Serbia adopted the Digital Property Act

The previous decade has been marked by major digital technology breakthroughs that outline the new “techno-economic paradigm”, hence in several countries the issue of legal shaping of the newly created financial and business patterns has opened up. Accordingly, on December 17^th, 2020, the National Assembly of the Republic of Serbia adopted the Digital Property Act (“Official Gazette of RS”, No. 153/2020), which made Serbia one of the pioneers in establishing a regulatory framework in this domain.

Below is a brief overview of the most important aspects of the system established by this law.

WHAT IS DIGITAL PROPERTY?

The Digital Property Act defines digital property as “a digital record of value that can be digitally bought, sold, exchanged or transferred and that can be used as a medium of exchange or for investment purposes“. It is important to note that money and existing financial instruments in digital form (digitized securities, electronic banking) are excluded from the scope of this term.

Notwithstanding the indisputable fact that the legislative activity in this domain was triggered by the dizzying development and increase in popularity of blockchain technology and cryptocurrencies based on it, the Digital Property Act adopts the principle of technological neutrality. Simply put, it applies to all digital property, regardless of its underlying technology, thus trying to avoid its provisions losing their significance due to further technological advances.

The Act highlights the two main modalities of digital property – virtual currency and digital token.

Virtual currency as a medium of exchange

Surrounded by highly inconsistent comparative legal environment on the issue of legal status of virtual currency (legal solutions range from interpreting it as a type of commodity, to recognizing it as an alternative to traditional money), the Serbian legislator opts for an approach where virtual currencies are not a means of unilateral payment, but a medium of exchange, provided that they are accepted as such by natural or legal persons.

Nevertheless, the illusion of payment in virtual currency can be created in practice, in a construction where the intermediary, who performs the service of acceptance/transfer of digital property in terms of this Act, performs its automatic conversion into the corresponding amount in dinars. This innovative model was exercised by some entities even before it was established by law, but it can hardly be expected that this type of “payment” will take on significant proportions immediately after the adoption of this law, since the virtual currencies worldwide are primarily used for investment purposes.

In light of current events, the most significant form encompassed by this term are certainly cryptocurrencies – virtual currencies based on cryptographically secured, decentralized, peer to peer monetary systems, such as bitcoin or ethereum.

Digital token – legal framework for crowdfunding

In contrast to virtual currency, which does not necessarily imply the existence of any other underlying assets, a digital token is a non-property right that represents other property rights in digital form, such as the right of the user to be provided with certain services.

The introduction of this institute is potentially the most significant novelty when it comes to stimulating the domestic economy, as it creates the possibility of uncomplicated financing of start-up companies and various innovative projects. Namely, a normative basis for “ICO” financing from Serbia is created in this way, as the legislator evidently tries to entice domestic “crypto-businesses”, sending them a signal that they can, as economic entities registered in Serbia, easily raise capital from all over the globe in legally secure environment.

The ICO (Initial Coin Offering), originated during the last decade as a consequence of the development of cryptocurrencies, is a counterpart of the initial public offering (the first issue of shares by which a company transits from one of the closed forms to a public open joint stock company), howbeit this way of capital raising is much simpler and is not coupled with rigid regulations and high costs, which makes it affordable and attractive for developing companies.

In this context, it is envisaged that this Act will also apply to digital property with the characteristics of a financial instrument (otherwise the subject of the Capital Market Act), provided that it meets certain conditions. As the Digital Property Act provides for a much more favorable issuance and secondary trading regime, this also enables trouble-free capital raising, e.g., through issuing blockchain corporate debentures.

ISSUANCE AND SECONDARY TRADING

The Act does not restrict the mere issuance of digital property, but conditions its advertising with issuing the “white paper“. Bearing in mind that digital assets are typically issued with the intention of raising funds from a larger number of people, and that advertising is therefore a virtually indispensable element of such endeavor, this legal regime is only nominally free.

The rationale behind the “white paper” institute is to protect investors by providing them with an opportunity to make an informed investment decision and assess the associated risks. It is a document that contains information exhaustively prescribed by law, the publication of which must be approved by the supervisory body (National Bank of Serbia or the Securities Commission) in a legally regulated procedure.

When it comes to secondary trading, a distinction is made between digital asset trading platforms, managed by a licensed organizer, and the OTC market (“Over the Counter“), on which the transactions take place without intermediaries. An interesting novelty is that the Act recognizes and explicitly permits the use of so-called “smart contracts” – computer programs or protocols that automate the implementation of already concluded agreements, by having their provisions incorporated into the program code.

REGULATION OF SERVICE PROVIDERS ‘ACTIVITIES

Businesses that provide “digital property-related services” will play a significant part in the newly established system, especially given that banks are not allowed to perform this type of activities (with the exception of storing cryptographic keys). The Act establishes digital property-related services as a broad-ranging term, thereby explicitly stipulating that some of them can be provided through cryptomates – “crypto ATMs”, so to speak – which are already installed in several cities in Serbia.

Until the enactment of this Act, the activities of service providers have been restricted only by the provisions of the Law on Prevention of Money Laundering and Terrorist Financing. The new legal regime implies their obligatory registration and a mandatory business license, obtained under certain conditions such as minimum capital (half of which can be non-monetary capital, which includes software), as well as obligations for these subjects, primarily aimed at protecting the interests of users.

OTHER NOVELTIES AND EXPECTATIONS

The Digital Property Act enables digital property collateral, in the form of pledge and fiduciary. When it comes to entering digital property as a stake in a company, this is permitted only in the case of digital tokens, on the condition that they do not relate to the provision of services or performing work, while for virtual currencies it is explicitly excluded. It is important to point out that special attention is paid to the prohibition of abuse on the market, in this respect, the basic forms of such abuse: abuse of insider information and manipulation on the market, are envisaged as criminal acts.

It should be kept in mind that the Digital Property Act is merely the backbone of complete regulation of this matter, therefore, further acts are expected in the forthcoming period, to specify its institutes and regulate certain open issues such as “mining” of cryptocurrencies. In that context, the changes that engaged the utmost attention of the public are tax regulations amendments, by which the taxation of digital property was established in Serbia for the first time. It remains to be seen whether, through interpretation and implementation, this legislative endeavor will achieve its raison d’être, primarily increasing the competitiveness of the Serbian economy and preventing abuses in this sphere.