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At the end of 2020, the National Assembly of the Republic of Serbia adopted the Law on Digital Assets and joined the group of countries that have started to govern the regulatory framework for virtual currencies (cryptocurrencies) and digital tokens. This Law has come into effect on June 29, 2021.
The regulation introduces significant novelties regarding the trade of cryptocurrencies and digital assets, as most of the obligations pertaining to entities that provide services related to digital assets (“service providers”). One of the most significant provisions is the obligation of the service providers to obtain licenses from the competent authorities, i.e., a license for the provision of digital asset services. In this manner, the legislator introduces certain financial, technical, and organizational minimum standards regarding the services stated above, and in accordance with the specific nature of digital assets.
Applications for cryptocurrency licenses are submitted to the National Bank of Serbia (NBS) if the services are related to cryptocurrencies, while the Securities Commission is authorized for issuing licenses for services related to digital tokens, as well as other types of digital assets qualifying as financial instruments.
The Law on Digital Assets lists the types of digital asset services that previously require obtaining a license. These include the following:
1. reception, transmission, and execution of orders relating to the purchase and sale of digital assets on behalf of third parties;
2. purchase and sale of digital assets for cash and/or scriptural money and/or e-money (services of so-called Fiat-crypto exchange offices);
3. digital asset exchange services for other digital assets (services of “traditional” crypto exchange offices);
4. custody (safekeeping) and administration of digital assets on behalf of digital asset users and the related services;
5. services pertaining to the issuing, offering, and placing of digital assets, on a firm commitment basis (underwriting) or without a firm commitment basis (agent services);
6. maintaining a register of pledges on digital assets;
7. digital assets acceptance/transfer services;
8. digital assets portfolio management; and
9. operation of a digital assets trading platform.
Besides these services, the law regulates the provision of advisory services regarding digital assets. However, it is not necessary to obtain a license from the competent authorities for the provision of these services. Providers of advisory services are only obliged to notify their clients that they are conducting business without the license issued by the competent authorities, and to publish that information on their internet presentation, i.e., their website.
The Law stipulates that issuing digital assets is generally allowed in Serbia. However, when it comes to issuing digital assets by advertising the initial coin offering (so-called ICO), the Law on Digital Assets introduces a new institution – white paper. The white paper contains data that allows investors to make an investment decision and risk assessment associated with investing in digital assets.
An issuer of digital assets may advertise ICO only if the white paper has been approved by the competent authorities. So, if the white paper has not been approved, advertising ICO is prohibited. However, there are exceptions to this prohibition:
- advertising is allowed if the ICO is addressed to fewer than 20 natural or legal persons;
- advertising is allowed if the total number of digital tokens issued does not exceed 20;
- advertising is allowed if the initial offering is addressed to buyers/investors who buy/invest in digital assets no less than EUR 50,000 per buyer/investor; and
- advertising is allowed only if the total value of digital assets issued by a single issuer during 12 months, does not exceed EUR 100,000.
An additional condition is that the issuer is obliged to indicate that the white paper was not approved by the competent authorities while advertising the issuing of digital assets through the ICO.
Therefore, the Law generally allows issuing digital assets without any previous approval from the competent authorities, and even foresees the cases when an ICO can be implemented without an approved white paper. Still, it seems that the conditions for implementing ICO without previously obtaining a license are quite restrictive, so most startups will still have to go through the procedure of obtaining approval for the white paper, to implement ICO in accordance with the Law.
The Law on Digital Assets prescribes that digital asset service providers can be only legal persons. In most cases in practice, this will be an LLC (Limited Liability Company) or JC (Joint-Stock Company).
However, not every legal person can be a digital asset services provider. Namely, the law explicitly prescribes 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 those services. So, banks, insurance companies, providers of financial leasing, and other companies under the supervision of the National Bank of Serbia cannot obtain a license for the provision of services related to digital assets, nor can they possess cryptocurrencies and digital tokens. Besides that, these financial institutions and the persons related to these financial institutions shall not be founders, nor have a direct or indirect holding in a legal person providing digital asset services, and shall not participate in the management of the provider of services. One of the explanations listed as a reason for these prohibitions is preserving the stability of financial institutions and the financial system in Serbia, due to the potential risks that digital assets and businesses dealing with digital assets carry.
Notwithstanding this prohibition, banks may provide services of custody (safekeeping) and administering digital assets on behalf of the digital assets’ user, but only regarding the part about safekeeping cryptographic keys. Banks are not required to get issued a special license for the provision of this service but are obliged to notify the National Bank of Serbia about their intention to provide such services no later than 30 days before starting with the provision of such services and submit the necessary documents to the NBS.
Also, it is important to keep in mind that the provider of advisory services can be a legal person, entrepreneur, or natural person registered for performing autonomous professions.
As of June 29, 2021, only entities with an issued cryptocurrency license by the National Bank of Serbia or Securities Commission are able to provide digital asset services. The request for provision of services related to cryptocurrencies is submitted to the National Bank of Serbia, while the request for provision of services related to digital tokens, as well as other kinds of digital assets qualifying as financial instruments are submitted to the Securities Commission. If the provider of services intends to provide services related to cryptocurrency and digital tokens (i.e., other kinds of digital assets qualifying as financial instruments), both competent authorities will decide on the issuance of the license.
For a legal person to obtain a license for the provision of services related to digital assets, it is necessary to fulfill the conditions prescribed by the law. The most common question related to the conditions for obtaining a license is whether the law prescribes a minimum capital that the company has to possess to obtain the license. The answer is – yes. The Law on Digital Assets, depending on the services for which the company wishes to obtain a license, prescribes a mandatory minimum capital ranging from EUR 20,000 to EUR 125,000. The table below lists the minimum capital prescribed by the law for companies that offer services related to digital assets.
The minimum capital can be monetary and in-kind, but at least half of the minimum capital can be subscribed to and paid in money. So, if a company applies for a crypto exchange license, at least EUR 10,000 of the capital would have to be paid in money, while the remaining amount of the capital could be, for example, software. The law prescribes that in-kind capital can be in digital tokens, which do not relate to the provision of services or execution of work, while cryptocurrencies are explicitly prohibited from being used as a stake in a company.
In addition, it is important to know that the provider of services can expand their scope of services related to digital assets afterward, of course, after they obtain a license from the competent authorities. So, if an individual initially obtains a license for the provision of services of a “traditional” crypto exchange, there are no obstacles to, later on, submitting a request for obtaining a license for the provision of Fiat-crypto exchange services.
Besides the conditions which are related to the minimum capital, the Law on Digital Assets prescribes several other conditions which the potential service providers have to fulfill to obtain a license for the provision of services related to digital assets. These conditions refer to staff, organizational and technical competence. Also, the competent authorities will give a consent agreement to the selection of management members of the provider of services, so those individuals must fulfill the requests prescribed by the law as well.
Additionally, it is important to keep in mind that it is necessary to first establish a company before applying for a cryptocurrency license in Serbia. The license is obtained before the beginning of the provision of certain services, but not before establishing a company that shall provide the services for which the cryptocurrency license was requested.
One of the significant and positive options which the Law on Digital Assets provides is the implementation of a one-stop online counter service for submitting requests related to digital assets. Specifically, applying for a license for the provision of services related to digital assets (as well as all other requests in accordance with the law) will be performed through a unique website. Besides that, all documents which should be submitted alongside the request will also be submitted through the website, in electronic form.
Introducing a one-stop online counter service makes submitting requests even easier for those service providers who apply for cryptocurrency licenses to the National Bank of Serbia as well as to the Securities Commission. The Law unambiguously prescribes that, if an individual submits requests which fall into the responsibility of both supervisory authorities, all necessary documentation is submitted in only a single copy, while the competent authorities are obliged to exchange all available documentation between themselves.
This new, atypical procedure for our legal system is surely a step in the right direction. Even though this procedure has not yet become widely used, it can be expected that this mechanism shall ease the procedure of obtaining licenses for the provision of services regarding digital assets so that the procedure itself will be significantly more efficient.
The transitional and final provisions of the Law on Digital Assets, stipulate that entities that provide services related to digital assets are obliged to harmonize their business and general acts with the law and bylaws of the National Bank of Serbia and Securities Commission within six months from the day when the law entered into force (by June 29, 2021) and to apply for appropriate cryptocurrency licenses in Serbia.
The general idea of the legislator to leave the existing service providers 6 months to harmonize their business with the Law on Digital Assets was quite reasonable, having in mind all the novelties that this law brings. As it usually happens, two significant problems arose in practice with this plan.
First of all, there were justified concerns regarding the deadlines for the adoption of these acts, because experience has shown that often, and especially when more complex acts are in question, these deadlines are not met. Such actions create legal uncertainty, and interested persons do not have the opportunity to start preparing the documentation for submitting the request because they do not have a complete overview of what the authorities request from them. Specifically, the National Bank of Serbia has adopted several bylaws in mid-May 2021, that regulate digital assets in more detail, while the bylaws of the Securities Commission were adopted in 2020 and 2021. That way, the providers of services related to cryptocurrencies were left with about a month and a half to fulfill the conditions prescribed by the bylaws of the National Bank of Serbia. On the other hand, providers of services who offer services related to digital tokens and other types of digital assets qualifying as financial instruments were left with less than a month to fulfill the conditions that the Securities Commission prescribed.
The second problem refers to the existing service providers. Specifically, service providers were left with a deadline until June 29, 2021, (when the law started to apply) to harmonize their business with the law and apply for a license for the provision of services related to digital assets.
Since the Law on Digital Assets started to apply (as of June 29, 2021), all entities that offer services related to digital assets have to possess appropriate licenses, so as not to violate the provisions of the law and risk getting sanctioned. On the other hand, the competent authorities – the National Bank of Serbia and the Securities Commission had not been able to issue the necessary licenses to existing service providers before the law starts to apply, as they had not have a valid legal basis for this. There were justified concerns that, if an adequate solution is had not been found by the beginning of the implementation of the law, this legal vacuum could have posed quite a problem for the existing service providers who would in fact be forced to halt their business until they obtain the appropriate licenses.
In general, the adoption of the Law on Digital Assets is a good thing, since a new social phenomenon has finally been regulated. The downside is that there are still open issues, as was expected, having in mind that new legal institutions are being introduced and new asset classes are being regulated. We can only hope that the competent authorities will have the capacity and readiness to examine the requests, as well as to decide on them in a timely manner. It seems that the “success” of this law will be decided by the efficiency of the competent authorities in conducting and resolving the proceedings in question.