Companies and projects have increasingly relied on the sale of digital assets, or tokens, as a means of fundraising. These tokens generally do not grant the holders an ownership interest in the issuing company or project, but may provide governance rights, access rights or other utility. This has been conducted through public sales known as initial coin offerings (ICOs), proliferation through token generation events (TGEs) or private sales, among other mechanisms. While showing characteristics of traditional methods of fundraising, there are a range of unanswered questions related to the legal classifications of such products. As ICOs and TGEs will usually be distributed online and internationally, there is usually no single legal framework applying to such transaction, and the legal framework of each market in which the tokens may be offered or sold needs to be considered.
Attitude of the country towards ICOs/token sales
The regulatory framework for cryptocurrencies, tokens and other digital assets is set out in the Law on Digital Assets (“LDA”), which started to apply as of 29 June 2021. The LDA regulates in detail issuance, trading and exchange of the cryptocurrencies and other digital assets and provision of services in relation to cryptocurrencies and other digital assets in Serbia.
Presence of any explicit regulation on ICOs and the issuance of token/coins
Yes, there is. The LDA sets out the comprehensive rules on issuance of digital assets in Serbia including cryptocurrencies and digital tokens.
Presence of any explicit restrictions on ICOs or the issuance, distribution and/or transfer of token/coins
The LDA explicitly allows issuance of digital assets without a white paper. However, advertising of an initial offering of digital assets (and promoting its acquisition) is allowed, only if a white paper is approved by the SEC or if such advertising is caught by exemptions prescribed under the LDA.
Secondary trading in digital assets in Serbia is allowed, no matter the place of issuance or the approval of a white paper. However, there are restrictions in regard to advertisement of digital assets without an approved white paper.
The LDA prescribes licensing requirement for provision of services related to digital assets. Such license should be obtained from the SEC (in case such services are connected with tokens) or the NBS (in case such services are connected with cryptocurrencies).
Obligations and requirements to issue token/coins
The general rule is that the issuance of the digital assets is done based on the white paper approved by the local regulator. White paper is a document published when issuing digital assets which contains information on the issuer of digital assets, digital assets and risks associated with digital assets and which allows investors to make an informed investment decision. The LDA envisages an exemption from approval of the white paper for the digital assets issued under the following terms: 1) the initial bid was sent to less than 20 natural and/or legal entities; 2) the total number of digital tokens issued is not more than 20; 3) the initial offer is sent to buyers/investors who buy/invest in digital assets in the amount of at least EUR 50,000 per buyer/investor; and 4) the total value of digital assets issued by one issuer during a period of 12 months is less than EUR 100,000. On the other hand, the digital assets for which approval of the white paper is needed could be issued without such an approval if there is no advertising of such issuance.
Secondary trading in digital assets in Serbia is allowed, no matter the place of issuance or the approval of a white paper. There are restrictions in regard to advertisement of digital assets without an approved white paper, with exceptions being made in regard to those digital assets that have an approved subsequent white paper, that have a white paper approved in an EU member state, and those that are being traded on a large scale on the global market in line with EU AML /CFT rules.
The LDA prescribes licensing requirement for provision of services connected to digital assets and those services are the following: receipt, transfer and execution of orders for purchase and sale of digital assets on behalf of third parties; purchase and sale of digital assets for cash and/or funds on the account and/or electronic money; exchange of digital asset for other digital asset; the safekeeping and administration of digital assets on behalf of users of digital assets and thereto related services which includes control over the means by which digital assets are accessed (e.g. cryptographic keys), as well as related services (e.g. administration of collateral); services related to the issuance, offer and sale of digital assets, with the obligation of their purchase (underwriting) or without that obligation (agency); keeping a register of pledges on digital assets; digital assets acceptance / transfer services (meaning a service provided by a digital asset service provider to a merchant, by accepting from the consumer the appropriate value of the digital asset, corresponding to the price of goods sold and/or services provided to that consumer, converting such digital asset into appropriate amount of legal tender and transferring that amount to the merchant’s account); digital asset portfolio management; organizing a platform for trading in digital assets (which includes, among other, connecting of supply and demand for digital assets on a platform for trading in digital assets, in line with the platform’s rules, and in a manner that leads to the conclusion of valid contracts; keeping and publishing of information related to such digital assets tradable on the platform, etc.).
For providing of the above services in Serbia, a company would have to be locally established and would have to obtain an adequate license from SEC (in case such services are connected with tokens) or the NBS (in case such services are connected with cryptocurrencies). Under the LDA, the minimum capital for provision of services connected with the digital assets ranges from EUR 20,000 to EUR 125,000, depending on the type of service provided.
Classification of token/coins in the jurisdiction
LDA defines digital asset as: “a digital value record that can be digitally bought, sold, exchanged or transferred and that can be used as a medium of exchange or for investment purposes, where digital assets do not include digital currency records that are legal tender and other financial assets regulated by other laws, except when otherwise regulated by these legal services”. Digital assets comprise virtual currency and digital tokens.
Digital token is defined as: “digital token is a type of digital asset and means any intangible property right that in digital form represents one or more other property rights, which may include the right of the user of the digital token to be provided with certain services”. Virtual currency is regulated as: “virtual currency is a type of digital asset that has not been issued and which value is not guaranteed by the central bank or other public authority, which is not necessarily tied to legal tender and has no legal status of money or currency, but is accepted by natural or legal persons as a medium of exchange buy, sell, exchange, transmit and store electronically”.
In practice, it is very difficult to draw a clear line between virtual currencies and digital tokens. Based on the published view of the SEC, if a digital asset gives certain rights (e.g., the right to participate in transaction validation or project management) and is accepted as a medium of exchange, it will be considered to be both virtual currency and digital token – i.e., hybrid in nature.
The following rule may help in differentiation - if the digital property does not give any rights other than that it can be used for exchange, which is the case with e.g. bitcoin, then it is a virtual currency. If digital assets give other rights besides being usable for exchange, then they are (almost) certainly hybrid digital assets. If digital assets contain certain rights, but digital assets themselves are not intended for exchange, then it is probably a digital token.
The LDA provides that the CM Law will apply to the issuance of digital assets that have all the characteristics of a financial instrument, as well as to secondary trading and the provision of services connected to such digital assets. However, the CM Law
shall not apply to the issuance of digital assets that have all the characteristics of a financial instrument, nor to secondary trading and provision of services related to such digital assets, if all of the following conditions are met: 1) digital assets have no characteristics of the share; 2) digital assets are not exchangeable for shares; 3) the total value of digital assets issued by one issuer during a period of 12 months does not exceed the amount of EUR 3,000,000.
There is no regulation in relation to treatment of digital assets as investment product.
Presence of a duty to publish a prospectus bevor offering token/coins to investors
General rule is that the issuance of the digital assets is done based on the white paper approved by the local regulator. White paper is a prospectus-like document published when issuing digital assets which contains information on the issuer of digital assets, digital assets and risks associated with digital assets and which allows investors to make an informed investment decision. It is possible to issue the digital assets for which approval of the white paper is needed without such an approval if there is no advertising of such issuance.
Secondary trading in digital assets in Serbia is allowed, regardless of the approval of a white paper. However, there are restrictions in regard to advertisement of digital assets without an approved white paper, with exceptions being made in regard to those digital assets that have an approved subsequent white paper, that have a white paper approved in an EU member state, and those that are being traded on a large scale on the global market in line with EU AML/CFT rules.
Presence of AML/KYC requirements that are needed to be fulfilled regarding (i) the initial issuance of token/coins and (ii) any following transfer of token/coins to third parties
The white paper issued prior to the initial issuance of token/coins contains description of procedures for compliance with AML, including internal acts of the issuer for timely and comprehensive identification, assessment, measurement, monitoring, control and mitigation of risks of money laundering and terrorist financing that are related or may be related to the issuance of virtual currency and a description of the issuer's internal control mechanisms established to meet the obligations set out in the AML Law.
Providers of services connected with the digital assets are obligors of the AML Law. AML Law defines the actions and measures which the obligors should undertake for the prevention and detection of money laundering and terrorism financing before, during the course of, and following the execution of a transaction or establishment of a business relationship. Those actions and measures, which are expressly listed in the AML Law, include, among others, KYC procedure; record keeping, protection and storing of data from such records; developing the list of indicators for identifying persons and transactions with respect to which there are reasons for suspicion of money laundering or terrorism financing, etc. When providing services connected to digital assets, including purchase and sale of digital assets for cash and/or funds on the account and/or electronic money, the digital asset services provider is obliged to obtain data on all persons involved in the digital asset transaction. If another digital asset service provider is involved in the execution of the digital asset transaction, it is obliged to ensure that this data is submitted to that to such service provider.
Additional comments regarding (i) the legal situation for ICOs/token/coins and (ii) any following transfer of token/coins to third parties
Market size for ICOs/token sales and existence of any previous regulated ICO/token sales in the jurisdiction
The LDA has recently started to apply and the market is still underdeveloped. However, there is an increasing number of interested companies, especially in the gaming and IT industries, which are interested in issuing various types of digital assets. At the moment, there is no locally licensed company providing services connected with the digital assets.
Until now, there was only one issuance of a local cryptocurrency, “Lazar”. This cryptocurrency was issued without obtaining a white paper, by using one of the available exemptions.
Additional comments regarding the economic situation for ICOs/token sales or what companies must be aware of in this business area