Digital assets. A somewhat contradictory notion, but for a short period of time, the digital assets managed to put to question the millennial legal perception of assets as something purely material. And that would not be so interesting if it were not for the digital assets’ ability to financially transform into money. Mining and cryptocurrencies have been filling newspaper columns for years now and the first thing that catches the eye is their monetary value. Behind these terms is a legally unregulated business creating a significant fortune for individuals who, as simple as it gets, just sit in front of a computer. As expected, it caught the eye of the regulators. There are two reasons for that – eliminating legal uncertainty and taxation, of course. As a result – the Act on Digital Assets was passed.
The new Act on Digital Assets (the Act) has come into force on December 29, 2020. However, its application has been postponed for 6 months. Obviously, this was done for the reasons of making of bylaws and instructions, preparation of supervisory bodies, as well as of the subjects to which the Act shall be applicable. In a nutshell, the Act introduces the digital assets’ market, enables the use thereof in legal transactions, but also creates a legal basis for taxation under tax laws.
Under the Act, digital or virtual assets is a recording of a value, which may be bought, sold, exchanged, or used for investment. It introduces the principle of technological neutrality, under which the Act applies to any form of digital assets, irrespective of the technology on which it is based. The purpose is for the Act to be applied comprehensively. However, digital recordings of legal means of payment (such as the prospect of digital euro), do not fall to the notion of digital assets.
Both domestic and foreign natural and legal persons, as well as entrepreneurs, can do business services related to digital assets. The supervision over the application but also passing of bylaws has been conferred to the National Bank of Serbia and to the Securities Commission.
The Act introduces primary (issuing of digital assets) and the secondary market i.e. trading with digital assets. In that context, the Act resembles the Capital Markets Act. Like the prospectus, when issuing digital assets there is a so-called White Paper, a document the issuer must publish before issuing the digital assets. Like the prospectus, the reason for issuing the White Paper is informing the owners or users, of the issuer, digital assets, and related risks, so as to reach the right financial decision on investing in the digital assets. Issuing of the initial offer is possible even without the White Paper, but only exceptionally and in cases specifically set under the Act. Trading on the secondary market is available via platform, OTC, or via so-called smart contracts.
As it can be realized so far, transparency toward users and supervisory bodies is one of the Act’s principal rules when doing business with digital assets. In that context, companies doing business with digital assets must not bring users or potential users into delusion over digital assets, whether through marketing or by providing inadequate information.
Since the Act introduces a unique financial market of digital assets, it consequently brings rules on the prohibition of insider dealing and prevention of money laundering and financing of terrorism.
It is interesting to note that the Act allows establishing collaterals and fiduciary rights over digital assets. This is one of the first of the more recent laws explicitly regulating fiduciary, for which there is a decades’ long legal debate on its permissibility.
As to cryptocurrencies, the Act defines them as currencies not aligned with a central bank, but that natural and legal persons are those who may exclusively accept them as means of exchange. The awareness on its financial volatility (first in line are cryptocurrencies) has brought a legal prohibition on financial institutions supervised by the National Bank of Serbia to provide any services related to digital assets, nor they may have them in their portfolio etc. The exception was made to banks, which can provide services related to the safekeeping of crypto keys[1]. The prohibition on financial institutions to accept digital assets as means of collateral has been specifically emphasized, thus limiting the possibility of pledges over digital assets to be used as means of securing credit.
As to mining of cryptocurrencies, which increasingly draws the attention of the “digital” community, the Act sets that it is allowed, but it left it out of its scope. Somewhat a specific legal solution, as many legal systems forbid mining of cryptocurrencies.
As to taxation, the Act has set up legal basis for taxation under respective tax laws. Almost immediately with the passing of the Act, the digital assets became subject to rules on capital gains and losses from the Personal Income Tax Act and Income Tax Act and were also subjected to taxation regarding inheritance and gifts. The lucrative cryptocurrency business in Serbia has got its legal framework. The necessity of such law is clear – the financial aspect of digital assets’ trading has become visible, and more and more participants getting involved in this market required legal regulation, principally for protecting the money market and the stability of the financial system. But the lawmaker went beyond that, in a desire to develop a regulated market for the digital assets. The actual application of the Act and its effects in practice is yet to be seen.
Authors: Miodrag Jevtić, Mina Kuzminac and Teodora Ristić
[1] Crypto keys serve for access to crypto ATMs, the machines enabling the exchange of digital assets for money, or of digital assets for other digital assets.
