February 2011 and numbered 27846.
4. Civil Procedural Law No. 6100, published in the Official Journal dated 04 February 2011 and numbered 27836.
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