By the end of this year, Serbia is expected to have a completely new legislation dedicated to cryptocurrencies and other instruments referred to as “digital assets” (digitalna imovina). The draft legislation (Nacrt Zakona o digitalnoj imovini) was prepared by the Ministry of Finance and a group of stakeholders, including the Securities Exchange Commission (“SEC”) and the National Bank of Serbia (“NBS”). We outline below its main features.
1. Subject matter, scope and main concepts
The law will apply to the following matters:
- the issuance and admission to trading of digital assets in Serbia;
- the authorisation and supervision of digital assets service providers;
- taking security over digital assets;
- anti-money laundering rules related to digital assets;
- consumer protection rules for the issuance and trading of digital assets;
- measures to prevent market abuse; etc.
The law will not apply to:
- the digital asset transactions executed within a limited network;
- the automatic creation of digital assets through mining as a reward for the validation of transactions;
- the digital assets that qualify as financial instruments (subject to important exceptions outlined below).
The following are the most important concepts under the draft law:
- “digital assets” (digitalna imovina) – digital representation of value which may be purchased, sold, exchanged or transferred electronically, and which may be used as a means of exchange or for purposes of investment, excluding digital representations of currencies that are legal tender and financial assets that are regulated by other laws, unless indicated otherwise in this law;
- “virtual currency” (virtuelna valuta) – a type of digital asset which is not issued and is not backed by the central bank or government, which is not necessarily pegged to legal tender, which does not have the legal status of money or currency, but it is accepted by natural and legal persons as a medium of exchange and may be purchased, sold, exchanged or transferred electronically;
- “digital token” (digitalni token) – a type of digital asset that represents an incorporeal property right that is stored in digital format, including the right of the token-holder to receive specified services;
- “stable digital asset” (stabilna digitalna valuta) – a type of digital asset that is issued with an aim of it maintaining a stable value by referencing currency that is legal tender or one or several property rights with low value volatility.
2. Selected issues
The authorisation of the digital asset service providers
The following services will be subject to the licensing requirements:
- the reception, transmission and execution of orders for sale and purchase of digital assets on behalf of third parties;
- the sale and purchase of digital assets for fiat currency;
- the exchange of digital assets for other digital assets;
- the custody and administration of digital assets of digital assets on behalf of third parties;
- the underwriting of digital assets and/or placing of digital assets;
- merchant acquiring services allowing traders to accept digital assets as payment;
- managing portfolios of digital assets;
- operating a platform that allows customers to purchase and sell digital assets.
Providing advice on digital assets, including investment advice and recommendations, will not require a license.
The digital asset service providers will be subject to the initial capital requirements in the amount depending on the nature of the digital asset services provided. Most of the digital asset services require a minimum initial capital of EUR 20,000 in RSD counter-value. The highest initial capital requirement of EUR 125,000 in RSD counter-value applies to the services of operating a digital asset exchange platform. At least half of the initial capital must be contributed in money; the rest can be contributed in kind (e.g. software).
The law will impose various other requirements on the digital asset service providers, including organisational requirements, the rules on the safekeeping of clients’ funds, the obligation to act honestly, fairly and professionally, etc.
The draft law does not offer guidance as to when a third-country digital asset service provider would be deemed to provide services in Serbia and thus require a local license. We think it would be helpful to clarify that the third-country firms are allowed to provide digital assets services at the initiative of a Serbia resident without a license. Conversely, where a third-country firm solicits Serbian resident or promotes or advertises digital asset services in Serbia, it would be reasonable to require such firm to establish a Serbian subsidiary and subject its activities to the local licensing requirements.
The NBS-licensed financial institutions, such as banks, insurance companies, and financial leasing companies, will not be allowed to provide digital asset services, with the exception of holding cryptographic keys on behalf of the client and providing related custody services. Furthermore, these institutions will not be allowed to receive digital asset services or to possess digital assets. This protectionism does not seem warranted considering the global trend of financial institutions incorporating digital coin technology in their core business. It is also at odds with the proclaimed intention of the law to promote security in dealing with digital assets.
The use of digital assets as means of payment
According to the definition of “merchant acquiring services”, the Serbian traders will be allowed to accept digital assets as payment; however, each such transaction will be settled by the service provider exchanging the digital asset for legal tender and transferring the proceeds to the trader. The draft law does not provide for direct settlement in digital assets.
The draft law defines “stable digital assets” i.e. “stablecoins” but does not regulate at all the business of issuing such digital assets. As a result, the definition does not have any role within the draft. In particular, the draft does not draw a line between electronic money and the centrally issued “stablecoins” whose value is backed by legal tender or which have other common features with electronic money. We hope the public debate of the draft law will clarify whether the sponsors’ intention was to create a bespoke regime for such digital assets or if the Payment Services Act (Zakon o platnim uslugama) will apply to them.
The use of digital assets as a source of funding / initial offering
The draft law regulates the manner and conditions pursuant to which the digital assets can be issued and offered to public. “Digital tokens” are of particular interest, since some may offer holders a share in future company earnings or future capital flows, making such assets analogous to share, bonds and other financial instruments. The draft law recognizes that certain digital assets may have “features of the financial instruments”. Such digital assets will not be subject to registration, disclosure and other requirements under the capital markets legislation, provided that each of the following conditions are met:
- such tokens do not have “features of shares”;
- such tokens are not exchangeable for shares; and
- over a period of 12 months, the total value of the digital assets issued by a single issuer does not exceed the Serbian dinar equivalent of EUR 3,000,000.
Prior to the issuance of the digital assets, including “security tokens” that qualify for the above exception, the issuer is supposed to draft a whitepaper. The whitepaper is subject to numerous requirements aimed at ensuring that this document has serious legal implications and is not regarded as a pure PR tool. The issuers and their auditors, among others, will be liable if the whitepaper contains data that is incomplete, inaccurate or misleading.
A whitepaper must contain “all necessary information” required for an investor to make an investment decision and assess the risks related to the investment in digital assets and other information required by law. Information must be presented in an easily analysable, concise and comprehensible form. At the minimum, a whitepaper must include:
- information on the issuer, including the main participants in design and development of the digital asset;
- a detailed description of the reasons for the issuance and how the funds raised through the issuance will be used;
- information on the digital asset, including the rights and liabilities attached to the digital asset, and the number of digital assets;
- a detailed description of the risks that are specific to the issuer, the digital asset, the issuance and the project financed through the issuance;
- a detailed description of technical procedures used for the issuance of the digital asset;
- a detailed description of procedures and technology used for safekeeping the clients’ funds and digital assets; and
- other information required by law and the implementing bylaws yet to be drafted.
The competent authority (NBS, if the digital asset is a virtual currency, SEC, if it as a digital token) may approve, reject or dismiss the whitepaper presented to it by the issuer. In general, a whitepaper may be dismissed for procedural reasons and rejected for substantive reasons such as issuer’s insolvency, inaccurate, incomplete or misleading statements in the whitepaper, etc. If the whitepaper is approved, the issuer is required to publish it no later than by the beginning of the offering. The issuer may publish a whitepaper that has not been approved by the competent authority provided that it makes it clear that the whitepaper has not been approved. The draft law states that the issuer may publicize the initial offering of the digital assets without approved whitepaper “in accordance with the decision of the competent authority” or if:
- the digital assets are offered to fewer than 20 natural or legal persons; or
- the offer is addressed to the buyers which invest in digital assets at least a Serbian dinar equivalent of EUR 50,000 per investor; or
- over a period of 12 months, the total value of the digital assets issued by a single issuer does not exceed the Serbian dinar equivalent of EUR 100,000.
The draft law allows secondary trading in digital assets issued in Serbia or abroad for which the whitepaper has been approved. It also allows secondary trading in digital assets issued in Serbia or abroad for which the whitepaper has not been approved. The wording of the relevant provision implies that the Serbian residents are generally permitted to engage in secondary trading of digital assets issued abroad without the requirement that the issuer presents and receives approval for a whitepaper from the local competent authority. However, a person may not publicize the digital assets issued in Serbia or abroad for which the whitepaper has not been locally approved except “in accordance with the decision of the competent authority” or if:
- a white paper has been issued and approved after the issuance of such digital asset;
- a whitepaper or an equivalent document has been approved in the EU member state for such digital asset; or
- such digital asset is being traded “in significant volumes” on a global exchange through licensed or registered platforms in accordance with the AML rules and procedures.
The provision of the digital asset services in relation to digital assets issued abroad and the admission of such digital assets to a local exchange is permitted; however, the admission of digital assets for which the whitepaper has not been approved will require a 30-days prior notification to the NBS.