Law on Digital Property in Serbia
Law on Digital Property in Serbia by the end of the year
At the session held on 27 November 2020, the Government of the Republic of Serbia adopted the Draft Law on Digital Property in order to regulate, improve and develop this market and prevent the misuse of that type of property for criminal purposes.
The Government, inter alia, stated that the adoption of this law will enable financing with investment tokens, improvement and development of the capital market, use of digital technology and providing a framework for combating abuse on the digital property market, as well as money laundering and terrorist financing.
Legal solutions should improve the business environment and contribute to the further digitalization of services in the economy, with adequate management of security and financial risks arising from the nature of this form of property.
In such fashion, Serbia endeavours to keep pace with modern trends in global, digital and electronic business, but also to further encourage domestic IT entrepreneurship in the area of information and communication technologies in a standardized and controlled manner through this type of provision of services and doing business.
After the adoption of the law, legal security should be achieved as well as predictability in business with digital property ensured within the legal framework.
In the text below, we briefly present the content of the official proposal of the Draft Law on Digital Property.
The constitutional basis for passing the Law on Digital Property is contained in Article 97, paragraph 1, item 6 and 7 of the Constitution of the Republic of Serbia, which stipulate that the Republic of Serbia regulates and provides, among other things, the single market, the legal position of economic entities, the system of performing certain economic and other activities, as well as property and obligation relations and protection of all forms of property.
Reasons for passing the Law
The most important reasons for the adoption of this Law are: (1) regulating the digital property market, in order to improve and develop it, on the one hand, and prevent the misuse of digital property for criminal purposes, on the other hand, (2) enabling financing with investment tokens, (3) prosperity and development of the capital market using digital technology and (4) strengthening the framework for combating abuse in the digital property market, as well as money laundering and terrorist financing.
The aim of this law is to improve the business environment and contribute to further digitalization of services in the economy in the Republic of Serbia, with adequate management of security and financial risks arising from the nature of this form of property.
In this way, we strive to keep pace with modern trends in global digital and electronic business, but also through this type of service and business to further encourage our IT entrepreneurship in the area of information and communication technologies, in a standardized and controlled manner, above all in accordance with international standards in the areas of fight against crime and prevention of money laundering.
At the moment, digital property (primarily so-called virtual currencies) are explicitly regulated only by the Law on Prevention of Money Laundering and Terrorist Financing (“Official Gazette of RS”, No. 113/2017 and 91/2019), and exclusively for the prevention of misuse of virtual currencies.
Since 2017, it has been regulated that the obligors of this Law and persons providing services related to virtual currencies (such as crypto exchange offices), which means that these entities are obliged to fully establish and verify the identity of the party trading in virtual currencies, to determine the real owners of those entities, monitor transactions, timely inform the National Bank of Serbia and the Administration for the Prevention of Money Laundering about all irregularities, etc.
The supervision of the National Bank of Serbia over the operations of new taxpayers has been introduced in the part related to the application of regulations in the area of prevention of money laundering and terrorist financing. These obligations were introduced even before the entry into force of the so-called The fifth EU directive on the prevention of money laundering, which has made our country one of the leading countries in the consistent application of standards in this area.
On the other hand, this Law does not regulate the issues of conditions and manner in which the mentioned entities operate, capital requirements, whether a license or work permit is required, etc.
Therefore, the proposed legal solutions create legal security and, within the legal framework, provide predictability in dealing with digital property, starting with the definition of digital property (the institute that is introduced in our law for the first time), virtual currency, digital tokens, and conditions for conducting business with these property through licensed service providers, supervising their operations and arranging other relevant issues, issuing digital property and secondary trading in digital property in the Republic of Serbia, providing services related to digital property, possessory lien and fiduciary right on digital property, supervision over implementation of this Law, and also contains provisions whose purpose is to reduce misuse in the digital property market.
In order to more comprehensively regulate digital property from the aspect of prevention of money laundering and terrorist financing, and harmonization with international standards, this Law also contains several provisions on the application of regulations governing the prevention of money laundering and terrorist financing to digital property service providers. The law also proposes amendments to the Law on Prevention of Money Laundering and Terrorist Financing, which will harmonize the provisions of that law with the Law on Digital Property and determine special actions and measures for prevention of money laundering and terrorist financing related to digital property (which take into account the specifics of doing business with digital property, but also recognize the special risks that this business carries).
After the adoption of the Law on Digital Property, conditions will be created for the existing regulations governing property in the Republic of Serbia to apply, to a certain extent, to digital property (for example regulations on property and contracts, criminal code, etc.), and some issues (such as possessory liens) will be adapted to the specifics of digital property and regulated in this Law, which will reduce doubts in the application of existing regulations that are currently present due to the absence of regulations on digital property.
According to some data at the global level, the total market capitalization of cryptocurrencies in 2019 amounted to 237.1 billion US dollars, compared to 128.78 billion in 2018. By comparison, by 2016, the total market capitalization was below $ 18 billion.
According to the information gathered during the consultations with the participants in the digital property market in the Republic of Serbia, there are currently several companies operating in that market. These companies are largely unregulated, which in itself creates practical problems for them, such as difficulties in opening a bank account or in applying business, tax, accounting and other regulations.
Also, the trust of the investor public in the companies that would manage these deals could be enhanced by passing the Law because it eliminates many issues arising from the fact that at the moment the digital property market is not regulated, and is known for inherent risks.
What are expectations?
For that reason, the adoption of this Law would contribute to the possibility of improving the business of digital property service providers who have development projects and quality ideas in IT entrepreneurship and thus accelerate the development of this industry, and would open opportunities for easier financing of innovative start-ups and small and medium-sized legal entities.
Due to the nature of digital property and their cross-border portability, foreign investors are also expected to be attracted. This law is bringing one of the key innovations, that is the possibility for participants in the capital market, primarily broker-dealer companies and the stock exchange, to join the digital property market.
In this way, it is achieved that entities who have decades of experience in dealing with financial instruments use this experience, as well as their resources, for the development of the digital property market, which will lead to the appropriate level of service quality from the very beginning of Law enforcement, ie ensure healthy competition and reliability of providers of these services.
The adoption of this Law will also lead to the improvement of the capital market, since it enables the issuance of financial instruments in the form of digital property, using digital technology, under certain conditions, without applying the rules prescribed by the Capital Market Law.
In order to fall under this lenient regime, a digital property that has all the characteristics of a financial instrument must meet the following conditions: (1) it does not have the characteristics of shares, (2) it is not substitutable for shares and (3) the total value of digital property of 12 months issued by one issuer does not exceed the amount of 3,000,000 euros in dinars at the official middle exchange rate of the dinar against the euro determined by the National Bank of Serbia on the day of issuance, ie during the primary sale.
It can be expected that the novelty in question will lead to a significant increase in the number of initial public offers of financial instruments, primarily bonds, as well as that these initial public offers will come from small and medium enterprises – since the process of issuing financial instruments in the form of digital property. in accordance with this Law, it is significantly cheaper and simpler than the procedure of issuing financial instruments in accordance with the Law on Capital Market. The Law contains mechanisms to struggle with digital property market misuse, specifically manipulation and insider trading.
These mechanisms are similar to the mechanisms used on the capital market, and will be implemented by the National Bank of Serbia (when it comes to virtual currencies) and the Securities Commission (when it comes to digital tokens). The introduction of this type of market surveillance is expected to increase the security and certainty of doing business in the digital property market. The Law on digital property is also based on the principle of technological neutrality, and although it is largely focused on blockchain technology, it does not favour or restrict any technology, which potentially includes information and communication technologies (“ICT“) that will develop in the future.
When it comes to the prevention of money laundering and terrorist financing, this Law undoubtedly introduces all forms of digital property into the system of struggling with money laundering and terrorist financing, and determines who is obliged to apply the regulations in question – since it is necessary to obtain an appropriate permit to provide the services related to digital property.
In this way, full compliance of domestic regulations with the Fifth Anti-Money Laundering Directive and international standards for the prevention of money laundering and terrorist financing defined by the FATF (Financial Action Task Force) recommendations (Recommendation 15), which require licensing or registration of entities providing virtual property service providers.
Responsibility for licensing and supervising the operations of digital property-related service providers is divided between the Securities Commission and the National Bank of Serbia, with the Commission responsible for all matters related to investment tokens (white paper approval, secondary trading, licensing and supervision of service providers related to these tokens, giving opinions on the application of this Law), and the National Bank of Serbia for all the above issues related to virtual currencies. The proposed provisions also provide for the establishment of a special web portal for communication between supervisors and providers of services related to digital property, especially in the case of those companies that provide services related to digital tokens and services related to virtual currencies, as this ensures the submission of all documentation related to their business through a single point of contact and without duplication of costs.
When considering other possibilities for solving problems related to the development of the digital property market, it was determined that these problems cannot be solved without prescribing a comprehensive legal framework, since the current laws do not provide a basis for competent institutions to regulate this area by bylaws, nor would it be legally possible to regulate the subject matter by those acts.
The adoption of the Law is the best solution to the problem because in a systematic and comprehensive manner, while respecting the principles of legal security and the rule of law, regulates matters that only the legislator can regulate: introduction of new economic entities and regulation of their business, contractual relations between providers and users of services related to digital property, introduction of the institute of digital property, issuance and trading of investment tokens, supervision over participants in the digital property market of the Republic of Serbia, penal provisions, etc.
Key issues for analysing the current situation and properly defining the proposed change
What indicators are monitored in the area? What are the reasons why these indicators are monitored and what are their values?
Taking into account the introduction of new institutes and opportunities for the ICT industry of the Republic of Serbia, indicators in this area will refer to the following: Number of issued white papers within three years from the entry into force of regulations; Number of licenses issued for the provision of services related to digital property within three years from the entry into force of the regulations; Growth in the number of companies whose activity is the provision of services related to digital property within three years from the entry into force of regulations.
The source consists of the records of the institutions responsible for the implementation of the regulation in question – the Securities Commission and the National Bank of Serbia. The base value for these indicators is 0.
By introducing institutes such as white paper and licenses for performing activities in the area of digital property, the Republic of Serbia regulates and improves the business framework of companies in the area of digital property. The white paper, as such, is a kind of “prospectus” for the purpose of issuing digital property, with the content of which the investor can get familiar with the advantages and risks of digital property issued as well as more information about technology and entities involved in designing digital property. The information provided in the white paper must be concise, clear and comprehensible and must be presented in a way that allows easy analysis. The number of issued white papers would be a clear indicator of the number of newly created types of digital property in the Republic of Serbia and thus would give a clear answer to the question of whether the regulation creates favourable conditions for the development of such property in the Republic of Serbia and whether companies engaged in activities in the area of digital property have an incentive to develop new technological solutions in the form of virtual currencies and digital tokens. digital property have an incentive to develop new technological solutions in the form of virtual currencies and digital tokens. On the other hand, the number of issued licenses would indicate a clear number of companies dealing with the area of digital property and whether this area is in its infancy in the Republic of Serbia through the monitoring of annual indicators. Indirectly, by analysing companies that are not newly established, and which submitted a request for the issuance of the license, the Republic of Serbia will be able to have an insight into the number of companies that have potentially dealt with this area in the grey zone. In line with the introduction of the new system Law, it is in the interest of the Republic of Serbia to monitor quantitative indicators for the aforementioned points and to monitor whether the chosen option encourages the growth of the ICT industry in the area of digital property.
Is a public policy document or regulation being implemented or has it been implemented in the subject area?
Regulations in this area are still being developed worldwide, as well as at the level of the European Union. The Republic of Serbia has recognized global trends and by following the examples of certain jurisdictions, such as France and Malta, decided to systematically approach the regulation of the area through legislation. At the moment, digital property (primarily the so-called virtual currency) is explicitly regulated only by the aforementioned Law on Prevention of Money Laundering and Terrorist Financing, and exclusively for the purpose of prevention of misuse of virtual currency.
What current regulations and public policy documents are important for the proposed change and what is the significance of that?
By passing the Law, the Republic of Serbia would become a new member of the club of countries that are pioneers in creating a regulatory framework for digital property, and thus provide clear frameworks and legal certainty for investors and users of digital property. The overriding goal of passing this Law is to provide entrepreneurs with greater business opportunities, to more easily finance their innovative ideas, improve liquidity and enter the digital property market, whose global value is currently estimated at more than $ 300 billion, despite all the challenges the world economy is facing nowadays.
The Republic of Serbia is recognized as a country of technological development by the world’s leading publications such as the British the Economist, and by drafting the law on digital property, the Republic of Serbia sends a clear signal to continue its leading position in Southeast Europe in financial technologies (Fintech) and digitalization. services for the benefit of the citizens of the Republic of Serbia and its economy.
Have problems been identified in the area and to whom do they relate?
With the enactment of the new Law, businessmen will have more innovative opportunities to develop their business, such as issuing investment tokens in order to raise capital or launch platforms for the exchange of digital property. Passing the Law would be a major step towards increasing legal certainty, developing digital technologies and the competitiveness of the Serbian economy on the global stage. This is especially important in the context of the situation with the corona virus, which has only accelerated the overall digitalization of society and business, and in which digital property also has an important place. Until now, the economy (but also natural persons) did not have any framework for doing business with digital property, so the consequences were: increased legal uncertainty, tax evasion, doing business in the grey zone, etc. Until now, market participants, avoiding the unregulated local market, have reported business activities in foreign markets, which has further caused an unjustified outflow of a large part of income from the Republic of Serbia. Furthermore, local participants are not motivated to develop new blockchain technologies in the domestic market due to legal uncertainty as to how their product will be treated and how services will be charged.
Which target groups will be affected by the proposed change?
The target groups that will be affected by the proposed changes are the economy, industry and individuals. Such a new regulatory framework will affect the higher employment of citizens as well as the overall development of the industry. It is important to note that the ICT industry is one of the fastest growing industries in the Republic of Serbia and that in 2019 alone more than 200 companies were established that deal with the development of software solutions, and through the introduction of a new system law, that number will be even bigger.
Is it possible to make a change by applying the applicable regulations?
No, because as mentioned, the existing legal framework does not recognize the possibilities for doing business with digital property nor does it recognize the legal institutes that are introduced by the new regulation. If the intervention is abandoned, the damage to the Republic of Serbia will be extensive. In that sense, a certain number of talents from the Republic of Serbia would be expected to go to jurisdictions that have a friendly and shaped framework for digital property business, the ICT industry would be reduced and the business in the grey zone would be encouraged when it comes to virtual currencies.
Key questions for definition of the goal
Why is it necessary to achieve the desired change at the level of society?
The answer to this question defines the general goal. By adopting the Law on digital property, the Republic of Serbia introduces new institutes into its legal and economic system, such as virtual currencies and digital tokens. In that sense, the general goal of this Draft is: Regulation of a new area by introducing new legal institutes in the economic system of the Republic of Serbia and improving the competitiveness and innovation of the ICT industry.
What does this change aim to achieve?
The answer to this question defines specific goals, the achievement of which should lead to the achievement of the general goal. In relation to the specific goals, measures for their achievement are formulated). • Encouragement of investments from abroad in the ICT industry of the Republic of Serbia; • Growth in the number of economic entities established for the purpose of providing services in the field of digital property; • Growth of exports of products and services from the ICT industry; • Encouragement of employment of citizens of the Republic of Serbia in the ICT industry; • Preventing the misuse of digital property and the use of digital property for criminal purposes; • Regulating the field of digital property in a systematic and comprehensive manner, and in accordance with the applicable regulations in the Republic of Serbia.
On the basis of which performance indicators will it be possible to determine whether the general or specific goals have been achieved?
- Creating a market infrastructure for the issuance and trading of digital property to be issued in the Republic of Serbia, including primarily platforms for trading and exchange of digital property within a period of nine months from the beginning of the application of the Law; • Number of published white papers; • Number of issued licenses for the provision of services in the area of digital property; • Number of investments in blockchain technology and Web companies in the Republic of Serbia. • Number of relocated companies for the development of blockchain solutions in the Republic of Serbia.
Key issues for financial effects analysis
Is it necessary to provide financial resources for the implementation of the chosen option in the budget, or from other sources of financing and which ones?
The selected options will require minimal financial resources. In accordance with the conversation between the institutions responsible for implementing the selected option, it will be necessary to establish a portal on the Internet through which interested persons from the business sector will be able to communicate with supervisory authorities and submit documents and data prescribed by the Draft Law on Digital Property. The model for submitting the necessary documentation is not technologically demanding and as such will require a low value of financial resources to be established.
Key questions for economic effects analysis
What costs and benefits (material and immaterial) will the chosen option cause to the economy, a particular branch, or a certain category of economic entities?
The chosen option will cause limited material and immaterial costs. In this sense, the costs that will have to be borne by the service providers will relate to administrative costs as well as to costs related to operations (legal costs, audit costs, etc.). When it comes to benefits, the chosen option will bring greater legal certainty, as well as a regulated legal framework in which entities offering services related to digital property will be able to operate in a transparent manner with reduced risks, both financial and legal. A special benefit for the economy will be the introduction and recognition of new institutes by the legal system of the Republic of Serbia, namely virtual currencies and digital tokens, which will be used to attract foreign investment in the domestic ICT sector, raise capital and develop advanced software solutions for clients, both in the Republic of Serbia and abroad. We note that the provisions of the Law relating to the exclusion of the scope of application of this Law, in relation to the so-called. “Network of individuals” means individuals who operate in accordance with the internal rules of the network in question and whose digital property are not used for commercial purposes outside that network (for example, within video games). Regarding the “mining” of digital property, we note that such activity is not prohibited by this regulation, but is excluded from the application of this regulation, because “mining” does not create an obligatory relationship between individuals nor does it represent a particular service.
Does the chosen option affect the competitiveness of economic entities in the domestic and foreign markets (including the effects on price competitiveness) and in what way?
The chosen option will positively affect the competitiveness of economic entities in both the domestic and foreign markets. The issuance of digital property is one of the key activities in the subject area, and as such is allowed under the Draft Law on Digital Property. Prior to issuing digital property, the issuer may create a white paper containing all the necessary information that, given the specific characteristics of the issuer and the digital property offered, allow investors to make an investment decision and assess the risks associated with investing in digital property and fulfils all other conditions prescribed for white paper in accordance with this Law. In order to promote the development of digital property and the wider use of innovations in the domestic market in terms of distributed book technology and blockchain infrastructure, it is necessary to regulate the legal framework that will further encourage the competitiveness of the domestic ICT industry. The chosen option provides new opportunities for the ICT industry to develop and improve the technological basis for the issuance and trade of digital property, but also the opportunity to access new funding.
Key questions for the analysis of social effects
Would the chosen option affect the labour market and employment, as well as working conditions and in what way (for example changes in employment rates, redundancies, abolished or newly created jobs, existing rights and obligations of workers, retraining needs or additional training imposed by the labour market, gender equality, vulnerable groups and forms of their employment, etc.)?
The chosen option affects the labour market and employment, especially the sector of the ICT industry. With increased legal certainty and a regulated regulatory framework, the chosen option brings a higher level of employment of ICT professionals. The chosen option does not affect the regulations in the field of labour law, however, the regulation of digital property will directly affect the fact that persons, legal or natural, go beyond the framework of grey zone into legal flows, thus ensuring the rights and obligations of employees.
Key issues for management effects analysis
In terms of pledge and register, pledge on digital property is most similar in its characteristics to pledge on financial instruments, taking into account that these are intangible property rights. However, although financial instruments are managed in a centralized manner, and are on the accounts of the Central Registry of Securities, the feature of digital property is that they are in the so-called. digital wallets. The specificity of digital wallets, as such, is that they are managed by the providers of services related to digital property. Taking into account the elements of this type of property: (i) easy transferability and (ii) the possibility of damaging creditors, the proposed solution prevents the pledge register from making additional disposal of the pledged property. In order to prevent this disposition, it is necessary to entrust the management of wallets to digital property service providers, because the Business Registers Agency does not manage digital property addresses and is not currently technically qualified to take over this type of competence. However, the proposed solution does not exclude the possibility that in the future the conditions for performing the above activities by the Business Registers Agency will be met.
Does the existing public administration have the capacity to implement the chosen option (including the quality and quantity of available capacities) and is it necessary to take certain measures to improve these capacities?
The existing public administration has the capacity to implement the chosen option. The competent institutions, in terms of the Draft Law on Digital Property, are the National Bank of Serbia and the Securities Commission. According to the available data, the institutions in question have sufficient capacity to implement the obligations arising from the competencies established by the Draft Law on Digital Property.
Is the chosen option in accordance with applicable regulations, international agreements and adopted public policy documents?
The chosen option is in accordance with applicable regulations and international agreements and therefore, in parallel with this Law, the adoption of the Law on Amendments to the Law on Prevention of Money Laundering and Terrorist Financing is proposed, in order to harmonize this Law with the Law on Digital Property and International standards in this area defined by the FATF recommendations.
Does the chosen option affect the rule of law and security?
The option chosen does not directly affect the rule of law and security. The chosen option does not represent a security risk for the Republic of Serbia. When it comes to distribution book platforms, they rely on the use of information and technology infrastructures, and as such can be exposed to cyber-attacks, infrastructural failures and fraud. In centralized systems, such as the banking system, transaction records are kept by one institution – the bank. In this sense, banks have the role of intermediaries and guarantors of data related to transactions. On the other hand, the technology of distribution book platforms is organized differently because there is no central institution that regulates relations, but there are more participants who share the platform. Transaction records are transparent to all participants in the platform, and several types of transactions can be performed on it that do not require an intermediary. The distribution book model in question can facilitate and speed up market transactions, but at the same time such a model is also exposed to cyber security risks. Digital property, especially those that are decentralized and operate without an established management system and structure, pose particular technological and operational risks. Considering that the application of the distribution book is a new technology, it can still be subject to errors and limitations. In this regard, problems may arise with the management of the platform itself, and digital property trading platforms are often the subject of hacker attacks, fraud and other crimes. Taking into account the above, the regulations governing the area of digital property must protect investors from all potential risks.
What additional measures need to be implemented and how long will it take to implement the chosen option and ensure its subsequent consistent implementation, ie its sustainability?
Due to the regulation of a new system area, it is not possible to currently predict a time frame to ensure consistent implementation or sustainability taking into account the characteristics of a technology industry based on innovation and frequent changes and improvements in product properties. Taking into account the above, sustainability will be ensured by the adoption of appropriate bylaws by the relevant institutions in order to improve the regulatory framework, regulate certain issues and ensure legal certainty for all groups affected by the chosen option.
Information on the performed consultations
Has the support of all key stakeholders and target groups been provided for the implementation of the chosen option? Yes. Stakeholders and target groups had the opportunity to participate in the drafting of the Law on Digital Property through the work of the Working Group for the drafting of the cryptocurrency regulatory framework in the Republic of Serbia and during the public consultation process.
The adoption of this Law is expected by the end of December 2020.
*English translation of this informative article has not been verified nor approved by Stojković Attorneys