When it comes to conducting your Token Offering, one of the very first things which comes to mind is apparently not regulation. But, 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, lets 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 and secondary trading of crypto assets and provision of services related to crypto assets.
The Law makes 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. On the other side, Law defines digital tokens as a type of crypto asset meaning any intangible property right which in digital form represents one or more other property rights, which may include the right of the user of the digital token to be provided with certain services.
What this means is that basically any tangible or intangible right can be incorporated into a digital token. 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, but rather gives a broad definition of digital tokens. So let us try to make a regulatory difference between utility tokens and security tokens.
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 Law on capital market. There are 2 important things to remark here. First is that the Law on capital market shall not apply if all the following conditions are met:
1) crypto assets do not have the characteristics of shares;
2) crypto assets are not exchangeable for 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 mentioned in Law on capital market can be incorporated in digital tokens if aforementioned provisions are met. Another is that Law explicitly states that the Law on capital market shall apply only if crypto assets have all the characteristics of a financial instrument which is a pretty unclear provision. If we take a look into a Law on capital market 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.
What we are trying to say is that tokenization as a new economy and concept opens up possibilities of creating new financial products which are not recognized as financial instruments by Serbian Law on capital market. In addition, clearing and settlement of financial instruments must be done through Central Securities Depository and Clearing House which is not an option due to the fact that Serbian Central Securities Depository and Clearing House does not have technical capacity to support token transactions on blockchain.
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 a security meaning that a huge circle of investments can be considered a security having a consequence that issuer of securities is obliged to be SEC compliant. Contrary, 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.
On the other side, the Law does not impose any specific regulatory regime on issuing and trading of 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 can be issued without any specific restrictions. What is also important is that Law provides another significant exemption by which Law does not apply to transactions with crypto assets if those transactions are made exclusively within a limited network of persons accepting those crypto assets (eg using crypto assets for certain products or services as a form of loyalty or reward, without the possibility of transferring them or sales). This basically means that tokenization of a closed ecosystem is possible without application of the Law.
The Law prescribes that White Paper is not mandatory for issuing of 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 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.
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.
We hope that after reading this article, readers will be able to comprehend why Serbia offers great opportunities when it comes to developing and issuing crypto assets and that besides great engineers Serbia has a progressive regulatory box as well.
Token Specialist & Legal Officer