When the Law on Digital Assets was enacted, Serbia became a pioneer in regulating the field of cryptocurrencies, digital tokens (e.g., NFTs), and Initial Coin Offerings (ICOs).
New regulations guarantee legal certainty to all investors in the crypto world. Startups can apply clear rules to avoid the fate of Ripple and the XRP cryptocurrency. XRP was embroiled in a lengthy legal battle with the U.S. Securities and Exchange Commission (SEC).
While the lack of regulation might sometimes seem like an advantage, this example has demonstrated that it does not apply to serious crypto projects and startups that invest substantial resources in their ideas.
Beyond startups, the law regulates crypto entrepreneurs and companies, both domestic and foreign.
Therefore, Law Office Pekić will use a series of blogs to highlight the significance of this topic. This will show how this industry can aid all entities in the development of their businesses.
1. What is ICO (initial coin offering)?
ICO, short for Initial Coin Offering, is a term coined for the initial offering of digital assets. It represents the process of fundraising through the issuance of new digital tokens.
In practice, ICO is a novel, alternative method of raising capital for companies in the early stages of business (i.e., startups), as well as for banks. This form of fundraising has become particularly significant in the crypto industry. It encompasses popular concepts such as NFTs (non-fungible tokens) and various cryptocurrencies.
ICO emerged as a counterpart to IPO (Initial Public Offering). IPO is the initiation of issuing shares of public companies on the stock market.
It's important to note that the process of an initial public offering is more complex than that of the initial offering of digital assets, i.e., ICO. ICO fundraising is often less formal and more accessible. This is logical because an initial public offering involves issuing shares of a company, which are securities.
By issuing digital tokens, shares in the corporate entity are not issued. Moreover, ownership of the token does not imply ownership of the corporate entity with the right to dividends, as shares do. This is where the distinction between tokens and shares lies.
Often, buyers of such digital tokens gain the right to specific services from the token issuer (known as a 'utility' token). Tokens can also entail other monetary rights.
2. ICO, Law on Digital Assets, and Whitepaper
As mentioned, with the enactment of the Law on Digital Assets in 2021, the issuance of digital assets, i.e., the initial offering of digital tokens, became permissible in Serbia.
In this process, the whitepaper plays a crucial role as a document that extensively describes the project, technology, team, economic aspects, and legal conditions related to the ICO.
However, in certain cases, an issuer may advertise an ICO even without an approved whitepaper.
For instance, if the initial offering targets fewer than 20 individuals and/or legal entities, a whitepaper may not be required.
Additionally, if the total number of digital tokens issued is not greater than 20, the issuer can bypass the obligation of a whitepaper.
If the initial offering is directed towards buyers/investors who invest at least 50,000 euros in the equivalent Serbian dinar value, it may be considered that these investors have sufficient funds and experience to assess risks. In such a case, the whitepaper may be optional.
Finally, if the total value of digital assets issued by an issuer during 12 months does not exceed 100.000,00 euros, the issuer may be exempted from the obligation to submit a whitepaper.
In cases where a whitepaper is attached to an ICO, it:
- must comply with the Law and the issuer's decision on issuing digital assets
- must be submitted by an authorized person
- must be complete, understandable, and contain truthful and accurate information relevant to investors.
Alongside the whitepaper and the request for approval of its publication, the supervisory authority must be provided with appropriate additional documentation according to Article 22 of the Law.
3. Advantages of ICO Funding and Issuing Digital Tokens
The benefits of ICO funding become evident when you are faced with the challenge of enhancing your business, but you lack the initial capital and prefer not to rely on traditional methods such as bank loans.
In other words, you have an idea to improve your business, you have a plan, and you are confident in its success, but you lack the funds.
This is where the concept of tokenization comes into play, revolutionizing the way funds are raised for innovative projects.
Issuing digital tokens emerges as an alternative means of financing your business and a solution to your problems. Here's why this method of fundraising is sometimes superior to traditional approaches.
When you take a loan from a bank, you:
- Pay high interest rates,
- Incur loan processing costs,
- Bear the risk of currency exchange rate fluctuations,
- Gather numerous documents,
- Pledge your real estate,
- Sign promissory notes, administrative restrictions, and all other possible forms of security.
All of this is done so that, in the end, you repay much more money than you initially borrowed during the loan period.
Instead of taking a loan from a bank, you can issue a digital token. The token provides financial benefits or rights to some services to the token buyers.
For example, if you have a project in mind, you can finance that development by issuing a digital token. It can be acquiring a machine to improve your business or expedite development.
The content of the token represents the right of its holder (buyer) to demand a certain amount of money or services from you. Often, it involves the use of your product in exchange for tokens at a more favorable price.
Your clients, who trust in your work, reputation, and business, can buy the token. Thereby, they directly support you and realize the rights associated with the token. Instead of the bank profiting from your innovative business venture, you eliminate the intermediary. Such benefits become accessible only to your most loyal clients who have been with you from the beginning (early adopters).
In summary, ICO provides an innovative approach to financing, freeing you from traditional constraints and enabling direct support from your community. This model not only eliminates the complexity of bank loans but also emphasizes the importance of building trust and loyalty among your clients.
4. Buyers of Digital Tokens and Tokenization
1. Gamers and Digital Tokens
As a concrete example of digital token buyers in practice, the startup GameCredits from the gaming industry and their digital token MGO can be cited.
In this case, buyers of the digital token were offered the following rights:
1) Discount when purchasing in-game content,
2) Free entry to VIP tournaments with cash prizes payable outside the game,
3) Private testing of new games in the store of the same issuer.
This startup is narrowly focused on the gaming industry as a specific niche.
In this scenario, for individuals highly interested in these games, purchasing the offered digital token brings exceptional value due to the rights it provides.
For someone who is not very interested in the games the startup offers, these tokens will have no value.
2. Artists and Collectors and Digital Tokens
Digital tokens are also purchased by individuals who want to support artists and collectors in creating valuable works in digital form.
Typically, in these niches, buyers expect their value to increase over time. Artwork is often rare, and unique. It is sought after due to its association with popular or influential artists.
Furthermore, buyers get to be part of an exclusive offering and community. They can publicly showcase their digital collection, and, in some cases, trade with it.
Here, of course, we are referring to NFTs (Non-Fungible Tokens).
3. Sports and Digital Tokens
Digital tokens are extensively utilized for creating and purchasing sports-related content, such as matches, behind-the-scenes footage, interviews, fan art, memorabilia, and more.
In addition to these benefits for buyers, digital tokens also offer advantages for athletes, as well as their clubs and leagues.
Primarily, in this niche, digital tokens serve as a means to increase earnings, connect with fans, and boost popularity.
4. Banks and Digital Tokens
Banks purchase regulated and recognized digital tokens from competent authorities when they seek to diversify their portfolio, such as when investing in various companies and projects utilizing blockchain technology and crypto assets.
Additionally, banks acquire digital tokens when aiming to enhance their services and products, such as payments, transfers, trading, lending, etc. The Law on Digital Assets of Serbia regulates this matter.
Digital tokens offer banks advantages like speed, security,
5. Real Estate and Digital Tokens
Tokenizing real estate involves the process of converting property rights into digital tokens. Tokens can be bought, sold, exchanged, or stored on blockchain platforms.
This process brings the same benefits to the real estate sector as it does to the banking sector.
For instance, in Slovenia, one of the first cases of real estate tokenization was the Blocksquare project. It initiated a platform for issuing, managing, and trading tokens representing shares in real estate.
A similar project could realistically thrive in Serbia as well. That is because Serbian laws share many similarities with the legislation in Slovenia.
6. Streaming Platforms, Stores, and Digital Tokens
Suppose you have an idea for a website where video clips or movies are shared (similar to Netflix), and you need initial capital. In that case, you can issue digital tokens, allowing buyers to have the right to 10 hours of watching the released video content (movies) with each token.
Alternatively, consider opening a laundromat with 10 washing machines. Buyers of tokens could then have the right to use laundry services for a specific unit of measure with each token.
For example, 1 token equals 10 laundry baskets, where the basket size is predetermined, or a permanent 20% discount for token owners.
Certainly, these examples represent significant simplifications, but they are necessary for a genuine understanding of the possibilities of using this form of financing.
On the other hand, the specific profitability of purchasing tokens depends on several factors.
In any case, issuing tokens will be more beneficial for innovative activities (start-ups), primarily due to the growth potential of such companies.
Note: What is crucial is that a digital token issued in accordance with the laws of the Republic of Serbia can be sold to anyone worldwide. Tokens are issued on the blockchain, so the buyer doesn't need to be from Serbia, as tokens are sold online to anyone.
Lawyer for Cryptocurrencies in Serbia
ICO financing through cryptocurrencies and digital tokens represents a revolutionary approach to capital. It's providing entrepreneurs and startups with the opportunity to realize their innovative ideas.
To ensure legal certainty, entities considering ICO must carefully monitor the regulations. Also, it is wise to consult an attorney for cryptocurrencies in Serbia.
This blog is for informational purposes only and does not constitute legal service, as each situation requires a commitment to the specific circumstances of an individual case, which may be different from others.
For tailored legal assistance, contact the Law Office Pekić at: [email protected]
Author: Attorney at Law Stefan Pekić
