Legal framework of the digital assets market.
With the adoption of the Law on Digital Assets ("LDA") and its entry into force on 29 June 2021, the legal system of the Republic of Serbia for the first time regulated the field of digital assets, defined basic concepts related to digital assets, modalities and conditions for entities providing services related to digital assets, procedures and conditions for entering the market of these services, including the regulation of certain instruments and institutes related to digital assets that were unknown or at least less represented in the legal system of the Republic of Serbia.
The LDA was adopted with the aim of defining the legal position of digital assets holders in the digital assets market of the Republic of Serbia, regulating the position of entities providing services related to digital assets, regulating financing modalities through certain digital assets instruments, and ultimately introducing legal certainty into the digital assets and digital assets services market.
Thus, the tendency of the legislator is ultimately reflected in introducing legal certainty and regulating the position and mutual relations of participants in the digital assets market. The introduction of legal certainty through the adoption of the LDA, as a kind of an economic policy instrument, indicates the tendency of the legislator to facilitate the expansion and strengthening of the market of digital assets and services related to digital assets in the Republic of Serbia.
In this regard, assuming that the basic concepts in this field are known to the reader, there are issues concerning the provision of services related to digital assets, the entrance of providers of these services into the market, the possibility of establishing "crypto banks" in the domestic market in accordance with foreign business models of such entities, and the range of services that fall under the services related to digital assets, along with the other issues of importance for doing business in this field.
This article addresses the basics for commencing the provision of services related to digital assets, as well as the preconditions for entering the market of services related to digital assets, while we will address the matter of issuing digital assets and the initial offer of digital assets in some of our future articles.
What is meant by digital assets?
The term digital assets, i.e. virtual assets, refers to a digital record of value that can be digitally bought, sold, exchanged or transferred and which can be used as an instrument of exchange or investment. Digital assets do not include digital currency records that are payment instruments or other financial assets regulated by other laws. From the above definition there are certain exceptions explicitly stipulated in the LDA.
The term services related to digital assets includes: receipt, transfer and execution of orders related to the purchase and sale of digital assets on behalf of third parties, services of purchase and sale of digital assets for cash and/or funds on the account and/or electronic money, services for the exchange of digital assets for other digital assets, safekeeping and administration of digital assets on behalf of users of digital assets and related services, services related to the issuance, offer and sale of digital assets, with (sponsor) or without (agency) obligation to purchase, keeping a register of rights of lien on digital assets, services of accepting/transferring digital assets, managing the portfolio of digital assets, as well as organizing a platform for trading in digital assets.
The provision of services related to digital assets is conditioned by the previous obtaining of a license by the competent authority, which is issued after determining the fulfilment of a number of conditions prescribed by the LDA such as security and information components, as well as other administrative conditions prescribed by the LDA.
Entities that can provide services related to digital assets
First of all, it is necessary to make a distinction between entities that own digital assets or are engaged in mining of digital assets, from entities that provide services related to digital assets.
Namely, mining is a type of acquisition of digital assets by participating in the provision of computer certification of transactions in information systems related to certain digital assets, hence the provisions of the LDA do not apply to mining.
Services related to digital assets are explicitly listed above, and for their provision it is necessary to meet the prescribed conditions and obtain the necessary licenses. In addition to digital assets related services, a digital assets-related service provider may only perform those activities and services that are directly related to digital assets-related services.
Therefore, services related to digital assets can be provided by all legal entities in accordance with the forms prescribed by the Law on Companies, as well as by entrepreneurs, after fulfilling the conditions and obtaining the necessary licenses.
Depending on the scope and type of services that a business entity plans to provide, there are different conditions that business entities must meet before starting to provide services. In this sense, the modality of the digital assets service provider that can provide the widest range of digital assets services under the LDA is the modality of the Digital Assets Trading Platform ( “Platform”).
The organizer of the Platform may provide the listed services related to digital assets, except for the investment advisory services and digital assets portfolio management services, subject to certain restrictions and exceptions prescribed by the LDA.
The Platform is the entity that most closely matches the comparative term of crypto banks. For the sake of terminological clarification, crypto banks that exist in comparative legal systems (for example, Switzerland) cannot operate according to that model on the territory of the Republic of Serbia.
Namely, crypto banks are not the classic banks as we know them and their business model in comparative systems does not correspond to our understanding of the business of classic banks. In this regard, the LDA (with certain exceptions) prohibits banks from providing services related to digital assets.
Therefore, due to the breadth of business opportunities of the Platform, hereafter in this article we will only address the conditions for entering the market of digital assets service providers in the modality of the Platform, since the scope of the Platform is the closest to the crypto bank comparative models. In the domestic market, the Platforms are recognized as crypto exchange offices, and their business within the secondary market of digital assets is of great importance for the domestic market and further development of this field.
Entering the digital assets services market in the form of a Platform
The realization of the business project of the Platform takes place through a legal entity (the most practical and most frequent case is a limited liability company) that is not associated with any of the financial institutions under the supervision of the National Bank of Serbia ("NBS"). The LDA stipulates that the provider of services related to digital assets must have the legal form of a company in terms of the law governing companies, which implies that potential investors are delegated discretionary authority to freely choose the form of a company to perform these activities in accordance with the Law on Companies.
The organization of the Platform can be performed only by the company that has been issued a license for the provision of services related to digital assets.
Thus, the entry into the market of providers of services related to digital assets in the modality of the Platform, is initiated by the application for a license submitted to the competent authority. Along with the application for a license, it is necessary to submit the documentation proving the fulfilment of the conditions related to the following:
1. Minimum share capital
The LDA prescribes that the minimum share capital for the establishment of the Platform in the amount of EUR 125,000 in dinar equivalent according to the official middle exchange rate of the dinar against the euro determined by the National Bank of Serbia.
The share capital of the platform can be pecuniary or non-pecuniary (e.g. in software), provided that at least half of the share capital must be subscribed and paid in cash. The Founder of the Platform is obliged to ensure that the capital of the Platform is always in the amount not less than the stated amount of the minimum capital. In that sense, the Platform is obliged to submit to the NBS a report on the minimum capital within the deadlines specified in the relevant bylaws.
2. Business plan
Business plan with the projection of revenues and expenditures for the first three years of operation on the basis of which it can be concluded that the applicant will be able to ensure compliance with the appropriate organizational, personnel, technical and other conditions for continuous, stable and secure operations, including the number and type of expected users of digital assets, as well as the expected volume and amount of digital assets transactions, for each type of service related to digital assets that it intends to provide.
3. Hardware, software and security aspect
In addition to the prescribed requirements regarding the hardware and software component, the internal system of the Platform must meet the requirements in terms of the measures for security management of the information and communication system, internal controls, measures to protect the funds of digital assets users, etc.
4. Organizational structure, credibility, and expertise of board members
Board members and managers of the digital assets service provider must have a good business reputation, while the employees must undergo the adequate training for conducting digital asset transactions. The competent authority passes the decision on granting its consent to electing the proposed board members and managers of the digital assets service provider based on the evidence that the conditions prescribed by the LDA have been met, when it assesses that the proposed board members and managers of that provider have a good business reputation. In addition, the applicant for a license must provide the competent authority with the information on persons closely related to the applicant with a description of that connection.
5. Other administrative conditions
The provider of services related to digital assets is obliged to establish adequate rules and procedures that ensure that the business of the Platform, its management and managers, as well as employees, is in accordance with the LDA and other bylaws of the supervisory authority, and other regulations of the Republic of Serbia, especially the regulations preventing money laundering and terrorist financing.
Obtaining a license
The competent authority shall decide on the application for a license to provide services related to digital assets within 60 days from the date of receiving a valid application.
If the request is irregular, the competent authority shall within 20 days from the day of receiving the application, inform the applicant how to edit the request, in which case the 60-day period for deciding on the application for a license shall commence on the day of submitting the regular application.
The supervisory authority shall issue a decision on granting a license when it determines that all conditions have been met in accordance with the LDA.
In the event that the competent authority rejects the application for a license, the applicant may not submit a new application for a license to provide services related to digital assets within one year from the date of the decision to reject the application.
Projection of the costs of establishing the Platform
As we already stated above, the LDA prescribes the minimum share capital for the establishment of the Platform in the amount of EUR 125,000 in RSD equivalent according to the official middle exchange rate of the dinar against the euro determined by the National Bank of Serbia.
In addition to the minimum share capital, in the process of establishing the Platform, it is necessary to pay certain fees to the competent authorities (fee for addressing the request for issuing a license, fee for addressing the request for granting consent to the proposed board members and managers, fee for addressing the request for granting consent to the general acts of the company, etc.).
Additionally, all the accompanying costs of preparing the documentation (security and information documentation) are not included in the cost projection because they depend on each individual case.
Providing services related to digital assets abroad
In case the organizer of the Platform intends to provide services directly abroad, i.e. to provide services related to digital assets from the Republic of Serbia (online) to foreign customers, the organizer is obliged to obtain an additional license from the competent authority. The procedure for obtaining a license to provide services related to the digital assets abroad is to some extent consistent with the procedure for obtaining a license to provide these services in the Republic of Serbia, with certain specifics such as: the obligation to submit specifications of software and hardware components of the company, evidence that regulations in the country where the organizer intends to provide services are in line with international standards in the field of prevention of money laundering and terrorist financing, etc.
To conclude, in accordance with the current regulations in this field, the establishment of crypto banks based on models that operate in comparative systems sensu stricto is not possible. The model of organizing the provision of services related to digital assets in the Republic of Serbia that most closely corresponds to the concept of crypto banks (although it is not a crypto bank) is the model of the Platform.
However, given the small period of time that has passed since the beginning of the LDA application, it is possible that, in accordance with the practice and experience in the LDA application, in the forthcoming period new ideas would form and competencies of the Platform and other models for providing services related to digital assets get expanded, in a way that would correspond more closely to the crypto banks that exist in comparative systems of other countries.
By Vladimir Milosevic, Partner, and Eldar Rizvanovic, Associate, Milosevic Law Firm