The Republic of Serbia is one of the first countries to regulate the area of buying, selling and exchanging cryptocurrencies.
The Republic of Serbia is one of the first countries to regulate the area of buying, selling and exchanging cryptocurrencies by passing the Law on Digital Assets (“Law”). From the moment of appearance of cryptocurrencies until the enactment of the Law, this area was undefined, existing somewhere between the legal regulations and the grey zone.
The Law entered into force on 29 December 2020, while its application was postponed for a period of six months (29 June 2021) within which the subjects providing services related to digital assets are obliged to harmonize their business and general acts with the provisions of the Law and bylaws that will be adopted, as well as to submit an appropriate request for a permit.
Serbian Government pointed out that the main goal of the Law is further encouragement of the development of blockchain technology and tokenization as well as financing innovative projects in the Republic of Serbia, which should ultimately lead to greater opportunities for entrepreneurs to be able to easily finance their innovative ideas.
The Law regulates the following: 1) issuance of digital assets and secondary trading of digital assets in Serbia, 2) provision of services related to digital assets, 3) pledge on digital assets, 4) specific actions and measures to prevent money laundering and terrorism financing in connection with digital assets, 5) competence of the Securities and Exchange Commission (“SEC”) and the National Bank of Serbia (“NBS”) as well as 6) supervision over the application of the Law.
1. What are Digital Assets?
Digital or virtual assets are defined as a digital record of value that can be digitally bought, sold, exchanged or transferred and that can be used as a means of exchange or for investment purposes with the exception of digital records of currencies that are legal tender and other financial assets regulated under other laws.
The Law differentiates two forms of digital assets: 1) virtual currency and 2) digital token.
Virtual currencyis a type of digital assets that has not been issued and whose value is not guaranteed by the central bank or other public authority, which is not necessarily tied to statutory defined means of payment and does not have the legal status of money or currency but is accepted by individuals or legal entities as a mean of exchange and can be bought, sold, exchanged, transferred and stored electronically.
Digital tokenmeans any intangible property right that in digital form represents one or more other property rights, which may include the right of the digital token user to be provided with certain services.
Competence for performing activities related to digital assets is divided between the NBS and the SEC, so the NBS is competent in the part related to virtual currencies and the SEC in the part related to digital assets that have the characteristics of financial instruments.
In addition, the Law excludes the liability of the Republic of Serbia, the NBS, the SEC and other competent authorities and public authorities for the value of digital assets. Consequently, the users and other holders of digital assets and/or providers of services related to digital assets bear any possible damage and losses incurred in connection with transactions with digital assets. Considering that, it is evident that distrust towards digital assets and their importance for the development of the entire economy continues to exist.
In this regard, before establishing a business relationship, the provider of services related to digital assets is required to inform the user of digital assets of all risks arising from transactions with digital assets.
2. Issuance and Trading with Digital Assets.
The Law prescribes that the issuance of digital assets in the Republic of Serbia is allowed regardless of whether the so-called “white paper” has been prepared and/or approved, whereby the possibility of issuance of digital assets without “white paper” is significantly limited.
The so-called “white paper” is a document which is prepared by the issuer before the issuance of the digital assets and whose content is prescribed by the Law. In principle, it contains all the necessary information allowing investors to make an investment decisions and risk assessments related to investing in digital assets. The white paper has to be approved by the supervisory authority (SEC or NBS) and then published before the initial offering of digital assets.
Additionally, when digital assets have characteristics of a financial instrument, the Law on Capital Market applies on issuance, secondary trading as well as on provision of services related to such digital assets unless when the requirements prescribed by the Law are fulfilled.
As for the secondary trading with digital assets, the Law prescribes that it can be performed on an organized platform, OTC market or via so-called “smart contracts”.
The Law defines a new institute “smart contract” as a computer program or protocol, based on distributed database technology or similar technologies, which, in whole or part, automatically executes, controls or documents legally relevant events and actions in accordance with the already concluded agreement whereby that agreement may be concluded electronically through that protocol or program.
3. Provision of Services Related to Digital Assets.
The Law stipulates that a provider of services related to digital assets must be organized in one of the legal forms of companies defined under the Company Law and regulates in detail the requirements that these companies have to fulfil depending on the type of services they want to provide. In this regard, the Law, inter alia, prescribes that the provider of services related to digital assets must have a minimum share capital in the amount of EUR 20,000 up to 125,000 (depending on the scope of services it intends to provide) as well as a permit from the SEC or the NBS (with the exception of providers of consultancy services).
On the other hand, according to the Law, institutions under the supervision of the NBS are not authorized to provide services related to digital assets, except for the service of storing and administering digital assets for the account of digital assets users and related services, and only in the part of storing cryptographic keys.
The Law, also, sets out various obligations for providers of services related to digital assets. In this regard, the Law, inter alia, prescribes that the Law on Prevention of Money Laundering and Terrorism Financing applies to providers of services related to digital assets and thus the service providers are obliged to verify the identity of digital assets users.
4. Activities of Business Entities Related to Digital Assets.
The Law stipulates that digital tokens that are not related to work or services can be an in-kind contribution in a company (whereby in case of general partnership and limited partnership digital tokens may be related to work and services). The list of such tokens will be determined by the SEC.
Unlike digital tokens, virtual currencies are not eligible to be a contribution in a company, but they can be converted or exchanged for money and paid-in as a monetary contribution in a company.
In addition, the Law stipulates that capital of financial institutions under the supervision of the NBS cannot include digital assets nor instruments related to digital assets, nor digital assets can be a contribution in such institutions. Exceptionally, NBS is authorized to prescribe the conditions under which and the manner in which financial institutions under its supervision may invest in digital tokens that have the characteristics of a financial instrument or that are used exclusively for investment purposes.
5. Pledge on Digital Assets.
The Law explicitly provides the possibility of establishing a pledge on digital assets in order to secure a monetary claim in domestic or foreign currency or a non-monetary claim expressed in digital assetsby concluding a pledge agreement whose content is determined by the Law.
The moment of acquiring the pledge on digital assets is the moment of registration the pledge in the register maintained by a provider of services related to digital assets, licensed by the supervisory authority to maintain a digital assets pledge register, and for storing and administrating digital assets for the user’s account and for related services.
The Law also regulates in detail the manner of settling the pledgee from the pledged digital assets.
Finally, interestingly, although the institute of fiduciary ownership does not exist in our law, the Law prescribes that fiduciary on digital assets is regulated by the digital assets fiduciary agreement. According to such agreement, the fiduciary debtor is obliged to transfer to the fiduciary creditor the ownership on digital assets in order to secure the claim and on the other hand the fiduciary creditor is obliged to return the received or equivalent collateral to the fiduciary debtor after the execution of the secured claim, i.e. simultaneously with that execution.
6. Penalty Provisions.
The Law stipulates fairly high fines for entities that are not in compliance with the provisions of the Law and bylaws and also prescribes criteria for determining the amount of the fine. Thus, according to the Law, a subject of supervision cannot be fined less than RSD 100,000 or more than RSD 5,000,000, and a member of the management or the head of the subject of supervision cannot be fined less than RSD 30,000 or more than RSD 1,000,000.
In addition to the fine, the Law determines that in such case the supervisory authority may take some of the following measures against the subject of supervision: 1) send a recommendation, 2) send a written warning, 3) issue orders and measures for elimination of identified irregularities and 4) issue a decision on revoking the license for the provision of services related to digital assets. In this regard, the Law provides the supervisory authority with discretion to decide on the measure it takes against the subject of supervision.
The Law also defines two criminal offences related to digital assets. The most severe forms of these criminal offences are punishable cumulatively by fine and imprisonment of up to five years. Attempts of these criminal offences are also punishable.
7. Key Takeaways.
The adoption of the Law undoubtedly represents an attempt for further development the digital society in the Republic of Serbia. However, it is surprising that the Law does not even regulate the so-called cryptocurrency mining, which is in many countries strictly regulated.
Certainly, the practice will show in which part the Law needs to be amended and/or supplemented in order to comprehensively regulate the area of digital assets and whether the solutions provided by the Law can be successfully implemented in practice.