At the end of 2020, the National Assembly of the Republic of Serbia adopted the Law on Digital Assets, making Serbia one of the countries that began regulating the legal framework for virtual currencies (cryptocurrencies) and digital tokens. The law has been in effect since 29 June 2021.
This regulation introduced significant innovations regarding the trading of cryptocurrencies and digital assets, as well as a number of obligations for entities providing services related to digital assets (“service providers“). One of the most significant provisions concerns the obligation of service providers to obtain licenses or permits from the competent authorities for providing services related to digital assets. In this way, the legislator introduces certain financial, technical, and organizational minimum standards concerning these services, in line with the specific nature of digital assets.
Applications for permits are submitted to the National Bank of Serbia (NBS) if the services involve cryptocurrencies, while the Securities Commission is responsible for issuing permits for services related to digital tokens, as well as other types of digital assets that have the characteristics of financial instruments.
Services Related to Digital Assets
The Law on Digital Assets exhaustively enumerates the services related to digital assets for which prior permit must be obtained. These are:
- receiving, transmitting, and executing orders related to the purchase and sale of digital assets on behalf of third parties;
- services for the purchase and sale of digital assets for cash and/or account funds and/or electronic money (so-called Fiat-to-crypto exchange services);
- services for the exchange of digital assets for other digital assets (services of “classic” crypto exchanges);
- custody and administration of digital assets on behalf of digital asset users, along with related services;
- services related to the issuance, offering, and sale of digital assets, with the obligation of redemption (underwriting) or without this obligation (agency);
- maintaining a register of pledges on digital assets;
- services of accepting/transferring digital assets;
- digital asset portfolio management; and
- organizing a platform for trading digital assets.
In addition to these services, the law also regulates the provision of advisory services related to digital assets. Unlike the previous 9 categories, no permit from the competent authorities is required to provide these services. Providers of advisory services are only required to inform their clients that they operate without the permit from the competent authority and to disclose this fact on their website.
Approval for Advertising the Issuance of Digital Assets via Public Offer (so-called “ICO” and “White paper”)
The law stipulates that the issuance of digital assets in Serbia is generally permitted. However, when it comes to the issuance of digital assets through the advertising of an initial offer (so-called ICO), the Law on Digital Assets introduces a new concept -the white paper. The white paper contains information that enables investors to make an informed decision about investing and assess the risks associated with investing in digital assets.
The issuer of digital assets may advertise an ICO only if the white paper has been approved by the competent authority. Therefore, if the white paper has not been approved, advertising the ICO is prohibited. However, there are certain exceptions to this prohibition:
- the ICO may be advertised if the advertisement is directed to fewer than 20 persons (regardless of whether they are individuals or legal entities);
- advertising is permitted if, in the case of issuing digital tokens via an ICO, no more than 20 tokens are issued;
- advertising is permitted if the initial offer is directed to buyers/investors who purchase/invest in digital assets with a value of at least EUR 50,000 per buyer/investor; and
- advertising is permitted if the total value of digital assets issued by a single issuer over a 12-month period is less than EUR 100,000.
An additional requirement is the obligation of the issuer to clearly state that the white paper has not been approved by the competent authority when advertising the issuance of digital assets through an ICO.
Thus, the Law generally permits the issuance of digital assets without any prior permit from the competent authority, and even foresees cases in which ICO can be conducted without white paper approval. However, it appears that the conditions for conducting an ICO without prior permit are rather restrictive, meaning that most startups will likely need to go through the procedure of obtaining white paper approval, in order to conduct an ICO in compliance with the Law.
Who Can Provide Services Related to Digital Assets?
The Law on Digital Assets stipulates that only a legal entity can be a service provider. In practice, this will most often be a limited liability company (LLC) or a joint-stock company (JSC).
However, not every legal entity can provide services related to digital assets. The law explicitly states that financial institutions under the supervision of the National Bank of Serbia cannot provide services related to digital assets, nor can they be users of these services. Thus, banks, insurance companies, financial leasing providers, and other entities under the supervision of the National Bank of Serbia cannot obtain permits to provide services related to digital assets, nor can they hold cryptocurrencies and digital tokens. Additionally, these financial institutions and their affiliates cannot be founders, hold direct or indirect ownership in service providers, or participate in the management of service providers. The rationale for these restrictions is to preserve the stability of financial institutions and the financial system in Serbia, due to the potential risks associated with digital assets and operations involving digital assets.
An exception to this prohibition allows banks to provide custody and administration services for digital assets on behalf of digital asset users, but only in terms of storing cryptographic keys. For this service, the bank does not need a special permit, but it is required to notify the National Bank of Serbia of its intent to provide such a service and submit the necessary documentation at least 30 days before starting the service.
It is also important to note that an advisory service provider can be a legal entity, an entrepreneur, or an individual registered to carry out the activity of a freelance profession.
License for Providing Services Related to Digital Assets
As mentioned earlier, as of 29 June 2021, services related to digital assets can only be provided by entity that has a permit issued by the National Bank of Serbia or the Securities Commission. Applications for providing services related to cryptocurrencies are submitted to the National Bank of Serbia, while applications for services related to digital tokens and other types of digital assets that have the characteristics of financial instruments are submitted to the Securities Commission. If a service provider intends to offer services related to both cryptocurrencies and digital tokens (or other types of digital assets that have the characteristics of financial instruments), both authorities will be involved in the licensing process.
For a legal entity to obtain a permit to provide services related to digital assets, it must meet the legally prescribed conditions. One of the most common questions regarding the requirements for a permit is whether the law prescribes a minimum capital requirement for the company to obtain a permit. The answer is yes. The Law on Digital Assets prescribes a mandatory minimum capital requirement ranging from EUR 20,000 to EUR 125,000, depending on the services for which the company seeks a permit. The table below shows the minimum capital required by law for companies providing services related to digital assets.
The minimum capital can be both monetary and non-monetary, provided that at least half of the minimum capital must be registered and paid in cash. For instance, if a company were to apply for a permit to provide cryptocurrency exchange services, at least EUR 10,000 of the capital would have to be paid in cash, while the remaining amount could be in non-monetary assets, such as software. The law also allows non-monetary capital to be in digital tokens, provided they are not related to service provision or work performance, while explicitly prohibiting contributions in cryptocurrencies.
It is also important to note that a service provider may subsequently expand the scope of services related to digital assets, of course, after obtaining permit from the competent authority. For example, if an entity initially obtains a permit to provide “classic” cryptocurrency exchange services, there is nothing preventing it from subsequently applying for a permit to provide Fiat-to-crypto exchange services.
In addition to the minimum capital requirement, the Law on Digital Assets prescribes a number of other conditions that potential service providers must meet in order to obtain the permit to provide services related to digital assets. These conditions primarily relate to staffing, organizational, and technical capabilities. Additionally, the competent authority will also approve the selection of members of the service provider’s management, and these individuals must also meet the requirements stipulated by the law.
Furthermore, it is essential to bear in mind that before submitting an application for a permit to provide services related to digital assets, a company must be established. The permit must be obtained prior to the commencement of services, but not before the establishment of the company that will provide the services for which permit is required.
One-stop Online Portal for Submitting Permit Applications
One of the significant and positive innovations introduced by the Law on Digital Assets is the establishment of a one-stop online portal for submitting applications related to digital assets. Specifically, applications for permits to provide services related to digital assets (as well as all other applications in accordance with the law) will be submitted via a unified web portal. Additionally, all documentation required to accompany the application will also be submitted through the web portal in electronic form.
The introduction of the one-stop online portal particularly simplifies the submission process for service providers who are applying for licenses from both the National Bank of Serbia and the Securities Commission. The law unequivocally states that if the same entity submits applications falling under the jurisdiction of both regulatory bodies, all required documentation is submitted only once, and the competent authorities are obligated to exchange all available documentation between themselves.
This new procedure, which is atypical for our legal system, is certainly a step in the right direction. Although it has not yet fully taken hold, in practice, it is expected that this mechanism will simplify the process of obtaining licenses to provide services related to digital assets and make the procedure significantly more efficient.
Deadline for Compliance with the New Law
The transitional and final provisions of the Law on Digital Assets stipulate that entities providing services related to digital assets must align their operations and general acts with the law and the bylaws of the National Bank of Serbia and the Securities Commission within six months of the law’s entry into force (by 29 June 2021) and submit applications for the issuance of the necessary permits.
The legislator’s general intention to give existing service providers a six-month deadline to comply with the Law on Digital Assets was quite logical, considering the numerous new provisions introduced by this law. As is often the case, two significant issues arose in practice.
Firstly, there was justified concern regarding the deadlines for adopting these acts, as experience has shown that these deadlines, especially for more complex acts, are often not met. Such delays create legal uncertainty, leaving interested parties without the ability to start preparing the documentation required for submitting applications since they lack a complete overview of what the authorities require of them.
In accordance with its legal obligation, the National Bank of Serbia adopted a series of bylaws regulating digital currencies in mid-May 2021, while the Securities Commission’s bylaws were adopted in 2020 and 2021. This effectively left service providers related to cryptocurrencies with approximately one and a half months to meet all the conditions set out in the National Bank of Serbia’s bylaws. On the other hand, service providers offering services related to digital tokens and other types of digital assets that resemble financial instruments had less than a month to comply with the conditions prescribed by the Securities Commission.
The second issue relates to existing service providers. Specifically, service providers were given a deadline of 29 June 2021, to align their operations and submit applications for permits to provide services related to digital assets, coinciding with the law’s commencement.
From the moment the Law on Digital Assets came into effect (29 June 2021), all entities providing services related to digital assets were required to have the necessary permits to avoid violating the law and risking sanctions. On the other hand, the competent authorities – the National Bank of Serbia and the Securities Commission – were unable to issue the required permits to existing service providers before the law’s effective date, as they did not have the legal basis to do so. It was rightly pointed out that, if an adequate solution was not found before the law came into force, this legal vacuum could pose a significant problem for existing service providers, who would effectively be forced to halt their operations until they obtained the necessary permits.
Overall, the adoption of the Law on Digital Assets is a positive step, as it finally regulates a new societal phenomenon. It is unfortunate that a number of questions remain unresolved, but this is to be expected given the introduction of new legal concepts and the regulation of a new class of assets. We can only hope that the competent authorities have the capacity and willingness to process and assess applications within their jurisdiction and make timely decisions on them. It appears that the “success” of this law will depend largely on the efficiency of the competent authorities in managing and resolving the procedures in question.
