At the end of 2020, the National Assembly of the Republic of Serbia adopted the Law on Digital Assets (“Official Gazette of the RS”, No. 153/2020) (the “Law”), which entered into force on December 29, 2020, and is applied from June 30, 2021.
The Law provides for the existence of many by-laws, which are expected to be adopted by the beginning of the implementation of the Law. Although the Law does not set a deadline for adopting the by-laws by the competent authorities, the Law requires persons to provide services related to digital assets (“Service Providers”) to harmonize their business and general acts with the provisions of the Law and the by-laws by June 29, 2021 and submit to the supervisory authority an appropriate application for a permit to continue their business activities in the field of services related to digital assets. Based on this, we can assume that by-laws should be adopted before that otherwise it remains for Service Providers to act within the prescribed period, without clear and precise regulations on what should be done to comply with the Law.
The Law regulates the issuance of digital assets and secondary trading in Serbia’s digital assets, the provision of services related to digital assets, the lien and fiduciary right to digital assets, and determining the competencies of the National Bank of Serbia and the Securities Commission for the supervision of the application of the Law.
The Law promotes the principle of technological neutrality. Therefore, the Law applies to all digital assets and all services related to digital assets, regardless of the technology on which these digital assets are based, which means that it is not limited to DLT or blockchain technology that are primarily associated with cryptocurrencies. The question remains whether the technology will be regulated in more detail by the by-laws. If not, the existing legal solution gives room to use any technology, both from the past and the future, yet to emerge.
Definitions provided by the Law
The terms created in the last few years, primarily by creators and users of cryptocurrencies and a small number of legal enthusiasts who were initially interested in this area, have found a place in the Law as new legal terms and institutes.
Thus, the Law defines digital assets, virtual currencies, digital token, white paper, smart contract.
The Law follows the current position that the National Bank of Serbia i.a that is that cryptocurrency (defined by the Law as the virtual currency) is not a mean of payment. The Law provides individuals or legal entities to accept it to exchange, buy, sell, transfer and store electronically.
In addition to virtual currency, as a type of digital asset, the Law defines a digital token as intangible property rights that in digital form represent one or more other property rights, which may include the right of digital token users to be provided with certain services.
The Law defines the White Paper as a document published when digital assets are publicly issued. The White paper should contain data on the issuer of digital assets, digital assets and risks related to digital assets, enabling investors to make an informed investment decision. This term owes its planetary popularity (even its introduction to the regulations in certain countries) to ICOs (“initial token offering” or as the Law defines it: “initial digital assets offering“). The number of ICOs, especially during 2017 and 2018, and the amount of money raised, little or no state control and huge uncertainty of investors, are the reasons that led to the need for legislators to engage and create a legal framework for these new investment opportunities.
The smart contract has also found a place in the Law, which at first glance can lead to confusion, whether it is a particular type of contract as a legal business or something else. First of all, the term smart contract originated in the early nineties, when Nick Szabo, computer scientist, cryptographer and lawyer, used the term to denote a computer program or protocol that can automatically execute the concluded agreement. Therefore, this term should not be confused with the term contract in the sense of the Law on Contracts and Torts, because it is not. The Law correctly defines that: a smart contract is a computer program or protocol, based on distributed database technology or similar technologies, which, in whole or in part, automatically executes, controls or documents legally relevant events and actions related to an already concluded legal contract, whereby that contract may be concluded electronically through that program or protocol. So, as before, contracts will be concluded by consent reached between entities by means of a natural language or communication, unless a program code becomes the language of communication. When it comes to humans, natural language will not be replaced by the language of code, but when it comes to machines (supplied with artificial intelligence), the way is open for communication between them, and the language of such communication will certainly not be through natural language. After this, the only question remains whether we will allow machines to become subjects of Law and when and allowed them to conclude smart contracts with each other, as legally binding acts.
According to the Law, service providers must be established as a company in line with the Company Law. The Law prescribes the mandatory amount of the founding capital of companies that want to provide digital assets related services in the range from 20,000.00 euros to 125,000.00 euros, depending on the type of services. The minimum share capital can be monetary and non-monetary, but at least half of the registered share capital must be subscribed and paid in cash.
Companies are obliged to obtain a license to perform a specific activity before starting to provide the Services. The issuing authority for a licence is the National Bank of Serbia or the Securities Commission (depending on service to be provided), within 60 days upon filling the application.
The Law divided competencies between the Securities Commission and the National Bank of Serbia. The National Bank of Serbia is responsible for issues related to virtual currencies, and the Securities Commission is responsible for matters related to digital tokens. In situations when it comes to digital assets that have the characteristics of both a virtual currency and a digital token, both authorities are in charge.
Services related to digital assets and activities of the Service Provider
As services related to digital assets, the Law stipulates 1) receipt, transfer and execution of orders related to the purchase and sale of digital assets on behalf of third parties; 2) services of purchase and sale of digital assets for cash and/or non-cash and/or electronic money; 3) digital asset exchange services for other digital assets; 4) storage and administration of digital assets on behalf of users of digital assets and related services; 5) services related to the issuance, offer and sale of digital assets, with the obligation to purchase it (sponsorship) or without that obligation (the agency); 6) keeping a register of liens on the digital assets; 7) digital assets acceptance/transfer services; 8) digital asset portfolio management, 9) organization of a digital asset trading platform (the “Services“).
Providers of the above-listed Services may conduct these services upon obtaining a license to perform such activities from the competent authority. In addition to the Services, providers may perform only services directly related to digital assets. The Law prescribes an exception to this rule with regard to brokerage-dealership companies and market organizers in terms of the Capital Market Law. Additionally, no special permit is required to provide digital asset advisory services.
It remains to be seen whether the types of Services listed in the Law include, and even provide for, all services related to digital assets that may occur in practice, having in mind the speed with which the field of innovative technologies is developing.
Finally, according to the Law, the acquisition of digital assets by mining is allowed. The Law does not apply to digital assets acquirers through mining, so mining is not considered a service related to digital assets and not requires a special permit.
This text does not represent a legal opinion, but the position of the author. To be continued with more detailed elaborations of certain terms defined by the Law on Digital Assets.