New Acts for New Markets…  

The Law on Digital Assets has been in use on the Serbian soil for almost a year. By enacting such legislation Serbia had joined the short list of countries that have decided to regulate crypto assets. The regulation of digital assets at this level is a response to the rapidly growing crypto market and legal uncertainty caused by a lack of regulation, the rapid development of technology and multiple crashes of the crypto market. 

With the adoption of this law, Serbia jumped on the bandwagon of rare states that regulated this area. At the moment there is no unform regulation at the EU level, although the long-awaited Regulation on Markets in Crypto Assets (MiCA) is expected to enter into force. Particular European countries such as Estonia, Malta and Switzerland have set themselves apart as a good legislative environment for crypto assets and blockchain technology. 

There is no doubt that legislative reactions vary around the world, yet they encompass a common goal – to make a new space for crypto regulation and novel concepts. For example, a number of U.S. states enacted laws regulating Decentralized Autonomous Organizations (DAOs) as legal entities with limited liability. 

 Digital assets present an extensive topic. In this blogpost, we are going to examine the white paper concept in relation to Initial Coin Offerings (ICO). 

White Paper and ICO- basic concepts and link

The Law on Digital Assets says that the issuance of digital assets is allowed in Serbia. Generally, there are no bumps on the road. The Law further stipulates that there is a ‘but’ – when it comes to the advertising of the initial offering of digital assets, having a white paper is required. 

Before we start talking about the creation of a white paper, we shall explain some basic concepts in accordance with the Serbian Law. 

The Law regulates the field of digital assets that is marked as a digital representation of value that can be virtually bought, sold, exchanged or transferred and used as a medium of exchange or for investment purposes (it does not apply to digital representations of fiat currencies and other financial assets governed by other laws). The Law uses terms ‘digital’ and ‘virtual’ interchangeably. 

We may further divide digital assets into virtual currency and digital tokens. While virtual currency refers to a type of digital assets that is not issued or guaranteed by a central bank or public authority, and which is used as a medium of exchange between natural and legal persons, a digital token means any intangible property representing in digital form one or more property rights. 

As stated in the beginning of this blogpost, the issuance of digital assets is allowed, regardless of whether a white paper has been made for it and/or approved by the competent authority. In the following article we can see that no initial offering of digital assets without an approved white paper shall be advertised in Serbia, unless it is about: 

• An initial offer addressed to fewer than 20 natural or legal persons; 
• The total number of digital tokens not exceeding 20; 
• The initial offer addressed to buyers/investors who buy/invest in digital assets worth at least € 50,000 on the day of purchase/investment; 
• The total value of digital assets issued by one issuer during a period of 12 months does not exceed € 100,000. 

In all other cases, the ICO is conditioned by the composition of a white paper. The concept of Initial Coin Offering (ICO) is not quite new. The procedure is similar to the concept of Initial Public Offering (IPO) that refers to the public offering of company shares with the purpose to raise capital and transform a closed company to a publicly traded form. ICO is basically a modified IPO tailored to the needs of digital assets and blockchain technology. 

Finally, let’s define the white paper – White paper refers to a document published at the issuance of digital assets in compliance with the Law on Digital Assets, which contains information on the issuer of digital assets, information on the digital assets, and the risks associated with the digital assets. The purpose of the white paper is to allow potential buyers/investors to make an informed investment decision. The Law also defines the concept of a subsequent white paper as a document that is published after the issue of digital assets for which a white paper has not been published.  

Content of the white paper according to the Serbian Law on Digital Assets  

In order for investors to make an informed investment decision, the information provided in the white paper must be concise, understandable and presented in a manner that allows a simple analysis. Data must be accurate and should not mislead in any way.  

Therefore, a white paper should contain: 

• Data about the issuer (including data about the main participants in the design and development of digital assets); 
• A detailed description of the reasons behind the initial offering and the intended use of the funds raised; 
• Data about digital assets offered (including a detailed description of rights and obligations attached to digital assets, data on secondary trading in digital assets, as well as data about the quantity of the digital assets offered, or the method of determining the quantity); 
• A detailed description of the terms of ICO, including a detailed description of all specific terms applying to divergent categories of acquirers, particularly with regard to digital assets obtained by the issuer and the persons related with the issuer, and the success threshold (if any); 
• A description of the risks associated with the issuer, digital assets, ICOs and the implementation of the project relating to those assets; 
• A detailed description of the technical procedures on the basis of which the issuance of digital assets is carried out; 
• A detailed description of the procedures and technologies used to safeguard funds and digital assets raised through ICOs; 
•  A description of the procedures that ensure compliance with obligations relating to anti-money laundering and combating the financing of terrorism (here we should mention the need to comply with Serbian Anti-Money Laundering and Terrorism Financing legislation); 
• Applicable regulations and jurisdiction; and 
• Statements of responsible persons (the issuer, but also independent auditors of the issuer or other person who has assumed responsibility). 

Additionally, it is essential to include a warning regarding the risks associated with purchasing or investing in digital assets. 

The white paper and digital tokens  

 In case a white paper refers to digital tokens as the second type of digital assets, the Serbian Rulebook on the white paper and subsequent white papers related to digital tokens should be taken into account as well. Here we can find more information about the content of a white paper and the required documentation that has to be submitted with the application for approval.  

Hence, a white paper should contain all the mandatory elements as prescribed by the Law on Digital Assets. The Rulebook in question serves to specify more closely each mandatory element. For example, the Law states that the third mandatory element refers to data on digital assets (virtual currency or digital tokens) without explaining it additionally. 

How this element should look like in writing has been explained by this Rulebook (when it comes to the issuance of digital tokens) in six paragraphs. Additionally, the last obligatory element under the Law refers to the statements of responsible persons, and the Rulebook shows us how these statements should be written. 

Content of the white paper according to the European draft MiCA Regulation

Who is obliged to make and publish white paper?  

 MiCA imposes an obligation on issuers of crypto assets to publish a white paper with mandatory disclosure requirements. To avoid administrative burdens, small and medium-sized enterprises are exempt from this requirement in case the total consideration of the offering is less than € 1,000,000 over a period of 12 months or if they are issuers of stablecoins in the amount that is below € 5,000,000.

Why did MiCA lay down the obligation to publish a white paper? 

In order to ensure consumer protection, potential buyers should be informed about basic characteristics, functions and risks of digital assets they intend to purchase. MiCA defines the white paper as an ‘information document’ that should contain accurate and unambiguous data. 

What is the mandatory content and form of the white paper in accordance with Article 5 MiCA? 

The MiCA Regulation sets out a list of obligatory information such a document should contain: 

• A detailed description of the issuer and an overview of the main participants involved in the project’s design and development; 
• A detailed description of the issuer’s project, the type of crypto assets that will be offered, the reasons why these assets will be publicly offered, and their planned use; 
• A detailed description of the characteristics of the offer (especially regarding the amount of crypto assets, the issue price and subscription terms and conditions); 
• A detailed description of the rights and obligations attached to the crypto assets and the procedures and conditions for exercising such rights; 
• Information on the underlying technology and standards applied by the issuer; 
• A detailed description of the risks relating to the issuer, the crypto assets, the offer and the implementation of the project. 

Furthermore, the white paper should contain a statement of liability. Article 5 states how such a statement should look like. Additionally, the white paper should contain a few more concise and unambiguous statements, such as:  

• A statement that crypto assets may lose their value in part or in full; 
• A statement that crypto assets may not always be transferable; 
• A statement that crypto assets may not necessarily be liquid; 
• A statement that digital tokens (if the offer refers to them) may not be exchangeable against the good or service promised in the white paper (especially in the event of the project’s interruption or failure). 

Finally, a white paper should start with a summary which shall in brief and non-technical language provide key information about the offer to the public or the intended admission of crypto assets on a trading platform, as well as particular warnings and essential elements of the crypto assets concerned. The summary serves as an introduction to a white paper that lays down relevant information to help potential purchasers in making an informed decision. 

 Sources:

1. Law on Digital Assets (‘Official Gazette of the Republic of Serbia’ no. 153/2020). 
2. Law on Prevention on Money Laundering and Terrorist Financing (‘Official Gazette of the Republic of Serbia’ no. 113/2017, 91/2019 i 153/2020). 
3. Rulebook on the white paper and subsequent white paper in relation to digital tokens (‘Official Gazette of the Republic of Serbia’ no. 69/2021). 
4. Proposal for a Regulation of the European Parliament and of the Council on Markets in Crypto Assets, and amending Directive (EU) 2019/1937 (SWD (2020) 381 final)