Digital assets and their trading bring with them numerous challenges and risks. Both users and the State Regulatory Authorities are facing them.
Therefore, it was and remains necessary to establish an appropriate legal framework. It shall enable safe and transparent functioning of the digital property (assets) market. Also, it should protect the rights and interests of participants in that market.
One of the keys to this intention is the idea of licenses for digital assets service providers.
These licenses are necessary for all participants who want to enable digital assets trading. Therefore, this article will focus on them in detail, and also on digital assets in general.
In addition, I’m sure that you will find some useful information and advice in this article if you are engaged in or plan to engage in this type of trading.
If all of this sounds interesting to you, keep on reading.
Law on Digital Assets
The Serbian Parliament passed The Law on Digital Assets in December 2020. It entered into force six months later, in June 2021. It is the first law of its kind in the region and one of the first in Europe. It provides a comprehensive and modern framework for crypto regulation and digital assets in general.
The law defines digital assets 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". The law divides it into two types:
- Virtual or crypto currencies; and
- Digital tokens
Virtual currencies (e.g. Bitcoin) are digital assets that have not been issued and whose value is not guaranteed by the National Bank of Serbia or any other state regulatory authority. Also, virtual currencies are not necessarily tied to legal tender. Thereby the Law mentions stable coins. Also, they do not have the legal status of a currency or money.
Digital tokens (e.g. NFTs) are a type of digital asset that contains certain rights/obligations concerning the issuer/third party. They can only be transferred with their consent and cannot be used as a medium of exchange.
Generally speaking, this Law regulates the process of issuance (ICO) and circulation. It regulates service providers related to digital assets.
Cryptocurrency trading in Serbia
Cryptocurrency trading in Serbia is probably something that interests you, if you are reading this. It is the first activity that we must mention when we talk about providing services related to digital assets.
This activity has become more frequent after the adoption of the Law on Digital Assets. It sometimes implies providing services related to digital assets.
From a technical point of view, to trade cryptocurrencies in Serbia, it is necessary to have a crypto wallet. A wallet is a software or hardware device for storing and transferring digital assets. Also, it is necessary to have access to one of the domestic or foreign cryptocurrency exchanges (e.g. Coinbase, Bitpanda, Binance, Kraken, etc.)
Depending on the status of cryptocurrencies, different tax regulations and legal treatments apply. Also, it varies if you are a natural person or a legal entity. Digital assets are subject to taxation in the form of income tax or capital gains tax for natural persons, as well as inheritance tax and gift tax. Corporate income tax and sometimes value-added tax (VAT) apply to legal entities.
There are even countries whose citizens are exempt from paying cryptocurrency taxes.
As you can see, trading cryptocurrencies in Serbia requires a good knowledge of the regulations. In this context, the engagement of expert advisors, such as cryptocurrency law offices is recommended. That is to ensure full compliance with tax and other regulations, as well as effective protection of the rights of cryptocurrency traders.
Licenses (Permits) to Provide Services Related to Digital Assets
The license for the provision of services related to digital assets is issued by the National Bank of Serbia (NBS). The NBS, as a central bank, is responsible for supervising virtual (crypto) currencies.
Without these licenses, it is not possible to provide services related to cryptocurrencies.
On the other hand, the license to provide services related to digital tokens is issued by the Securities Commission.
The next question is: How do you get this license?
First of all, you will need to apply for their issuance to the appropriate supervisory authority. For that, you would need to submit a series of documents about certain persons and your business.
The crypto regulation prescribes the necessary conditions and documentation you will need to submit. These are, among others:
- A series of formal documents
- (e.g. the certificate of registration from the Business Registers Agency, general acts of the incorporated business, as well as its program of activities and a business plan);
- Descriptions of various AML measures. This includes measures to protect users' funds and internal audit measures. Also, it's required to train employees in connection with conducting transactions with virtual currencies, etc;
- Personnel, technical, and organizational data. The data on the members of the management and the manager of the service provider, description of the organizational structure, description of the management system and internal control and audit system, etc.).
Also, you must prove that you have the required minimum basic capital. Minimum monetary or non-monetary amount is prescribed by the Law on Digital Assets. It ranges from EUR 20,000 to EUR 125,000, depending on the services that the legal entity wants to provide.
At least half of the capital must be monetary, while the remaining amount can be non-monetary. An example of non-monetary basic capital is software.
You must also prove that you have not been convicted in the past. Also to prove that no criminal proceedings are being tried against you currently. Finally, you will not be approved if have been convicted for other commercial offense. The reasoning is that this conviction makes you ineligible to provide these services.
The authority decides on the application for a license to provide services related to digital assets within 60 days. The decision will be positive only if all conditions are met. Otherwise, you need to submit an amendment to the application and this deadline is extended.
Suppose you want to know more about this subject. In that case, the website of the NBS Digital Assets Law elaborates even more thoroughly. It provides a complete overview of the crypto regulations. It provides a list of indicators for recognizing suspicious behavior concerning AML/TF. that may in a certain situation related to the provision of services related to digital assets.
Services related to digital assets that require permission
There are nine services related to digital assets that require a license to provide them. These services include:
- Receiving, transferring, and executing orders for the purchase and sale of digital assets for the account of third parties,
- Purchasing and selling digital assets for cash, account funds, and/or electronic money.
- Exchange of one digital asset for another,
- Storage and administration of digital assets (including related services) on behalf of users,
- Related to the issuance, offer, and sale of digital assets, with or without the obligation to purchase (sponsorship) (agency),
- Keeping a register of liens on digital assets,
- Acceptance/transfer of digital assets,
- Digital asset portfolio management,
- Organization of platforms for trading digital assets.
The enumerated services can be provided exclusively by legal entities (most often LLCs and LTDs/PLCs). Providing of any other services from this list for which the legal entity has not been granted a license is strictly prohibited.
Now, let's thoroughly examine the services under the numbers 7) and 8). Precisely, to explain the problems related to them, which already appeared in practice.
a) Transfer acceptance services (crypto retail payment)
Crypto retail payment services deserve special attention. There are a lot of ambiguities surrounding them.
It is clear that the minimum capital of the company required for obtaining a license is prescribed and it is EUR 50,000.00 in dinar equivalent. This also applies to portfolio management licenses.
The main problem that occurs is the process known as KYC (Know Your Customer). This process refers to the identification and verification of users. It is an obligation mandated by NBS.
NBS requires that crypto-payment service providers know the identity of each payer. This can be physically unfeasible. Small transactions such as payments in restaurants are nearly impossible to trace.
Figuratively speaking, in the B2C context, this would mean that the provider of each crypto payment terminal must have a person physically present in each restaurant where crypto payments are enabled. This person's duty would be to collect the ID of each payer and perform the KYC process.
For now, there is a proposal not to impose such strict KYC standards on transactions below approximately €500. This would facilitate the provision of crypto-payment services in these circumstances. However, this idea is currently only in the realm of discussion because the NBS is currently too rigid in its rules and interpretations of AML (Anti-Money Laundering) regulations.
b) Digital asset portfolio management services
Another service worth highlighting is digital asset portfolio management services. Here we'll explain why.
First, let's clarify what is a digital asset portfolio. A digital asset portfolio is a collection of digital assets in which one invests one’s funds.
This is a service for managing portfolios of digital assets on behalf of investors. It is similar to portfolio management of securities. It is based on approval from a client. It is a special contractual relationship with the digital asset user.
The provider must collect all the necessary information about the knowledge and experience of the user. The information refers to the investment area, financial situation, as well as his financial goals. This is important for a certain type of digital assets/services. Based on this information, the provider makes a recommendation for investment, trading, or other appropriate services related to digital assets.
Regarding these services, there are a couple of problematic items:
For one, the bylaws are set to drastically limit the number of persons who can manage providers of services related to digital assets. For example, one of the requirements for managers is at least 3 years of experience in a management position of a body whose activity is similar to the work related to the provision of services related to digital assets.
In practice, this would mean that very few portfolio managers could perform this role. This is due to the fact that digital assets in Serbia has recently been completely unregulated and that these restrictions are inconsistent with that fact.
Another problem also relates to providers of digital asset portfolio management services. Many portfolio managers disguise as investment advisors. Especially those who release e.g. newsletters/tips with a goal of obtaining funds from other people to manage their portfolio.
Namely, to manage other people's cryptocurrencies and tokens, a license is necessary. Unfortunately, this is not the case with many who trade in Serbia with other people's funds. In other words, this type of trading is illegal and sanctions are provided by law. Violators (providers) would be fined and compelled to obtain the appropriate license.
Exception: investment consulting, advising, and education, do not require a license. Consultants only have to inform customers that they are operating without a license. It is mandatory to post this information on their website.
Anti-money laundering (AML) related to cryptocurrencies
Provisions regarding the prevention of money laundering represent a significant part of the Law on Digital Assets. Together with the Law on AML, it plays an important role in defining the obligations of service providers related to digital assets.
Therefore, a service provider that wants to obtain a license to provide services related to digital assets must submit a description of the internal control measures established to fulfill the obligations prescribed by regulation on preventing money laundering and terrorist financing, along with the license application.
If these measures are not met, the authority will reject the license application.
Furthermore, neither a member of the board nor a manager of a provider of services related to digital assets can be convicted on charges of money laundering or terrorist financing. Apart from them, persons with qualified participation in the provider of services related to digital assets may not perform business and other activities related to this money laundering or financing of terrorism.
In addition, the service provider must also:
- refuse the execution of any order contrary to the regulations on preventing money laundering/terrorist financing,
- electronically store data on completed transactions with digital assets, including data prescribed by the Law on the prevention of money laundering and financing of terrorism, for a minimum of 10 years,
- establish, maintain, and improve internal control systems that are effective and efficient in identifying, measuring, monitoring, and managing the risks of money laundering and terrorist financing.
Finally, the most important provisions of the Law are that digital assets should be treated as property or value per anti-money laundering and anti-terrorist financing (AML) regulations.
Why?
It’s because the providers of services related to digital assets are, in the widest possible way, obliged to act under the regulations that regulate these issues, that is, the guidelines that apply to traditional financial institutions. This obligation also applies when the service provider wants to provide these services in a foreign country.
Also, taking actions and measures to prevent and detect money laundering and terrorist financing is part of that obligation. Among these actions is the obligation of the service provider to establish a business relationship with each user of digital assets, as well as to determine and regularly verify his identity (KYC) under the appropriate legal procedure in the field of prevention of money laundering and terrorist financing.
Failure to comply with these regulations leads to the revocation of the license to provide services related to digital assets by the supervisory authority.
Crypto exchanges in Serbia
Crypto exchanges are platforms that allow owners of cryptocurrencies to buy, sell, and exchange cryptocurrencies for other cryptocurrencies or traditional fiat currencies.
These are, therefore, platforms such as Coinbase or Binance, which can be centralized (have a central authority that manages transactions) and decentralized (rely on distributed networks and smart contracts to perform transactions).
The centralized ones require registration and verification of the user's identity, while the decentralized ones do not, ie. enable direct exchange between users without intermediaries. (eg Uniswap). Control and audit of decentralized ones is still an enigma.
If we are already going to mention crypto exchanges in Serbia, you will surely come across two in your browser: ECD and Crypto12.
They enable the purchase and sale of cryptocurrencies for dinars or other cryptocurrencies, as well as their storage for users. Also, they have their own cryptocurrencies, i.e. machines like ATMs where cryptocurrencies can be bought or sold.
Crypto machines
Given that we mentioned them in the previous section, we will say a few words about „cryptomat“.
A cryptomat (crypto ATM) is an automated machine that enables transactions. In other words, buying and selling digital assets in exchange for funds or exchanging one digital asset for another.
a href="https://attorney.rs/en/cryptomats-crypto-atms-in-serbia/" target="_self">In Serbia, they can be used to provide services for buying and selling digital assets for cash and/or electronic money, as well as account funds. Also, they can be used to provide services of exchanging one digital asset for another.
Cryptocurrency lawyer in Serbia
Do you have any other questions about licenses to provide services related to digital assets or any other related issues? Feel free to contact us via email [email protected]
