Performing “exchange operations” or brokerage in the sale and purchase of cryptocurrencies is not new in Serbia, but now is for the first time regulated. Starting from June 30, 2021, as the date of application of the Law on Digital Assets (“Law“), providing these and other services will be regulated and it is necessary to fulfil certain legal requirements, including obtaining a prior licence from the supervisory authorised body for supervision of the application of the Law.
The Law stipulates that all entities that provide or intend to provide services related to digital assets (the “Service Providers“) must harmonise their business and comply with the Law and by-laws until June 29, 2021. By this date, all the Service Providers must submit a request to a supervisory authority in order to obtain a license to continue to perform services.
Under the Law, Service Providers can only be companies (as defined by the Law on Companies). The Law also prescribes the types of services and conditions that a company has to fulfil in order to obtain a license to provide such services.
Services related to digital assets
The Law defines the following as services (the “Services“) related to digital assets:
- receipt, transfer and execution of orders related to the purchase and sale of digital assets on behalf of third parties;
- services of buy and sale of digital assets for cash and/or wire transfers and/or electronic money;
- exchange of digital assets for other digital assets;
- storage and administration of digital assets and related services;
- services related to the issuance, offer and sale of digital assets, with the obligation of its purchase (sponsorship) or without that obligation (agency);
- maintaining a pledge register regarding digital assets;
- digital assets acceptance/transfer services;
- digital assets portfolio management;
- digital assets trading platform organisation.
The Law defines that the Service Provider may perform only activities and services directly related to the Services. This means that Service Provider cannot perform any other business activity.
The law provides exception for brokerage-dealership companies and market organisers as defined in the Law on the Capital Market. These companies besides their business activities may also provide services related to digital assets after obtaining a license from the supervisory authority.
Said limitation should be considered when issuing digital assets. Although the Law allows natural persons as well as legal entities to issue digital assets without a licence (through the initial coin offering i.e. ICO), when preparing an ICO project, entities involved should be cautious, so the project does not include any activity that requires a license to provide services related to digital assets, e.g. safekeeping of digital assets. In such situation, if the issuer of the digital assets included in its white paper some activity that may be considered as the Service, the issuer will act contrary to the Law, due to performance of the Services without proper licence, which is punishable.
According to the Law a license is not required for advisory services. Still, the Law obliges advisory service providers with no license to inform the users of such fact and to publish such information on their respective websites. The advisory service providers, aside companies, may be private individuals registered as entrepreneurs or natural persons whose profession is provisions of advisory services (e.g. lawyers).
Advisory services include investment advising, investment recommendations, capital structure advising, business strategy advising, digital asset issuance and similar matters, and other digital asset advisory services.
Who can be a Service Provider
The Service Provider may be a company established in accordance with the Law on Companies which obtained a licence from the supervisory authority.
Therefore, the general rule stipulates that the Service Provider can be any company that meets the conditions prescribed by the Law and has a license issued by a supervisory authority.
However, the Law prohibits the banks and other financial institutions under the supervisions of the National Bank of Serbia to provide the Services. The Law provides an exception to this prohibition, under which the banks may offer digital asset custody services, i.e. storing cryptographic keys.
This provision prevents the banks from providing the Services. It is assumption that the rationale of this provision is to prevent jeopardising business and liquidity of a bank, due to belief that all related to digital assets is presumed to be unstable. However, the digital assets custody services may create a greater risk to a bank than for example trading in digital assets as if a bank loses or damage the cryptographic keys it keeps (in any way, including misuse by employees), a bank shall be liable for the damage caused to third parties.
The Law prescribes a mandatory amount of share capital of the Services Providers, which is EUR 20,000.00 for all Services except for digital asset acceptance/transfer services and digital asset portfolio management services, in which situations the Service Provider is obliged to provide a minimum share capital of EUR 50,000.00, as well as in the case of providing the service of organising a platform for trading digital assets when the Service Provider is required to provide a minimum share capital of EUR 125,000.00. The stated minimal share capital can be pecuniary and non-pecuniary, provided that at least half of such capital must be registered and paid in cash.
License to provide Services
Companies are obliged to obtain a license for performance of the Services from a supervisory authority prior commencement of such activity.
Which supervisory authority will be competent for issuance of a license depends on the type of the Service, i.e. whether the Services are related to virtual currencies (the regulator is the National Bank of Serbia) or if the Services are related to digital tokens (the regulator is the Securities Commission). In event of hybrid digital assets, both authorities will be competent.
The Law further enlist necessary documentation to be submitted with the application, application’s approval process and what decisions a supervisory authority may enact. The Law entitles supervisory authorities to define in more detail conditions and procedure for issuing licenses.
Individuals appointed to be members of the Service Providers’ management or managers have to meet conditions prescribed by the Law. Their appointment is subject of approval by the supervisory authorities, whose consent may be withdrawn under the conditions set out under the Law. The Law also prescribes other conditions that the Service Provider must meet, i.e. those related to the personnel and organisational training, technical equipment of the Service Provider, etc.
Upon the submitted request for granting a license, a supervisory authority shall decide within 60 days from the day of receipt of a valid request. If a supervisory authority determines that the submitted request is not in compliance with prescribed conditions, time limit starts as of the day of submission of the request determined by a supervisory authority as valid. Therefore, the prescribed time limit for decision making may be relative in practice. After obtaining the license, the Service Provider will be registered in the register of service providers kept by the supervisory authorities, which is a new type of register that has not existed so far.
If a supervisory authority dismisses the request for granting a license, an applicant may not submit a new request within one year from the date of the decision dismissing the request.
It should be noted that decision on the request is final and no administrative appeal is available. Such decision may be challenged by initiation of proceedings governing administrative lawsuits. In such proceedings, it may not be decided on merits regarding the request, but only on whether a supervisory authority acted in accordance with rules of procedure. Therefore, the National Bank of Serbia and the Securities Commission are only authorities which may decide whether the conditions for issuance of a licence are met and their decision regarding merits may not be subject of decision of other authorities.
The duration of the license is not limited, but it can be terminated in one of the following manners: 1) when a supervisory authority decides to revoke license; 2) when the Service Provider has been deleted from the Company registry due to status change and 3) in event of initiating of bankruptcy or compulsory liquidation against the Service Provider.
The legislator also envisages other obligations of the Service Provider which pertains to business conduct and in accordance to which the Service Provider must act for the entire period of providing the Services. Thus, Service Providers must fully apply AML rules, digital asset customers protection rules, as well as payment services rules, execution of customers’ orders, customer complaints, record keeping and reporting to the supervisory authorities, bookkeeping rules, audit of financial statements rules, etc.
Impact of the Law on the current Service Providers
Final provisions of the Law create issues, which resolution is yet expected in practice. Namely, until June 29, 2021, the Service Providers should harmonize its business with the Law and regulations (regulations do not yet exist and the Law does not provide deadlines when to be enacted) and to apply for a license.
On the other hand, according to the provisions of the Law, the Law will become applicable in six months from the date of its entry into force (i.e. June 30, 2021 is the date of start of application of the Law). This means that the supervisory authority may decide upon applications for licenses only starting from June 30, 2021.
Since the supervisory authorities have no grounds to apply the Law and exercise the powers conferred to them under the Law before the Law starts applying, it is possible to assume that on June 30, 2021, the National Bank of Serbia and the Securities Commission will have a large number of requests.
The deadline for deciding on the submitted request is 60 days from the day of submitting of the valid request.
The practical consequence of such legal framework is that the existing service providers, e.g. crypto currency exchange (most common form of business related to services regarding digital assets in Serbia), as well as other entities who perform other Services, will be forced to pause their business activity until they obtain a license (which ideally may be within 60 days) or be exposed to serious risk to being sanctioned with severe penal measures if they continue to operate their businesses as of the day of application of the Law until the date of the decision on their request regarding licence issuance.
If this error is not rectified until the date of application of the Law, there will be no good enough solutions for the exciting service providers, as well as for the supervisory authorities which are bound to act in accordance with laws.
Unfortunately, these omissions or errors of the legislator are not novelties in process of enacting laws, similar issue was created with amendments to the Law on Enforcement and Security, which resulted in additional engagement in order to overcome issues created by the legislator itself. Although the Serbian Constitution determines when laws enter into force, our legislator has habit to define also a moment as of when laws are applicable (which category the Constitution does not envisage and which may be justified only regarding certain provisions of laws), which result in issues here presented.
This text does not constitute legal advice, it is the opinion of the authors. In further texts we will provide additional overview of terms under the Law on Digital Assets.
Authors: Ivana Bulatović, Attorney at Law and Željka Motika, Attorney at Law