Croatia: (Crypto)tokens And Initial Coin Offerings - Croatian Legal Framework

An ICO or Initial Coin Offering is a new disruptive crowdfunding mechanism where a backer of a project founded on a blockchain technology receives an underlying token as opposed to "regular" crowdfunding or an IPO where the backer receives a product or a security. Funding is mostly made in the form of other tokens (eg bitcoin or ether).

Thus far in 2017, ICOs have raised more than USD 2 billion worldwide, whilst in June 2017 they had surpassed angel and early venture capital funding for internet companies. Such a rise is mostly due to lack of regulatory constraints, which allows for easy access to worldwide capital as well as avoidance of high initial costs. In addition, tokens are highly liquid, which makes them appealing for speculators.

Compared to Croatian start-ups, which in 2016 managed to collect only HRK 2.3 million via crowdfunding as against HRK 5.3 million in 2015, and whereby only 12 of 49 initiated projects have been able to collect the envisaged amount, ICOs may provide a way for necessary capital injections to Croatian start-ups which cannot access venture capital.

ICOs currently work in a grey area and most jurisdictions have no specially implemented regulation. Until such regulations are adopted, the existing law may apply to them. In this regard, the US Securities and Exchange Commission found that tokens offered and sold by a "virtual" organisation known as The DAO (digital decentralised autonomous organisation and a form of investor-directed venture capital fund) were securities and therefore subject to the federal securities laws.

Accordingly, certain ICOs as well trading with certain tokens may fall under the provisions of the Croatian Capital Markets Act (Zakon o tr~iatu kapitala; "CMA"). This would primarily depend on the structure of an ICO or token, ie whether the token would represent certain types of assets or rights (eg equity, securitised debt, etc), and hence be a financial instrument. Accordingly, entities trading or intermediating with such tokens would need to obtain a necessary licence from the Croatian Financial Services Supervisory Agency (HANFA) or the Croatian National Bank ("CNB").

Moreover, pursuant to the CMA (which transposes the Prospectus directive), issuers of securities, as risky assets, are usually obliged to issue a prospectus in order to protect inexperienced investors. The prospectus must be approved by HANFA. Therefore, legal entity issuing tokens – which would represent a security – via ICO would have to issue prospectus, unless one of the exemptions prescribed by the CMA applies. In this regard, there is no prospectus obligation when the value of the offered securities is less than EUR 5 million in HRK, which considering the amount of funds usually collected by Croatian start-ups via crowdfunding, seems like a sizeable threshold. 

(Crypto)Tokens

What are (crypto)tokens? They are basically entries in a ledger, ie blockchain (blocks of digitally stored information that are cryptographically secured and linked in a chain), which may be accessed via a private key and reassigned to someone else by making a new entry in a ledger. Depending on the type of blockchain project, their underlying functionality may be to represent assets or rights, either on-chain (eg rights to use blockchain, rights to vote on blockchain, etc) or off-chain (eg proprietary ownership, equity rights, etc).

These tokens may thus be viewed as a commodity or an asset (basically IOUs), or as a security or financial instrument, provided there is legal acknowledgement. Each of these tokens may also become (crypto)currency if the social circle that accepts it as a (contractual) means of payment becomes large enough.

Besides a couple of opinions of the CNB on the status of bitcoin, the Croatian Government and regulators have no official position on the status of tokens or ICOs. Nevertheless, in 2013 the CNB announced that it will follow EU regulations regarding bitcoin, according to which the use of bitcoin does not violate any EU regulation. Then in June 2014, the CNB stated in a letter to the Croatian Tax Administration that bitcoin does not fall within any regulated category of means of payment, because according to the Croatian National Bank Act (Zakon o hrvatskoj narodnoj banci) and Foreign Exchange Act (Zakon o deviznom poslovanju) it does not constitute money, means of payment, foreign currency or foreign means of payment. It also stated that as the value of bitcoin does not reflect the value of (fiat) money which was received for it (ie it is not backed), it cannot be considered electronic money.

There are also several opinions of the Croatian Tax Administration regarding the treatment of bitcoin. The most recent of these refers to the conclusions from the ECJ's judgment in case C-264/14 regarding the VAT treatment of bitcoin, according to which bitcoin, being accepted by parties to a transaction, is considered a contractual means of payment as an alternative to legal tender. It was also concluded that bitcoin may not be considered tangible property, as its sole purpose is to serve as a means of payment, and that it neither represents security conferring a property right nor a security of a comparable nature.

On the basis of the ECJ's judgment and for the purpose of tax collection, the Croatian Tax Administration concluded that bitcoin is equivalent to a money-market instrument (type of financial asset) and that tax should be paid on revenues stemming from bitcoin trading. It is safe to assume, however, that this conclusion is a result of the Tax Administration wanting to forcefully subsume bitcoin under one of the expressly stipulated types of financial assets, which is both unnecessary and mistaken. In any case, the Tax Administration's conclusion should not be used for future interpretations of the legal status of bitcoin or any other token.  

A brief overview of the Croatian legal framework for tokens and ICOs is provided below. 

Payment services and electronic money

The Croatian Payment System Act (Zakon o platnom prometu), which transposes the Payment Service Directive – PSD I, should not apply to undertakings providing certain cryptocurrency services (eg cryptocurrency exchanges, such as bitcoin exchanges). Namely, the Payment System Act defines a payment transaction as an act of placing, transferring or withdrawing funds, whereas funds are deemed banknotes and coins, monetary claim against the payment service provider and electronic money. With this in mind, cryptocurrencies should not fall under any of the mentioned categories, primarily because they do not satisfy legal tender characteristics as there is no issuer (eg central or commercial bank), but are created directly within blockchain in line with the underlying code. In addition, the CNB expressly stated that bitcoin is not money.

As it does not differentiate the definition of "funds" from PSD I, the Payment System Act should not change following the implementation of PSD II. However, the Payment System Act will apply if the token is backed by or linked to funds (eg HRK, EUR, etc). In such a case, the token would represent monetary value issued by its issuer after receipt of funds for the purpose of making payment transactions. Undertakings issuing such tokens should register with the CNB as an electronic money institution and would also fall under its supervision in accordance with the Electronic Money Act (Zakon o elektroničkom novcu). The minimum share capital of an electronic money institution amounts to HRK 2,600,000 (approx. EUR 346,000), which is also the minimum of the electronic money institution's own funds (capital adequacy). The entire share capital must be paid in cash.

Anti-money laundering and Know Your Customer obligations

Although there are money laundering concerns linked to tokens, according to the Croatian Money Laundering and Terrorist Financing Prevention Act in force (Zakon o sprječavanju pranja novca i finacniranja terorizma; "AMLA"), its provisions should not apply to cryptocurrency exchanges, for example, as such services are not regulated thereby. However, the provisions of the AMLA apply to the electronic money institution, and thus if tokens are backed or linked to funds, the issuer would need to comply with the provisions of the AMLA.

Regardless of the above, considering the obligations of entities falling under the anti-money laundering provisions (eg depth analysis of customers) and that the AMLA defines assets very widely, being all means (including any means of payment), tangible or intangible, moveable or real, documents or instruments in any form, including electronic or digital, which prove ownership or right of ownership over assets, cryptocurrency exchanges still may face difficulties doing business with the credit institutions in which they plan or have opened transaction accounts.

In any case, the new proposal of the Money Laundering and Terrorist Financing Prevention Act, which transposes the 5th AML Directive, expressly prescribes anti-money laundering obligations to entities engaged in exchanging virtual currencies for fiat currencies and vice versa, as well as providers offering custodial services linked to virtual currencies.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions