Serbia – Crypto Assets Law and its opportunities

When it comes to conducting your Token Offering, one of the very first things which comes to mind is apparently regulation. It definitely deserves attention, since the regulatory aspect can be a deal breaker. Therefore, it is of outmost importance to choose juriscdiction for your Token Offering wisely, so to make sure that you have taken all advantages of certain regulatory regime. Therefore, let us get to know one of the most friendly jurisdictions for crypto assets – Serbia which besides favorable regulatory regime has a myriad of gifted people working in Web3 space.
The National Assembly of the Republic of Serbia passed the Crypto Assets Law (Law) in December 2020. Due to the novelty of the subject, the Law took into force on June 2021. The main areas regulated by the Law are: issuance of crypto assets, secondary trading of crypto assets as well as provision of services related to crypto assets.
The Law makes a clear difference between virtual currency (cryptocurrency) which is defined as a type of crypto asset that is not issued and which value is not guaranteed by the central bank or other public authority, which is not necessarily tied to the legal tender and has no legal status of money or currency, but is accepted by natural or legal persons as a medium of exchange. Perfect examples of virtual currencies according to the Law would be Bitcoin, Litecoin, Monero etc. On the other side, Law defines digital tokens as a type of crypto assets representing any intangible property right which in digital form represents one or more other rights, which may include the right of the digital token holder to be provided with certain services.
What this means is that basically any tangible or intangible right can be incorporated into digital tokens which will be subject of this article. What is important to mention for every potential token issuer is that Law does not make a clear difference between security tokens and utility tokens as two most important token types, nor it stipulates different types of tokens, but rather gives a broad definition of digital tokens. But, before diving into regulatory differences, let us firstly make a short introduction to digital tokens explaining what is so interesting and unique about them. 
Features of digital tokens
Digital tokens, by their economic nature, are multifunctional business instruments that create new sources and forms of value, unlike existing single-purpose financial instruments and money instruments. The token is a native instrument of digital platforms business models that are developed on open source technological solutions (Web3), as well as an instrument used to innovate Web2 business models.
The common feature of all types of tokens is that they are generally transferable in a direct exchange between buyer and seller (peer to peer) and that the issuer provides guarantees to the holder of the token, unlike virtual currencies where such guarantees do not exist (e.g. Bitcoin has no issuer, nor anyone guarantees its value). Distributed ledger and blockchain technology on which tokens are issued allow one tokenized instrument to be multi-purpose at the same time, being:
financing and/or investment instrument (may give the right to interest, part of income or profit);
a consumption instrument used to exchange for goods and services;
capital gain as an outcome of the difference between purchase and sale price;
incentive instrument for holding token in the form of interest (for example staking which does not represent solely investment mechanism, but also mechanism for enabling security and transaction verification as well);
governing instrument giving token holders right to participate in decision-making process by giving proposals and voting;
reward or incentive instrument for the token holder's activity or behavior (new value for consumers).
This basically means that a company can issue digital tokens in order to raise capital for its business operations without giving away equity or creating typical debt obligation. Instead of that investors can get compensated by receiving interest on their tokens (both in FIAT and in crypto) and/or having right to participate in part of income or profit. Besides that, investors in token can be rewarded for their engagement or for certain activities (which are beneficial both for the issuer and for the token holders) or to be incentivised for holding tokens for example in the form of staking which enables security and transaction verification to the network.
Now, when we are more familiar with tokens as new multi-functional instruments, let us try to make a regulatory difference between utility tokens and security tokens.
Security tokens
 It is important to mention that Law stipulates principle of technological neutrality meaning that the provisions of Law shall apply regardless of the technology being used when issuing and trading crypto assets. 
As mentioned, the Law does not define what security tokens are. Instead, the Law stipulates that issuance and secondary trading of crypto assets that have all the characteristics of a financial instrument shall be regulated by the Capital Market Act (CMA). As an exception, CMA shall not apply if all the following conditions are met:
1) crypto assets do not have the characteristics of public company shares;
2) crypto assets are not exchangeable for public company shares;
3) the total value of crypto assets issued by one issuer during a period of 12 months does not exceed the amount of EUR 3,000,000.
This basically means that any kind of financial instruments such as bonds, options, derivatives enlisted in CMA can be incorporated in digital tokens if aforementioned provisions are met. Also, the Law explicitly states that the CMA shall apply only if crypto assets have all the characteristics of financial instrument which is a pretty unclear provision. If we take a look into a CMA there is no such thing as definition of all the characteristics of a financial instrument. Hence, there is only enumeration of financial instruments not mentioning tokens or crypto assets at all. This regulatory position has been borrowed from MiFID 2.
What we are trying to say is that tokenization as a new concept in digital economy opens up possibilities of creating new financial products which are not recognized as financial instruments by Serbian CMA. 
Why is this important? Because if we take other jurisdictions for example USA, we can see that standard for securities is much more strict. Namely, Howey test (fun fact is that Howey test originates from 1946) prescribes that every investment agreement fullfiling following conditions is considered a security:
(1) an investment of money;
(2) in a common enterprise;
(3) with the expectation of profit and 
(4) to be derived from the efforts of others.
We can see that Howey test prescribes very broad conditions for securities meaning that a large circle of investments can be considered security having a consequence that issuer of securities is obliged to be SEC compliant. Contrary, the Law gives an opportunity for token issuers to take advantage of a legal loophole and to issue a tokens essentially being new financial products adapted to digital economy. In this way a regulatory sandbox for tokenization of financial instruments in Serbia has been created.
Utility tokens
On the other side, the Law does not impose any specific regulatory regime on issuing and trading utility tokens. This basically means that utility tokens which present a right of its owner to demand some kind of a service from its issuer or to acquire a certain good can be issued without any specific restrictions such as a treshold of 3.000.000 EUR etc. 
What is also important is that Law provides another significant exemption by which Law shall not apply to transactions with crypto assets if those transactions are made exclusively within a limited network of persons accepting those crypto assets (e.g. using crypto assets for certain products or services as a form of loyalty or reward, without the possibility of transferring them). This basically means that tokenization within a closed ecosystem is possible without application of the Law.
What issuers of crypto assets need to know
In accordance with definitions and competencies prescribed by the Law, the first question that a potential issuer of crypto assets should ask itself is whether the crypto asset it plans to issue is a virtual currency or a digital token. It is important to note that the issuer's decision that a certain crypto asset is a virtual currency or a digital token has no significance, rather its nature is determined in accordance with the characteristics of a particular crypto asset. 
After a decision was made to issue digital token, the second question arises and that is whether digital token has characteristics of a financial instrument listed in the CMA. If the digital token does not have the characteristics of a financial instrument, only the provisions of the Law (not CMA) will apply to its issuance, which represents a huge relief in terms of the issuance procedure.
Practically speaking, this means that issuers only need to comply with obligations prescribed by the Law, which are significantly simpler than those prescribed by the CMA. It is also good that issuers can be creative when structuring digital token, bearing in mind that the Law does not prescribe mandatory features of digital tokens.
Please, keep in mind that this exemption applies only in case digital tokens have all characteristics of financial instruments according to CMA (which has been thoroughly analyzed in part Security tokens). In other words, it means that any issuer is allowed to issue utility or other tokens (not security tokens) in an amount exceeding 3,000,000 EUR. 
Given the innovative nature of a token as an instrument, it is reasonably possible to be creative while structuring a token in a way that contains different elements such as profit participation, means of payment, voting, etc. By not containing all elements of a certain financial instrument prescribed in the CMA, a digital token effectively should not be considered a financial instrument.
It is also important to know that financial instruments cannot currently be issued in the form of digital tokens due to the fact that blockchain technology implies that several persons (nodes) participate in the processing of transactions and maintaining the registry, and the CMA prescribes that these tasks can only be performed by the Central Registry. In other words, it is currently not possible to issue digital tokens that are also financial instruments using blockchain technology (except in accordance with the exception described in part Security tokens).
White Paper
The Law prescribes that White Paper is not mandatory for issuing crypto assets. In essence, White Paper is required only in a case when issuer wants to advertise the issuing of crypto assets in the Republic of Serbia. However, there is an exemption from this rule. Namely, the issuer may advertise an initial offer of crypto assets for which a White Paper has not been approved in the following alternative cases:
1) the initial bid was sent to less than 20 natural and/or legal entities;
2) the total number of digital tokens issued is not more than 20;
3) the initial offer is sent to buyers/ investors who buy/invest in crypto assets in the amount of at least 50,000 EUR;
4) the total value of crypto assets issued by one issuer during a period of 12 months is less than 100,000 EUR.
Bear in mind, that only one of the aforementioned conditions needs to be fullfiled, not all of them. The publication of White Paper that is not approved in accordance with the Law is allowed provided that during its publication and during the initial offer of crypto assets, it is clearly stated that the White Paper is not approved.
Secondary trading of crypto assets
After an initial digital token offering has been completed successfully, the question is how investors can further trade issued crypto assets. Secondary circulation of crypto assets that have been issued in Serbia and abroad is allowed. In principle, there are 2 possibilities for secondary trading of crypto assets:
OTC trading, which implies that transactions are performed directly between the seller and the buyer of crypto assets;
Through crypto asset service providers. There are currently 2 licensed providers in Serbia on which platforms digital tokens can be listed.
After pointing out all the advantages of the Serbian crypto regulatory framework, we hope that readers will put Serbia on their radar when it comes to conducting innovative tokenization projects because Serbia offers not only empowering crypto regulation, but Serbia is the fifth country globally in terms of blockchain developers per capita, thus being a competitive location for global crypto and tokenization projects.
Bogdan Vujović
Legal Advisor & Brand Ambassador at Crypto12