USAID COOPERATION FOR GROWTH PROJECT (CFG)

ANALYSIS OF THE OBSTACLES FOR IMPLEMENTING CROWDLENDING IN SERBIA

The study was executed by: BDO Business Advisory

Approved Date: June 2019

Contract Number: 72016918C00001

Project Start Date and End Date: January 18, 2018 to January 17, 2022

Implemented by: Cardno Emerging Markets USA, Ltd.

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Table of Contents

1. Executive Summary ............................................................. 4

2. General Business Model of Crowdlending Platforms ...................... 5

2.1 Multi-Sided Platforms – A Distinctive Business Model Pattern ........... 5

2.2 Crowdlending as a Multi-Sided Platform Business Model ................. 5

2.2.1 Platform and Platform Operators ......................................... 6

2.2.2 Lenders/investors .......................................................... 7

2.2.3 Borrowers ................................................................. 9

2.2.4 Payment provider ......................................................... 11

2.2.5 Conclusion ................................................................ 11

2.3 Process of Crowdlending Campaign ......................................... 11

2.3.1 General principle ......................................................... 11

2.3.2 Borrower’s Perspective .................................................. 12

2.3.3 Lender’s Perspective ...................................................... 13

2.3.4 Platform’s role ............................................................ 13

3. General Legal and Regulatory Framework for Crowdlending in Serbia

..................................................................................... 13

4. Business Case Analysis Approach ........................................... 16

4.1 Business model analysis approach ............................................ 16

4.2. Legal and regulatory analysis approach ..................................... 18

5. Business Case No. 1 ............................................................ 18

5.1 Introduction ...................................................................... 18

5.2 Business Model of CONDA Platform ........................................ 19

5.3 Business Process Analysis ...................................................... 23

5.3.1 Description of Business Processes ....................................... 23

5.3.2 Legal Analysis of Business Processes (Compliance of Business Processes

with Serbian Laws) ........................................................ 25

5.3.2.1. Foreign Exchange ..................................................... 25

5.3.2.2. Legal Accountability / Licensing ...................................... 35

5.3.2.3 General Contract Law ............................................... 37

5.3.2.4 AML & KYC .......................................................... 38

5.3.2.5 Consumer Protection ................................................ 39

5.3.2.6 Data Protection ...................................................... 40

5.3.2.7 Collection of Claims ................................................. 48

5.3.3 Tax analysis of Business Processes (Compliance of Business Processes with

Serbian tax Laws and Double Tax Treaties) ............................. 53

6. Business Case No. 2 ............................................................ 55

6.1 Introduction ...................................................................... 55

6.2 Business Model of Bitbond Platform ......................................... 55

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6.3 Business Process Analysis ...................................................... 59

6.3.1 Description of Business Processes ....................................... 59

6.3.2 Legal Analysis of Business Processes (Compliance of Business Processes

with Serbian Laws) ........................................................ 60

6.3.2.1 Cryptocurrencies ..................................................... 60

6.3.2.2 Foreign Exchange ..................................................... 61

6.3.2.3 Legal Accountability / Licensing ...................................... 61

6.3.2.4. General contract law ................................................. 63

6.3.2.5 AML & KYC .......................................................... 63

6.3.2.6 Consumer Protection ................................................ 64

6.3.2.7 Data Protection ...................................................... 64

6.3.2.8 Collection of Claims ................................................. 64

6.3.3 Tax analysis of Business Processes (Compliance of Business Processes with

Serbian tax Laws and Double Tax Treaties) ............................. 65

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Table of Figures

Figure 1: Typical crowdlending business model 6

Figure 2: Basic principles of crowdlending platforms 11

Figure 3: Crowdlending campaign two main sub-process 12

Figure 4: The Business Model Canvas 18

Figure 5: Customer Segments features 19

Figure 6: CONDA Business Model Canvas 23

Figure 7: CONDA loan agreements - comparison to debt & equity 24

Figure 8: Bitbond Business Model Canvas 59

Figure 9: Bitbond business processes 59

Figure 10: Bitbond payment processing 60

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1. Executive Summary

The following study reviews the general business model of crowdlending platforms, its business

processes and protagonists, its feasibility and possible impact on the Serbian market, as well as

recommendations for regulators and other stakeholders. The study is sectioned in five

deliverables with subjects from the first two deliverables addressed in this document.

The Chapter 2 reviews the general principle of crowdlending platforms, the business model

pattern it is based on, processes it incorporates and all the involved parties that make it work.

Goal of this chapter is for the reader to understand the basic building blocks of crowdlending

platform business model and relations between them. Understanding of these basic principles is

helpful, if not even necessary for further analysis.

Chapter 3 assesses the general regulatory framework for crowdlending platforms in Serbia. Due

to the fact that there is no specific law regulating this type of service, Chapter 3 lists and

describes a broad range of general rules from various legal areas that are relevant for and will be

analysed in the study’s further chapters.

Approach to both business and legal framework analysis is explained in the Chapter 4, with

elaborate explanation of Business Model Canvas. This method, that became industry standard for

managers, entrepreneurs, consultants and investors, is used worldwide as a set of techniques for

systematically analysis, improvement, design and renovation of business models.

Chapters 5 and 6 analyse business cases from two different crowdlending platforms. Due to the

fact that business model and business processes of crowdlending platforms depend to a very large

extent on the specifics of a given platform, local laws, targeted customer groups, etc., this study

took into consideration two very different platforms.

CONDA is an Austrian company running crowdinvesting platforms in seven European countries

(together with local partners). They target start-ups and SMEs with approx. EUR 100,000 capital

required and loan maturities from three to 10 years. CONDA offers hybrid loans with both debt

and equity features, thus enabling lenders to participate in borrower’s success (upside potential).

Geographically, their markets are in following European countries: Austria, Switzerland, Germany,

Slovenia, Slovakia, Liechtenstein and Poland (with prospective projects in several other European

and non-European countries). Due to their local approach, every market has a platform adapted

to local laws and circumstances. However, all these country-focused platforms are connected in

the CONDA-network, so that investors from all countries can invest in the companies raising

funds within the network.

Bitbond is a German company, based in Berlin, targeting a global market with innovative

technologies used for credit scoring and utilizing crypto currencies for timely and cost-efficient

payment processing. By partnering with globally present companies (Amazon, eBay, Jumia, banks

etc.) they are able to gather uniform, but comprehensive, data from all over the world and offer

standardized services independent of local laws and regulations. Bitbond is targeting small

companies and entrepreneurs, mostly internet-based merchants and gastronomy shops, with

capital needs of up to EUR 50,000 and loan maturity of up to 12 months. Their focus is on

offering quick processing of unsecured loans, to recurring customers in need of short-term

working capital (processing time on average 24h). On the lenders side, unlike CONDA, Bitbond

relies heavily on institutional lenders and their strategic partners (ecommerce marketplace

operators) interested in financing their users (merchants).

For both business cases we have conducted business model and process analysis and tested their

feasibility under Serbian regulation framework. Conclusion can be made, that Bitbond’s business

model is not applicable under current regulation, while CONDA’s model might be feasible under

the condition that some minor issues, especially with foreign exchange law, stemming from the

innovative nature of the business model and lack of adequate regulation, have been clarified with

National Bank of Serbia.

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2. General Business Model of Crowdlending Platforms

2.1 Multi-Sided Platforms – A Distinctive Business Model Pattern

Platforms (also known as multi-sided platforms or multi-sided markets) represent a specific

business model pattern that has existed for a very long time, but developed intensively over the

last twenty years, influenced heavily by the rise of new technologies especially interactive internet.

Some of the most prominent examples are Visa credit cards, Google, Facebook, free newspapers

etc.

Basic principle of multi-sided platforms is value creation through intermediation. By positioning

itself as intermediary between two (or more) distinctive but interdependent groups of customers,

platform facilitates interactions between those groups creating value in the process. The larger

the number of users, the greater the volume created for all parties included, a phenomenon

known as network effect. For example, the more cardholders use Visa cards, the more shops are

motivated to accept these cards and pay the commission to Visa. The more people use their

search engine, the more targeted and tailored advertising can Google provide to advertisers. The

more software developers are basing their products on Microsoft operating systems, the more

incentivized are hardware manufacturers to put it on their computers.

As shown in the examples above, platforms do not only have to attract distinctive customer

groups, but also a sufficient number of users from these groups, in order to create promised

value and justify their existence. This value is what platforms charge its customers for and what

users are willing to pay. However, different customer groups have different price sensitivities

and/or different level of interest for certain services. In order to keep them as users at sufficient

scale, platforms must either charge very low prices to one customer segment, or even subsidize it

with the revenues generated with another segment.

For example, internet search engines, like Google, do not charge anything from the web surfers.

Therefore, one, highly incentivized and less price sensitive customer group (advertisers) covers

the cost incurred to service another, more price sensitive group (web surfers). As long as the

revenues generated on one “side”, cover all the costs incurred, the platform business model will

both attract two customer groups and stay profitable at the same time.

2.2 Crowdlending as a Multi-Sided Platform Business Model

There are many crowdlending platforms active worldwide with extremely diverse business models

that differ from one another based on:

• Borrowers (consumers, real estate projects, micro, small and medium enterprises etc.);

• Lenders (from open-to-everyone to premium investors only);

• Loan size (micro loans to significant amounts exceeding 1 million USD);

• National markets (focused on one country market vs internationally present);

• Collaterals (secured vs unsecured);

• Pricing structure (fixed vs success-based fees).

What is common to all of analysed platforms is the existence of typical multi-sided patterns

described in the previous chapter. Crowdlending, also known as peer-to-peer (P2P) or

marketplace lending, is almost exclusively offered by specialized platforms, connecting two main

customer groups (segments), borrowers and lenders, and satisfying their respective needs of

securing funding and finding investment opportunities. Borrowers receive loans directly from

investors, which enables the lender to earn interest higher than what they would get from bank

savings deposits. This process of fundraising through crowdlending platforms is usually referred to

as crowdlending campaign or crowdlending project.

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Since the lenders and borrowers both get better loan terms, it is a win-win situation for both

sides. However it is important to take into consideration that crowdlending investments contain

much higher risk than bank savings accounts and investors are advised to, firstly diversify their

investments over large number of projects and secondly, invest in high-risk investments such as

crowdlending only a portion of their wealth that would fit their risk aversion profile and risk

bearing ability.

Although there are significant differences in the details of platform specific business processes,

some basic principles regarding the operations of analysed platforms are the same. As described

in the image below, typical crowdlending business model incorporates following elements:

• Platform and its operator;

• Lenders/investors;

• Borrowers;

• Payment provider.

Figure 1: Typical crowdlending business model

2.2.1 Platform and Platform Operators

Main functions of the platform and the platform operator is to i) present investment

opportunities and to ii) organize a seamless lending process for investors and borrowers. The first

function enables, on the one side, potential borrowers to present themselves, their projects and

companies along with the required funding volume, to the potential lenders/investor. On the

other side, platform enables potential lenders to get informed about the investment

opportunities, with all the relevant key information and conditions (loan conditions, expected

return, maturity etc.).

Second main function does not necessarily concern the platform itself, but the platform operators

in the narrow sense, since it is their task to formulate the lending process, together with all the

possible partners in a most seamless possible way. Matters of payment processing, borrower

scoring, know-your-customer, anti-money-laundering and collection procedures etc. need to be

managed and organized in such way, that lending process is as secure and simple for the users as

possible. The extent to which platforms achieve this differs from one operator to another.

Although not necessarily a function required for a particular crowdlending campaign to succeed,

success of the crowdlending platform business model is to a very large extent dependent on the

ability of the platform operator to attract high quality projects and sufficient amount of investors.

To achieve this, marketing and sales abilities of platform operators, especially those concerning

the ability to market themselves, have shown to be of high importance.

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Fulfillment of the functions described represents the service a crowdfunding platform offers and

the value it delivers to its customers. Scope of services offered by platform operators also differs

greatly, with operators assuming roles spanning from simple intermediary to a much more

complex providers, similar to credit institutions in many ways. Apart from most obvious services

like access to funding for borrowers and investment opportunities for investors, services offered

include following:

• KYC and ALM checks;

• Commercial due diligence;

• Borrower scoring;

• Portfolio management;

• Automated investment tools;

• Marketing and sales services;

• Collection and litigation support;

• Investment insurance and buyback guarantees;

• Loan securitization;

• Payment services;

• Financial consulting;

• Etc.

Main revenue source for most of the platforms is loan origination, while loan servicing is

considered a secondary revenue stream. The services listed above are sometimes part of the

standardized loan origination packages and/or loan servicing agreements but can also be offered

separately as additional services. Fee structures vary immensely but most can be assigned to one

of the following fee types:

• Origination/transaction fees - Calculated as percentage of raised funds, directly connected to

fundraising success and volume. Who these fees are charged to differs between platforms,

with some of them charging only borrowers and some sharing those charges between the

borrowers and lenders. These fees cover mainly activities connected to payment services,

promotion & sales activities, usage of the platform etc.

• Application processing and scoring fees - not dependent on the campaign success these are

mostly fixed amounts charged for the application processing, due diligence and, if existing,

scoring procedure.

• Service fees - based on the outstanding loan amount (percent of the outstanding principal),

loan performance (percent of the interest payment) or portfolio value (charged to

investors as percentage of current portfolio value), these fees cover costs originated by

loan administration activities.

• Other fees – mostly charged for additional services such as portfolio management, special

investment tools, collection and legal services, etc.

By rendering their services, crowdlending platforms fulfilll their central role in the niche segment

of capital markets. Their attempt to address very specific needs of their customers and local

markets, competing other funding sources, and stay profitable by doing it, shapes their market

approach and business models to a very high extent. Which approach is most profitable, or at

least feasible on the long term, remains to be seen? So far, no crowdlending business model

suitable for all customer segments and all geographies has emerged as superior to others.

2.2.2 Lenders/investors

Crowdlending platforms target several different lender/investor types, most of whom can be

assigned to two main groups, namely private and professional lenders. These two main classes can

further be split into many other subclasses.

Under private investors this study understands private individuals investing their own savings with

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the goal of return on investment. Due to the fact that crowdlending is considered in general to be

riskier than other more conventional asset classes (e.g. bank savings accounts, investment funds,

blue chip stocks, etc.) investors expect higher yields that would justify the assumed risk. Many

platforms offer different services to private investors, like automated investing advisory or

collection and litigation support, in order to support the average investor without experience or

expertise in investing. Furthermore, some platforms even offer buyback guarantees or form

guarantee funds in order to cover potential losses for their investors.

General assumption is that average private investors lack the expertise and understanding to easily

assess the risks and opportunities, thus platforms are working hard on establishing mechanisms to

make the investing process as transparent and simple as possible.

Private investors are extremely valuable for the business borrowers (start-ups and SMEs), for they

not only provide large portion of capital but also implicitly give their opinion about the company

and its products. Since many of their potential investors are at the same time their current or

potential customers, borrower utilize crowdlending campaigns not only as fundraising but also as

marketing and market research instrument. Platforms often include Q&A sections in campaigns as

a communication tool that enables the borrowers to communicate with the interested investors

and get feedback about their products and business models. It is assumed that successful

campaigns signalize market interest and thereby provide proof of concept for innovative products

and/or business models (crowd approval). Another reasonable assumption would be that

individuals who have lent their money to fundraising businesses are motivated to become their

most loyal customers and brand ambassadors, giving crowdlending campaigns a significant

marketing element.

The other large group of investors includes many different institutional investors, such as

investment funds, asset managers, insurance companies, banks etc. that use crowdlending

platforms as additional asset class to invest surplus funds or as a sales channel. While asset

managers use auto investment tools provided by the platforms to automatize their investments

based on pre-set criteria (e.g. geography, industry, size, loan duration, credit score etc.)

commercial bankers use crowdlending platforms to find promising projects and customers. Many

banks have established partnerships with existing crowdlending platforms, while some have even

established their own. In the low interest rate environment and readily available capital, banks use

the platforms as a marketplace to distribute loans. Furthermore, crowdlending is used by

commercial banks as a scoring and risk mitigation tool, since successful crowdfunding campaign

(crowd approval) is considered to be a proof of concept for innovative business models.

There are also several lender types somewhere in between two main groups. For example,

business angels can be private, wealthy individuals, investing their own private means, but with

expertise in particular industry and experience in investing which distinguishes them from typical

private investor. Another group of investors are large corporates which use crowdlending to

support their suppliers or subsidiaries by acting as lead investors.

The role of lead investor, typical for platforms with large share of private investors among lenders,

is very important for business borrowers (start-ups and SMEs) therefore taking a prominent place

in this chapter. Lead investors are mostly professional investors (but not exclusively) providing a

large portion of raised funds and can be crucial for campaign success. They are, in most cases,

involved with the borrower even before the fundraising process and participate in the campaign

preparation. Their main function is to provide seal of approval and legitimacy for campaigns with

their presence, cooperation pledges and participation in financing. In some cases, lead investors

even take a role to represent all lenders, with the task of protecting lenders interests (especially

in case of default). Following lead investors types have been observed:

• Business angels – by pledging their expertise, experience, network and capital to the borrower,

these individuals, reputable in their fields, increase the chances of success for the borrower and

thereby give confidence to the crowd that the borrower’s project is worth investing. Financially,

business angels can participate in different ways: by providing equity capital to the borrower,

giving loans (convertible or not) or even both. Apart from expected investment return, business

angels benefit from the marketing effects of the campaign (crowd’s approval).

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• Venture capital funds – similar to business angels, but institutional and usually much larger, this

type of lead investor also provides borrowers with so called smart money (package of capital,

expertise, networks and industry experience) in form of equity or convertible loans. Similar to

business angels, these investors also benefit from the crowd’s approval of innovative companies

and their products. Furthermore, conducting a successful campaign is perceived as another

confirmation of entrepreneur’s capabilities.

• Large corporations (mostly retailers) – by acting as lead investors in the campaigns of their

small suppliers, large retailers not only co-finance them but also use the marketing effect of

crowdlending campaigns to increase awareness of these suppliers and their products, thereby

indirectly boosting their own sales. In some cases, large corporations do not participate in the

fundraising directly, but give legitimacy to the borrower by guaranteeing future cooperation with

them in case of a successful campaign. Some retailers (e.g. online marketplaces) use crowdlending

platforms simply to finance their users (online shops) and support their growth hoping to benefit

indirectly from it.

• Banks – there are several different reasons why banks act as lead investors in crowdlending

campaigns, the main being risk mitigation. Especially when it comes to innovative companies, not

only do the bank use crowd’s approval as a positive signal, some banks also see crowdlending

campaigns as marketing measure supporting their clients and decreasing the default probability. In

some platform-bank partnerships, banks condition their regular loans on a successful

crowdlending campaign. Since the seniority of bank loan gives the equity status to funds sourced

through the platforms (subordinated loans), the banks are able to fulfilll regulatory requirements

more easily. Similar principle is applied on platforms specialized on real estate crowdlending.

• Governments and development agencies – in order to support entrepreneurship and

innovation governmental agencies and ministries use crowdlending platforms to distribute

subsidies. The aim is to use the market testing effect of crowdlending campaigns to increase

chances of subsidies being allocated to companies or entrepreneurs with highest chances of

success.

Lastly, it can be concluded that lenders are only partly motivated by solely financial reasons. While

the projected loan returns play crucial role for most of the lenders, reasoning goes beyond with

clear intention to utilize market research/testing and marketing effects of the crowdlending

campaigns to either boost their own business (retailers) or mitigate risk (banks and government

agencies). This has especially been the case with B2C borrowers and their lead investors. Private

investors have also other, more emotional reasons such as loyalty to their favourite brand or

support of entrepreneurs from their respective region. Depending on the business model,

different platforms capitalize on these reasons to different extent. While almost all of them stress

expected returns of investment, some of them also focus on other reasons described above.

2.2.3 Borrowers

Probably the most defining element of the crowdlending platform business model is the type of

borrowers that the platform targets. While many platforms serve different lender groups at the

same time, when it comes to targeted borrowers’ platforms tend to be much more specialized.

While the lenders have similar motivation and even benefit from diversity in their ranks, different

borrower types have very different needs that are difficult to address by a single platform.

For that reason, borrowers have been clearly segmented into following types and addressed by

platforms accordingly:

• Start-ups1 – young, innovative and scalable companies are very prone to trying alternative ways

to raise funding. Due to their often limited capability to commence with loan payments in the first

few years of their existence, this type of borrowers rarely choses classic loans as means of

1 Here understood as a small, founder driven company with innovative and scalable products or services, high risk profile and large potential for growth.

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funding (if they can even get one). Also, from the investor side, equity crowdfunding is something

that seems to be a preferred option when it comes to investing into this kind of companies,

mostly due to unlimited upside.

There is, however, a trend of offering mezzanine finance products that would satisfy the needs of

both start-ups and investors. Many platforms, mostly in continental Europe, offer hybrid loans

with both debt- and equity-like features, that spare the parties from many administrative issues

connected to equity investing, but give flexibility to borrowers regarding the loan repayment and

enable investors to participate in the company’s success through performance-driven bonuses and

debt-to-equity swap options. Furthermore, this kind of loan gives more security to investor

compared to equity investment, without giving up on the upside completely.

Since both start-ups and investors are very interested in utilizing the marketing and market testing

effects of crowdlending campaigns (especially B2C borrowers), platforms specialized for this

borrower group often put emphasis on promotional aspect of campaigns. In line with this effort,

platforms insist on increasing transparency of borrowers and their business models, due to their

innovative and often very complex nature. The campaigns (including preparations) usually take

relatively long time (up to several months) with clear priority of transparency over urgency of

funding.

• Small and medium enterprises (SMEs) – Compared to start-ups, SMEs are much more frequent

users of crowdlending platforms. Their business models are generally less complex, thus less

difficult for investors to understand and easier for platforms to assess for credit scoring.

Depending on size of borrowers or loans, platforms exercise different approaches. While smaller

companies and entrepreneurs usually emphasize simplicity of application and speed of loan

approval, medium sized borrowers count much more on non-financial effects of campaigns.

Size also matters in choice between debt and mezzanine financing, with smaller borrowers usually

opting for “pure” debt and medium sized ones utilizing the variety of options on the market some

more.

Depending on the size, borrowers opt for platforms offering:

o Quick, small and simple loans financed mostly by anonymous, institutional investors with clear,

often quantified investment criteria and readily available capital, allocated to this asset class.

o Larger loans (often mezzanine capital) raised in longer campaigns with emphasis on promotion,

marketing effects and focus on diverse crowd of both prominent (and visible) lead investors and

private investors that are actual or potential customers.

However, since there are companies of both small and medium size with very different

characteristics, interests and needs, especially across different markets, it is very difficult to clearly

distinguish between these two groups and define them as separate customer segments.

• Real estate developers – As players from a very traditional industry, with relatively simple

business model, real estate developers utilize crowdlending, mostly combined with bank loans, to

finance their projects. Main reason why this model is so successful, is the fact that, unlike with

other customer segments, real estate loans are at least to some extent secured on property.

Furthermore, due to the fact that loans raised through crowdlending are subordinated to bank

loans, it is easier for developer to secure the funding required for the project. Banks consider

both developers own financing and loans raised from the crowd as equity, enabling these real

estate projects to more easily fulfilll regulatory capital requirements.

• Consumers – as by far the most numerous borrower group, consumers are targeted by a large

number of platforms specialized on non-business loans issued to private persons. Due to the fact

that this type of borrower is the one most protected by regulators, their participation in crowd

lending market is highly influenced by local legislation. The types of loans offered to consumers

are very diverse, spanning from small, short-term loans intended for consumption to larger loans

used for scholarships or real estate purchase.

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2.2.4 Payment provider

As a business model that emphasizes efficiency and lower costs compared to incumbents on the

financial markets (banks, investment funds etc.), platforms need to focus strongly on their

business processes. They need to be not only as secure as possible, but also very cost efficient.

Therefore, payment providers play a very important role in the crowdlending industry.

Depending on the business model, payment providers offer to platform operators different

services, some of them being:

• Payment processing;

• Escrow accounts;

• Currency exchange (both FIAT and cryptocurrencies);

• Etc.

2.2.5 Conclusion

The business model of crowdlending platforms includes at least four parties (platform operators,

lenders, borrowers and payment providers) and represents a complex interplay of many

processes and relations between them. Task of platform operators is to organize these processes

in a seamless, user friendly and law compliant way.

However, the interdependent involvement of both customer segments (lenders and borrowers) is

the main challenge for crowdlending platforms, since lenders will only be motivated to lend their

money to borrowers of certain characteristics, while borrowers will not be incentivized to raise

funding on a platform that does not attract a sufficient investment volume and/or investors of

adequate quality (lead investors). The alignment of the interests of these two groups is the major

task every platform operator encounters and depending on the concrete type of lenders and

borrowers the platform targets, different platforms apply very different business models.

2.3 Process of Crowdlending Campaign

2.3.1 General principle

Although the technical details of crowdlending campaigns depend on specific business models the

platforms apply, there are some basic principles common to most of the platforms described

simplified on the picture below.

Figure 2: Basic principles of crowdlending platforms

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To go into more details, we would have to break the crowdlending campaign process into two

sub-processes, one focused on the lenders and other on the borrower’s perspective (presented

on picture below). It is, however, important to note that this is only the general principle, which

can vary in detail on different platforms.

Figure 3: Crowdlending campaign two main sub-process

2.3.2 Borrower’s Perspective

Borrower commences the process of crowdlending by contacting the platform, which, in turn,

enables either a simple login (in case the borrower has already conducted campaigns on the

platform in past) or application process (for the first-time borrowers). After the login/application,

the borrower submits their campaign proposal which includes the company presentation, business

plan, loan request, repayment plan etc. to the platform and goes through a due diligence,

conducted by the platform itself and/or a third-party provider.

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After a successful check, platform approves the submitted proposal. Some platforms assign credit

ratings to borrowers and put them in the adequate risk class, while others exclude credit rating

from the process, claiming that only the borrowers of highest quality/lowest risk get approved by

the platform.

After the approval, borrower and the loan terms are presented on the platform and the

fundraising campaign begins. On the platforms offering tools for automated investing based on the

pre-set criteria, the fundraising process is quite quick and can last even under 24 hours (mostly

platforms targeting consumers and small enterprises). On platforms emphasizing the marketing

effect of the campaign (platforms focused on start-ups and medium enterprises) the fundraising

process takes more time (one month or longer) and includes significant promotional efforts.

In case the fundraising limit is achieved within the planned timeframe, campaigns are considered

successful and the borrower enters the loan agreement with the lenders, thus getting access to

the raised funds. On some platforms, borrowers are obliged to regular and detailed reporting to

investors while others have less requirements in this regard. Borrowers are obliged to repay the

loan according to the schedule and on terms agreed upon in the loan agreement.

2.3.3 Lender’s Perspective

Lender’s customer journey commences with the application or login (for already registered

investors) on the platform. The main task of the platform in this stage is the initial check of

applicants and implementation of know-your-customer and anti-money-laundering procedures

according to local laws.

After a successful check, potential lender is given access to investment/lending opportunities

presented on the platform, with all the relevant details of the loan. When lender has selected a

borrower and entered the loan amount money is usually transferred to an escrow account where

it stays until the campaign has ended. Simultaneously, lender has signed a digital loan agreement

with the borrower. At the end of campaign, if the targeted amount has been achieved, the loan

agreement is effective. Some platforms offer automated investment tools, where lenders can set

investment criteria and dedicated amount, enabling the tool to invest (and reinvest) for them.

If the borrowers fulfilll their reporting obligations according to loan agreement and platform

requirements, lenders are regularly informed about their loan and receive their scheduled

principal and interest payments.

2.3.4 Platform’s role

As already described in previous chapters, platforms function is to facilitate the whole fundraising

and investment process, but it does not end there. After the funds have been raised, the

administration of the loan and all the processes connected to loan repayment (or default) are

covered by platforms to at least some degree.

3. General Legal and Regulatory Framework for

Crowdlending in Serbia

The current Serbian regulatory framework does not contain any specific rules regarding

crowdlending activities. In the absence of such regulation, the status and legal treatment of

lenders, investors and platform operator should be assessed under a broad range of general rules

from various legal areas, the main being:

• foreign exchange,

• banking,

• capital markets,

• payment services,

• AML and KYC,

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• data protection,

• general contracts,

• consumer protection,

• litigation, and

• enforcement.

The foreign exchange regulations applicable to general cross-border loans would have to be

closely analysed to determine potential obstacles in the implementation of the crowdlending

platforms in Serbia, as they contain certain foreign exchange restrictions applicable to

crowdlending. Specifically, the FX Regulation2 provides for mandatory provisions, amongst other,

with respect to cross-border inflow and outflow of money, cross border financing and loan

transactions, available currency transactions, assignment of cross-border receivables, use of

offshore bank accounts, set-off, etc. It generally affects all payment transactions among a Serbian

and a foreign resident, as well as foreign currency payments among local entities. The main

authorities in charge for supervision of the foreign exchange rules are the National Bank of Serbia

(“NBS”), being a banking and forex regulator, and the Ministry of Finance (“Ministry”).

The FX Regulation is in practice strictly interpreted by the NBS and the Ministry in a manner that

any matter that is not regulated in the FX Regulation and the applicable bylaws is considered

unpermitted in the cross-border context. This means that for any transaction involving a Serbian

and a foreign resident, or a foreign currency, it should be ascertained if it is regulated by the FX

Regulation and what are the applicable requirements. This is relevant, among other, as local banks

may effectuate cross border payments only if the respective payment is in accordance with the FX

Regulation. Given that the FX Regulation does not explicitly regulate crowdlending, interpretation

of the FX Regulation by the NBS and the Ministry as a closed set of rules where anything that is

not expressly regulated is deemed unpermitted may cause obstacles in cross-border

crowdlending.

With regards to potential licencing requirements, the following laws may be of relevance:

- Law on Banks3,

- PS Law4, and

- CM Law5.

The Law on Banks regulates, among other, the performance of banking activities and the licencing

requirements thereunder. These rules are relevant in terms of potential accountability of

investors and platforms. Depending on the crowdlending scheme and, specifically the extent to

which the platform operator is involved in lending activities, a platform operator may need a

banking licence. From the perspective of investors, those who wish to avail of crowdlending

should consider the volume of loans they provide as granting of credits on a professional basis is

subject to licencing requirements.

Further, the PS Law governs, among other, the provision of payment services and the licencing

requirements thereunder. These rules may come into play if a platform is involved in the payment

processes between the investors and borrowers in which case it would be required to obtain a

licence for the specific payment service it conducts.

Authorisation requirements under the CM Law should be carefully assessed if a platform offers

2 Law on Foreign Exchange Operations (RS Official Gazette, Nos. 962/2006, 31/2011, 119/2012, 139/2014 and

30/2018) (“FX Law”), FX Law together with all pertaining bylaws “FX Regulation”).

3 Article 5 paragraph 2 of the Law on Banks (Official Gazette of the Republic of Serbia Nos. 107/2005, 91/2010 and

14/2015) (“Law on Banks”).

4 Payment Services Law (“Official Gazette of RS” Nos. 139/2014 and 44/2018) (“PS Law”).

5 Capital Markets Law (“Official Gazette of RS” Nos. 31/2011, 112/2015 and 108/2016) (“CM Law”).

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investment services connected to financial instruments as this may require a licence for

investment companies. However, these requirements are less significant for lending-based

platforms (as opposed to funding-based platforms).

Given the high importance of the traceability of financial transactions, the anti-money laundering

(“AML”) and know-your-customer (“KYC”) requirements should be assessed to determine

whether the participants in the crowdlending projects would be subject to any legal requirements.

In Serbia, AML and KYC obligations are primarily regulated by the AML Law6 which is largely

aligned with the EU Directive 2015/849 (4th AML Directive)7.

Further, the Data Protection Law8 which presents a copy of the EU General Data Protection

Regulation (GDPR) to a large extent, contains key rules and requirements that platform operators

need to comply with, mostly related to: (i) data processing principles, (ii) legal grounds for data

processing, (iii) data subjects’ rights, (iv) data governance and security obligations, (v) security of

processing, (vi) data transfer, and (vii) sanctions and enforcement.

When it comes to contract types governing the relations between the lenders and borrowers and

their contractual obligations, the Law on Obligations9 and its general principles of contracting

should be considered.

The consumer protection is regulated under the following laws:

- Consumer Protection Law10,

- Financial Services Related Law11,

- Distant Financial Services Related Law12.

The above laws should be assessed to determine whether the participants in a crowdlending

scheme may be qualified as consumers in which case the loan agreements would have to meet the

requirements under these laws and grant certain level of protection to such participants. The

Consumer Protection Law governs the rights of consumers and the manner of their protection,

rights and responsibilities of the consumer protection organizations, and implementation of an

out-of-court settlement mechanism for consumer disputes. Additionally, the Financial Services

Related Law regulates the rights of consumers in relation to financial services provided by banks,

financial leasing providers and merchants, as well conditions and manner of exercising and

protecting these rights. Finally, the Distant Financial Services Related Law13 governs the rights of

financial service consumers when negotiating distance contracts related to financial services by

6 Law on preventing money laundering and financing of terrorism (“Official Gazette of RS” No. 113/2017) (“AML

Law”).

7 Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 on the prevention of the

use of the financial system for the purposes of money laundering or terrorist financing.

8 Serbia has enacted a new Data Protection Law on 9 November 2018 (“Official Gazette of RS” No. 87/18), with its'

applicability postponed for 21 August 2019. In the meantime the existing law, which is largely outdated and often

difficult to comply with in practice, continues to apply. However, since we understand the implementation of the

analysed business model would take certain time, and 21 August is approaching fast, this study will present the

requirements set forth by the new Data Protection Law only (“Data Protection Law”) only.

9 Law on Obligations (“Official Gazette of SFRY” Nos. 29/78, 39/85, 45/89 – decision by CCY and 57/89, "Official

Gazette of FRY", No. 31/93 and "Official Gazette of SM", No. 1/2003 – Constitutional charter) (“Law on Obligations”)

10 Law on Consumer Protection (RS Official Gazette, Nos. 62/2014, 6/2016 and 44/2018) („Consumer Protection

Law“).

11 Law on Protection of Financial Services' Users (RS Official Gazette Nos. 36/2011 and 139/2014) (“Financial Services

Related Law”).

12 Law on Protection of Users of Financial Services in Distant Contracting (RS Official Gazette No. 44/2018) (“Distant

Financial Services Related Law”).

13 Law on Protection of Users of Financial Services in Distant Contracting (RS Official Gazette No. 44/2018) (“Distant

Financial Services Related Law”).

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using means of distance communication, as well as the terms and manner of protection of those

rights.

With regard to collection, general legal framework for collection of receivables is regulated by the

following laws:

• Law on Obligations – regulates obligations arising out of contracts, damage compensation, time

for statute of limitations of the claim etc;

• Law on Civil Procedure14 – regulates procedure for providing legal protection that is

processed and decided in litigation proceedings for resolving disputes from family, labour,

economic, property and other civil law relations, except for disputes for which it is prescribed by

a special law another type of procedure;

• Law on Enforcement and Security15 – regulates the procedure of compulsory collection of

claims on the basis of a domestic or foreign executive title or authentic document (“enforcement

procedure”) and the securing of claims (“security procedure”), unless provided otherwise by a

specific law;

• Law on Bankruptcy16 – regulates the conditions and manner of initiating and conducting the

bankruptcy over legal entities.

4. Business Case Analysis Approach

4.1 Business model analysis approach

As explained in Chapter 2, beside some basic similarities and principles typical for most

crowdlending platforms, there is no one single crowdlending platform business model. Almost

every platform has its own specific business model with different customer segments, sales

channels, service scopes, cost & fee structures etc. and can only be thoroughly analyzed on the

case-to-case basis.

For that reason, this study takes two different platforms as business cases and uses the business

model canvas methodology17 to analyse them separately. The basic idea is to cover as many

varieties and forms of crowdlending by analysing two quite different crowdlending platforms and

their business models.

The Business Model Canvas describes business models through nine basic building blocks that

show the logic of how a company intends to make money. These nine building blocks cover the

four main areas of business (customers, offer, infrastructure and financial viability) and include the

following:

• Customer Segments;

• Value Propositions;

• Channels (communication, distribution and sales);

• Customer Relationships;

• Revenue Streams;

14 Law on Civil Procedure (“Official Gazette of RS” Nos. 72/2011, 49/2013 – decision by CC, 74/2013 – decision by

CC, 55/2014 and 87/2018) (“Law on Civil Procedure”)

15 Law on Enforcement and Security (“Official Gazette of RS” Nos. 106/2015, 106/2016 – authentic interpretation and

113/2017 – authentic interpretation) (“Law on Enforcement and Security”)

16 Law on Bankruptcy (“Official Gazette of RS” Nos. 104/2009, 99/2011 – other law, 71/2012 – decision by CC,

83/2014, 113/2017, 44/2018 and 95/2018) (“Law on Bankruptcy”)

17 “Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers” - Alexander

Osterwalder, Yves Pigneur, Wiley, 2010.

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• Key Resources;

• Key Activities;

• Key Partnerships;

• Cost Structure.

Customer Segments – Customer Segments are the centrepiece of every business model that

all the other elements are in accordance with. In order to start analysing a business model, we

first have to define the subject company’s market and the products or services they offer. To find

out what their market is, we analyse how companies group their potential customers in groups

with common characteristics, needs and behaviours. Then, we determine which segments the

subject companies have decided to target, and which ones are to be ignored. Once the market

has been defined it is much easier to identify the customer needs and understand the business

model.

Value Propositions – This building block describes the bundle of products and services that

create value for specific Customer Segment. Furthermore, it states clearly the benefit for the

customer by explaining which customer requirement is fulfillled, in what way and what is the

reason the customers should chose the given company over competitors or substitutes.

Channels – Interaction between the company and its customers on all matters goes through

established communication ways, so called Channels. The process of interaction through these

channels can be divided in five phases: 1) awareness raising, 2) evaluation, 3) purchase, 4) delivery

and 5) after sales. Ways and means the separate Customer Segments want to be reached differs

between segments and have to be accordingly organized. Channel types include Own channels

(direct – sales force and web sales, indirect – own stores) and Partners (i.e. partner stores and

wholesalers).

Customer Relationships – What type of relationship does a company have with specific

Customer Segments, how are they maintained, what do they cost, how do they affect the average

revenue per customer and how are they integrated in the rest of the business model? All these

questions should be answered in this building block. Customer Relationships can range from

completely personal, to fully automated with many relationship types in between those two

(personal assistance, self-service, automated services, etc.). Which type of relationship is

established with which Customer Segment, is one of the crucial decisions a company has to make.

Revenue Streams – To build a sustainable business model, one has to generate revenues

exceeding generated costs. To do this, a company must know what value each Customer Segment

is willing to pay for, how much and how often, and how to price it? Are there possibly several

values of interest for a single Customer Segment generating more than one Revenue Stream per

segment? Next logical question would be, if the specific Customer Group is large enough to be

profitable for the company?

Key Resources – Most important tangible and intangible assets required by company to create

and offer a Value Proposition, reach Customer Segments and maintain Relationships with them,

earning revenues at the same time, are considered Key Resources. These can be physical,

intellectual, human or financial in nature, but whatever form they take, they are considered crucial

for the business model to work.

Key Activities – While the Key Resources refer to company’s assets, this building block

describes activities companies need to undertake in order to deliver Value Propositions, reach

markets, maintain Customer Relationships and earn revenues. Key Activities include production,

problem solving (service), platform facilitation etc.

Key Partnerships – In order to acquire resources and activities, reduce risk and achieve

economies of scale companies engage in partnerships of different types: (i) Strategic alliances (with

non-competitors), (ii) Cooperation (with competitors), (iii) Joint ventures (for developing new

businesses) and (iv) Buyer-supplier relationships.

Cost Structure – By acquiring Key Resources, performing Key Activities and maintaining Key

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Partnerships usually costs are incurred, that are to be planned, monitored and analysed in order

to keep them as low as possible. However, not every business model is dependent on the cost

level to the same extent (value-driven vs cost driven). Furthermore, nature of costs (variable vs

fixed; economies of scale and scope) should be also examined in this building block.

These nine building blocks, put together, make The Business Model Canvas presented in a picture

below. This structure will be applied to analyse given business cases, understand their business

models and processes and finally test their applicability in the circumstances that are characteristic

for the Serbian market.

Figure 4: The Business Model Canvas

4.2. Legal and regulatory analysis approach

In the absence of crowdfunding regulation in Serbia, we conducted an extensive research of

general legal, regulatory and administrative framework to determine the rules potentially

applicable to certain models of crowdlending platforms.

Specifically, with the aim to determine the feasibility of implementing crowdlending platforms such

as CONDA and Bitbond in Serbia, we analysed different aspects of their business models as

outlined in Sections 5.1 and 6.1 in light of different fields of law listed in Section 3. above.

Upon pinpointing the main legal ambiguities and gaps regarding the crowdlending implementation,

we provided our opinion on the potential solutions which are mainly based on the amendments in

the respective FX Regulation. Additionally, we outlined certain rules that would not necessarily

hinder the implementation of crowdlending platforms in Serbia but should be observed as they

might cause certain practical issues.

5. Business Case No. 1

5.1 Introduction

Since founded in 2013, CONDA has been running crowdfunding platforms in several European

countries (Austria, Germany, Switzerland, Slovenia, Slovakia, Poland, Liechtenstein) – providing

services for companies seeking for funding and investors looking for alternative investment

opportunities. It is one of the largest platforms and is one of the pioneers in the field of

crowdlending and crowdinvesting in its home market, Austria.

Key Partners Key Activities Value Propositions Customer Relationships Customer Segments

Who are your key partners? Who are your customers?

Who are your key suppliers How do you segment them?

Key Resources Channels

Cost Structure Revenue Streams

What are the most important costs inherent in your business model? What are customer segments paying for?

Which key resources are most expensive? How do they pay?

Which key activities are most expensive? How much does each revenue stream contribute to overall revenues?

What kind of fees are the customers paying?

Which key resources do you

acquire from partners?

Which key activities do

partners perform?

What type of relationship

have you established with

each of your customer

segments?

How are they integrated

with the rest of your

business model?

What key activities do your

value propositions,

distribution channels,

customer relationships and

revenue streams require?

What key resources

(physical, intellectual,

human, financial…) do your

value propositions,

distribution channels,

customer relationships and

revenue streams require?

Which services are you

offering to each customer

segment?

Which customer's problem

are you helping to solve?

Which customer needs are

you satisfying?

Through which chanels do

you reach each customer

segment?

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Their platform offers investor an opportunity to invest in hybrid loans with success participation,

meaning that apart from fixed interest rates and repayment amount investors are also entitled to

bonus interests and increased principle amount depending on the company success. Due to this

hybrid nature of the loans they offer, including both debt and equity features, CONDA consider

themselves more of a crowdinvesting rather than only crowdlending platform.

5.2 Business Model of CONDA Platform

Customer Segments – As a business model following a multisided platform pattern (described

in chapter 2.1) CONDA has more than one Customer Segment. In order to constitute a separate

segment customer group need to:

• Have needs that require and justify a distinct offer;

• Be reached through different Distribution Channel;

• Require and receive specialized types of relationships;

• Have different profitability than other segments;

• Be willing to pay for different aspects of the offer.

Two main Customer Segments that come to mind, lenders/investors and borrowers, are

presented in the following table. Features listed will be further scrutinized in the relevant building

blocks, but it is important at this point to recognize the distinction between two major segments.

Criteria Lenders/Investors Borrowers

Distinct Needs - Investment opportunity

- Specific risk profile

- Appropriate return

- Transparency

- Appealing investment story

- Upside potential

- Access to financing

- Marketing effect

- Market research effect

Distribution Channel - Platform’s website

- CONDA investor community

- Social media

- Word of mouth

- Partner programs

- CONDA network

- Platform’s website

- Presentation on events

- Partner programs

- CONDA advisory board

Relationship Type - Personal assistance

- Automated services

- Community

- Dedicated personal assistance

- Co-creation

Profitability - Low (relative to other segment) - High

Relevant Aspects of the

Offer

- Return

- Risk

- Transparency

- Costs

- Quickness

- Promotion

Figure 5: Customer Segments features

Lender/investor segment of CONDA includes primarily retail lenders with EUR 1.200 average

investment volume (EUR 100 being minimal investment amount). However, there are also lead

investors in almost every fundraising campaign, most of them being individuals with experience in

the respective field, increasing the probability of company success through their experience,

network and expertise.

Among investors, there are many individuals from the borrower’s network, including friends and

family, buyers, suppliers, etc. These investors, together with the lead investors, usually pledge

their investment even before the campaign has been made public, which is in line with the

platforms requirement to have at least 30% of the investment volume secured before the

campaign kick-off on the platform. This measure is expected to increase the probability of success

for the campaign, not only by relying on the so-called investor’s herd behaviour, but also following

the principle that successful entrepreneurs should be able to convince investors from their own

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environment before approaching the crowd.

It is logical to assume that most of the investors seek for high returns and favourable risk-return-

trade off, however, there is also a distinction to be made in this regard. While some investors

might be primarily interested in the fixed interest rates, the success participation element of the

hybrid loans offered by CONDA addresses investors more interested in the upside potential of

their loans. Since investment in the equity of start-ups and SMEs might be complicated and very

time consuming, CONDA’s contracts offer a relatively simple surrogate to this form of

investment. In case of start-up borrowers, this equity-like loan feature is what investors are most

interested in, since the fixed interest rate does not, in most cases, justify the risk.

Although probably every investor takes into consideration expected return and risk profile when

considering investing on CONDA platform, the experience has shown that some other reasons

also play important role in the process of investment decision. Most of the investments volume

comes usually from the region where the company is incorporated and/or active. This has

something to do with the level of awareness a brand, company or entrepreneur have in their

regions. Especially in case of B2C companies, with numerous consumer and built-up brand loyalty,

the investors are very often customers of the company. Therefore, the level of regional/local

awareness is, beside potential return and risk, a very significant investment factor.

Another major Customer Segment are borrowers, which can be further diversified in three

different sub-segments: start-ups, SMEs and real estate projects, with the last one being the least

significant. The loan structures differ depending on the borrower type, with special standardized

loan agreements for each of the three groups. While SME agreements are more similar to typical

debt, start-up agreements are more equity-like in nature.18

Companies acting as borrowers come from different industries, spanning from food and beverage,

over green technologies to hospitality industry. Accordingly, motivation for borrowers for

fundraising through CONDA platform is very diverse. While some companies are primarily and

only interested in raising funds, others also aim at marketing effects of the crowdlending

campaign. The latter is especially visible in cases where companies raise funds from more than

one source, with one being crowdfunding platform due to additional promotional effects. This is

very often the case with B2C companies that are trying to capitalize on their large consumer basis

and brand awareness at one hand, while also increasing the mentioned awareness and brand

loyalty by turning investors to customers, on the other. Compared to most of the other

platforms analysed in scope of research for this study, this marketing effect seems to be of much

higher importance on CONDA platform.

As already mentioned, CONDA business model runs according to the multi-sided platform

pattern, meaning that the interdependency of both Customer Segments is crucial for the platform

to work. It is of utmost importance to attract both customer segments to certain extent, since

one segment cannot be addressed without the other being involved. Although CONDA can

narrow its targeted market within these two major Customer Segments, they can never neglect

one segment in favour of the other. There always has to be an equilibrium of sufficient investment

opportunities and interested investors.

Apart from their main Customer Segments, CONDA has another Customer Segment namely

platform technology buyers/users. While some of them are buying CONDA’s platform

technology as a white label solution, others, mostly representatives in other countries, use their

platform and pay transaction fees dependent on the volume of business and revenues they

generate. Since this Customer Segment, interested primarily in CONDA’s software and services

connected to it, is not relevant in a study dedicated to crowdlending possibilities in Serbia, it will

not be thoroughly analysed in further text.

18 Although CONDA also offers real estate crowdfunding as a service, there are no projects visible on the platform

(neither actual, nor from the past) or loan agreement templates, thus it is impossible to analyse this sub-segment.

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Value Propositions – CONDA platform provides different Value Propositions to two distinct

Customer Segments and delivers different solutions to their problems. To the lenders/investors

CONDA is providing simple and transparent investment opportunities with upside potential and

appealing background story. In case of lenders motivated not strictly by expected return, such as

friends, family or strategic partners (suppliers or buyers), it offers relatively simple mechanism to

boost the fundraising company.

For borrowers CONDA offers primarily accessibility and customization as Value Propositions. In

cases of so called “unbankable” companies, without access to traditional sources of finance, like

bank loans or stock exchange, CONDA enables them to access other funding opportunities.

Furthermore, since every borrower gets a dedicated personal assistance regarding all the relevant

matters during campaign organization, CONDA offers services customized to customer specific

needs.

Another Value Proposition, relevant to some extent to both Customer Segments is the market

testing and marketing effect of the campaign. It offers promotional value to borrowers, tests the

market reaction to their business model and products, thus increases the chance of successful

repayment and potential upside to lenders.

Channels – For raising awareness of its services and the projects momentarily in the fundraising

phase, CONDA uses both direct and indirect channels, with direct ones being social media

marketing (digital marketing in general), their website and own sales force and network. Indirect

channels include partners such as chambers of commerce, start-up associations, various

organizations that they are members of, advisory board members, etc. Indirect channels are

usually used to address lender Customer Segment.

Potential customers can evaluate the quality of services on their website and social media

newsletters, helping them to understand the Value Propositions and make their decisions. After

the decision has been made, and the campaign has started, the indirect channel facilitated by

payment providers enables the investment processing through escrow account and payment

services. Payment providers are also included in period after campaign has ended. In case the

campaign is unsuccessful, they return the money to lenders disposal, and in case of success, they

process the invested amounts to the fundraising company. The same applies for the payments in

scope of interest payments and principal loan repayments.

Customer Relationships – CONDA platform offers different relationship types to different

Customer Segments. While lenders are approached through automated services on the website,

personal assistance in form of customer support and through community building on the website,

social media and even mobile messenger groups, relationships with borrowers are more

sophisticated. Members of this Customer Segment get dedicated personal assistance (advisory)

for campaign setup and execution and are even allowed to co-create custom made service

package, best suited for their needs.

Customer Relationships are well integrated into the CONDA business model, since community

building, service transparency and reliable personal assistance are crucial for both acquisition of

new borrowers and build-up of large community of satisfied, recurring lenders as a provider of

sustainable investment volume.

Revenue Streams – CONDA revenue model is based on two separate Revenue Streams. As

less cost sensitive Customer Segment, the borrowers, and the services rendered to them,

represent the main revenue generator. Borrowers pay brokerage fees connected to the campaign

itself and service fees charged annually for the loan administration. The brokerage fees are partly

fixed (fixed amount for campaign preparation), and partly connected to campaign success

(percentage of raised volume). Service fees are a percentage of the loan amount outstanding.

Since the willingness to pay is much higher at the borrowers, the Revenue Stream from their

segment is used to subsidize the other Customer Segment, namely the lenders. However, there

are some fees charged to investors, connected to the upside realization for the loans. For

example, if a SME borrower has paid bonus interests in a certain period, a percentage of those

bonus payments (transaction fee) is collected by CONDA as a success fee charged to lenders.

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Technology buyers purchase the platform license from CONDA as white label, while local

country representatives usually pay usage-based fees calculated on basis of fundraising volume.

Key Resources – Three main resources of CONDA are their platform (technology, copyrights,

community, data bases etc.), fundraising expertise (marketing, legal, financial) and professional

network of CONDA employees (partnerships, organization memberships, reputation of its

employees in the relevant communities, etc.). All of these intellectual and human resources are

utilized to deliver Value Propositions, establish and maintain Channels and Customer

Relationships as well as to generate Revenue Streams.

On this place it is important to mention the third Customer Segment (platform technology

buyers/users), since they contribute to enlargement of other two segments and thus represent a

significant resource. Many white-label buyers and representatives in countries other than Austria

connect their platforms with Austrian platform, the Austrian borrowers and their campaigns are

visible internationally and are open for investments for lenders from other countries. At the same

time, investors from Austria are able to lend to borrowers on partnering platforms.

Key Activities – As a business model designed around a platform as a Key Resource, CONDA’s

Key Activities are mostly platform and network related. Three main groups of activities include

platform management, service provisioning and platform promotion.

Platform management is mainly related to IT operations, like development, maintenance, and

customer support for seamless user experience. Users can be lenders/investors, borrowers, but

also technology buyers and users who have purchased the platform technology of are paying

usage-based fees, respectively, and get full customer support as after-sales service.

Service provisioning is related to the most part to campaigns and includes legal, financial,

marketing and fundraising advisory in general to borrowers as well as promotional activities in

scope of the fundraising process.

Platform promotion is equally important as the two Key Activities stated before, since the

platform represents the marketplace where lenders and borrowers cross paths. Without

properly promoted platform, one or both Customer Segments will be hard to attract.

Promotional activities include both marketing (including customer education) and promotion

within relevant communities, organizations, on events, in professional networks of key employees

etc.

Key Partnerships – CONDA has so far established partnerships of all four types:

• Strategic alliances - with non-competitors such as banks, management advisors, venture

capital funds, members of entrepreneur and business community (as part of CONDA

Advisory Board or otherwise), chambers of commerce, start-up associations, etc.

• Cooperation - with competitors in initiatives related to crowdfunding.

• Joint ventures – with local partners establishing crowdfunding platforms as parts of CONDA

network in other countries (outside of Austria)

• Buyer-supplier relationships – with payment providers, financial, tax and legal advisors,

marketing agencies, buyers of white-label solutions for crowdfunding platforms etc.

The purpose of these partnerships is to acquire resources and outsource activities, increase

economies of scale, thus decreasing costs, mitigating risk and improving own capabilities.

Cost Structure – CONDA’s Cost Structure is dominated by fixed costs in form of salaries,

rents, licenses, recurring accounting and legal services, etc. However, variable costs initiated by

activities such as marketing, customer education and, most prominently, payment processing

constitute a substantial portion of total costs.

By building partnerships CONDA exploits on both economies of scale, through network of

partnering platforms (white label buyers and local country representatives), and economies of

scope, by utilizing same resources for larger scope of operations related to different Customer

Segments (marketing, networking, legal and financial expertise etc.).

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Business Model Canvas – Summarized in the business model canvas, the CONDA business model

looks like this:

Figure 6: CONDA Business Model Canvas

5.3 Business Process Analysis

5.3.1 Description of Business Processes

Borrowers Perspective – The crowdinvesting process on CONDA platform begins with

borrower approaching the platform and filling out the application and uploading the business and

financial plan as well as any other document that would support their project. In order to get

their application accepted, potential borrowers have to go through a verification process

conducted by an external, third party (financial consultants chosen by the borrower), CONDA

team and their Advisory Board members.

The business model of the borrower has to be coherent, complete and understandable, while the

company must not have any financial, legal or tax issues. It is desirable to have an innovative,

interesting product or service, whose value is easy to understand and communicate. There also

has to be some proof of concept, or the proof that there is enough interest on the market to

make the presented business plan feasible. Furthermore, the company has to show that it has

enough resources to conduct a crowdinvesting campaign (time, human resources, etc.). Finally,

the required loan amount should be about EUR 100,000 or higher. At the moment of application

the company does not have to be in the legal form of limited liability Company (GmbH in

Austria), but has to become one before the start of the campaign.

If the feedback is positive, the borrower choses one of the three service packages, which differ in:

scope, fixed fee for the campaign preparation and the success fee. The broader the service scope

the more expensive the package. The borrower signs the contract with CONDA and defines

their service scope, duration of the campaign, as well as the upper and lower limit for the funds

they plan to raise. If the lower limit is not reached by the end of the campaign duration, the

Key Partners Key Activities Value Propositions Customer Relationships Customer Segments

Payment providers Platform management Personal assistance Lenders/Investors

Service provisioning Automated services Borrowers

Platform promotion Community

Banks

Industry organisations

Key Resources Channels

Marketing agencies

Platform Social

Country representatives

Fundraising know-how Network

etc.

CONDA network Own sales force

Payment providers

Cost Structure Revenue Streams

Project comissions/brokerage fees (fixed and success fees)

Service/administration fees

Success dependent transaction fees charged to investors

Platform technology licence

Platform usage fees

Simple and transparent

investment opportunities

Funding accessability

and customization

Market testing and

marketing effect

Dedicated personal

assistance & co-creation

Fixed costs: salaries, rents, licenses, recurring accounting and

legal services, etc.

Technology buyers

(white-label) or users

(local country

representatives)

Variable costs: marketing, customer education, payment

processing

Legal, financial, tax and

management consultants

Page 24 of 71

campaign is considered unsuccessful, and the borrower will not receive the loan. If the upper limit

is reached within the set duration, the campaign either ends automatically or the upper limit gets

increased.

When the service package is chosen, the preparations for the campaign can begin. The most

important part of this phase is the loan agreement formulation, since it makes a central piece of

borrowers offer to lenders/investors. As previously mentioned in this study, CONDA offers two

loan agreement templates, one for SMEs and another for start-ups19. Dependent on the type of

agreement, the loan might be more equity or debt like. The differences between these two forms

and comparison to “pure” debt and equity financing are presented in the table below.

Debt SME Loan Start-up Loan Equity

Seniority in

case of

insolvency

Senior Subordinated to

banks

Subordinated to

banks

Junior

Security Yes If yes, 2nd rank. If yes, 2nd rank. None

Covenants Yes None None None

Term Flexible 3-10 years 5-10 years None

Repayment Amortizing from

cash flow (monthly,

quarterly, annually)

Amortizing from

cash flow (monthly,

quarterly, annually)

Bullet at maturity None

Interest

Rates

Fixed Fixed + bonus Fixed + bonus N/A

Interest

Payment

Delays

Usually none Possible Yes N/A

Upside

(Success

Participation)

None Bonus interest

rates

Bonus interest

rates +

Appreciation

interest20 at

maturity

Unlimited

(equity value

+ dividends)

Voting Rights None None None Yes

Relative Risk

Level

Lowest Higher than debt Higher than SME

loan

Highest

Figure 7: CONDA loan agreements - comparison to debt & equity

Important elements of these agreements, such as fixed interest rate, repayment schedule, flexible

interest rates/appreciation interest calculation formulas, reporting requirements, potential

conversion-to-capital option etc. are also agreed upon in this phase. If there is a so-called lead

investor, one or more, their role and contract conditions can be agreed upon separately.

Apart from loan agreement, the main focus of the preparation phase are the marketing strategy

and promotional materials. The business model, products and services have to be presented in a

simple, transparent and understandable manner, in order to be easily evaluated by the potential

investors. Comprised business and financial plan presentation, along with a short investment story

should help the investor asses the success probability of the borrower’s project. Marketing

campaign includes activities spanning from social media campaigns, dedicated newsletter and blog

19 Real estate projects are out of scope of the case study.

20 Participation in enterprise value increase, calculated based on the formula set in the loan agreement.

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issue about the project, presentations on CONDA events, online marketing, etc. CONDA’s level

of involvement in these activities depends on the services package chosen by the borrower.

When all the preparations have been conducted, the campaign is presented on the platform and

the fundraising process begins. Along with the marketing activities, borrowers get to

communicate with the investors in the Q&A section on the platform, thus getting feedback from

the market about their business model, products or services. Investors are able to invest amounts

ranging from EUR 100 to EUR 5,000 (higher amounts are also possible under certain conditions

specific for local markets), which land on the escrow account until the total raised funds have

reached the lower limit set at the beginning of the campaign.

In case the campaign was successful, the borrower receives the loan and starts with repayments

and interest payments according to the dynamic scheduled in the agreement. Besides payments,

borrowers are also required to issue regular reports (including financial reports) to investors, at

least annually (preferably quarterly). CONDA calculates the amounts payable for every single

investor and sends the list with names and amounts to the borrower. This service is charged with

the annual service fee.

Lenders Perspective – Lenders kick-off the investment process by registering on the platform

and going through a KYC and AML check. Although browsing through basic presentations of

available investment opportunities is available also to unregistered users, only the registered one

are allowed to see the complete information about the projects, loan agreements21, ask questions

in the Q&A section and discuss the investment opportunities in the so called investor’s room

(registered investor community).

After the investors have evaluated the investment opportunities they can decide if and how much

are they willing to invest. Simultaneously to investment, lenders sign a digital loan agreement with

the borrower. At the end of campaign, if the targeted amount has been achieved, the loan

agreement is effective.

It is important to note that the platform warns investors on many places on the website that

crowdinvesting is very risky and this should be taken into consideration. The platform even

suggests diversifying investments to many projects and offers a systematic methodology for

investment evaluation.

Until the loan is repaid the investors are entitled to regular reports from borrowers. In case of

start-up loans there is a possibility for lenders and borrowers to agree on conversion of loan to

equity, thus enabling them to acquire equity share at the loan maturity.

5.3.2 Legal Analysis of Business Processes (Compliance of Business Processes with Serbian

Laws)

5.3.2.1. Foreign Exchange

a) Types of cross-border loans and the participants thereunder

The FX Regulation differentiates among several types of cross-border loans, the main categories

being the so-called financial loans22 (i.e. loans where a creditor disburses the funds to the

borrower’s bank account) and commercial loans (i.e. loans related to foreign trade of goods and

services). However, the regulation related to cross-border financing arrangements generally does

not make distinctions between foreign credits (granted by banks whose principal line of business

entails lending activities) and loans (granted by entities other than banks). Thus, both credits and

loans are subject to same foreign exchange requirements. Additionally, the FX Regulation does

21 Although sometimes these are freely available to everybody.

22 For the purposes of this study, we have outlined only the requirements (such as prepayment restrictions, reporting

and conclusion requirements, allowed purposes, etc.) for financial cross-border loans under Article 2 (21) paragraph

2 second indent of the FX Regulation and subordinated loans under Article 2 (21) paragraph 4 first indent of the FX

Regulation.

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not provide for limits to the loan/credit amount granted by foreign entities which allows the

foreign investors to freely determine the maximum of their investments via crowdlending.

In general, the FX Regulation allows Serbian entrepreneurs, individuals and legal persons to take

loans from foreign banks, individuals and legal entities while local branch offices of foreign legal

entities may only take loans from their shareholders23. Additionally, the foreign loans may be

granted by a single eligible lender or a group of such lenders granting a syndicated loan.

Since CONDA’s model is focused on legal entities as borrowers while crowdinvestors are

individuals or legal entities, the participants in CONDA’s platform are eligible under the FX

Regulation to grant/take cross-border loans.

b) Reporting requirements

A foreign financial loan needs to be reported with the NBS within 10 days from the date of

signing of the loan agreement. Drawing of the loan can begin only once the NBS confirms due

reporting of the loan agreement (meaning that the NBS has rubber-stamped the reporting forms

and awarded the loan and loan application number). For the loan to be reported with the NBS,

certain loan data (such as interest rates, utilization and repayment schedules etc.) needs to be

specified at the moment of filing for reporting.

The reporting of a loan is usually completed within 2-3 working days after the submission of

complete documentation to the NBS. Reporting is conducted through the borrower’s local bank

maintaining the account to which the loan will be disbursed and involves submission of certain

documents and forms (including, among other, borrower’s statement on purpose of the loan,

borrower’s statement on availability period of the loan, etc.). All of the documents should be

submitted in the original or certified copy and accompanied by a certified translation. For

reporting costs please see point d) of this Section.

Upon filing the loan reporting application, the NBS performs material review of documentation

and approves reporting only if it is satisfied that the agreement is in line with the FX Regulation.

Consequently, the NBS in practice applies wide discretionary approach and may raise comments

that may not be fully predicted in advance. In case such comments are raised, parties would need

to implement required change (either by amendments to the loan agreement or by separate

statements signed by the relevant parties) in order to complete the loan reporting procedure.

In practice, the loans reported to the NBS are either (i) loans between the borrower(s) and one

lender or (ii) so-called syndicated loans involving more than one lender in which a group of

lenders are providing a joint loan to the borrower(s) under the same terms and under the same

loan agreement, whereby one bank is appointed as the agency bank to manage the loan business

on behalf of the syndicate members. Although reporting of the loan agreement including multiple

lenders is tested only in relation to the syndicated loans, we do not see any legal obstacles for

one crowdlending campaign to be documented under one loan agreement and reported as one

loan having multiple lenders. However, consultation with the NBS with respect to reporting

would be advisable.

Given that CONDA’s model involves a large number of lenders whereby some may grant micro

loans whose value may not exceed the costs of the reporting of the loan, it would be optimal to

report one loan agreement signed by all the lenders for each crowdlending campaign (as opposed

to filing multiple separate applications for each crowdinvestor’s loan). This would not only reduce

the reporting costs but also ease the administrative burden of the Serbian borrower responsible

to report the cross-border loans.

Further, the requirement that the foreign financial loan has to be reported to the NBS prior to

disbursement of the loan would mean that the crowdinvestors would be unable to simultaneously

23 Decision on the Terms and Conditions of Using Foreign Financial Credits for Purposes Set out in Article 21,

Paragraph 2 of the Law on Foreign Exchange Operations (“Official Gazette of RS”, Nos 6/2013, 74/2013 and 32/2018)

(“Financial Loans Decision”)

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with subscription transfer the loan to the Serbian borrower (i.e. to its escrow account). Instead,

during the subscription period of a campaign, the crowdinvestors would only be bound by the

agreement to execute the payments once the campaign is declared successful and the loan

agreement reported. In this scenario, crowdinvestors would be able to withdraw from their

commitment during the subscription period, while enforcing their obligation to invest in campaign

would involve lengthy court proceedings which would at the end require that the court verdict is

recognized and enforced in the country of residence of such crowdinvestor which may be rather

expensive with the unpredictable outcome. In addition, the NBS interprets the definition of the

financial loan24 very literal and insists that the funds under the loan are transferred directly from the

lender’s bank account to the borrower’s bank account, which effectively prevents involvement of

any third party which may hold the funds until the reporting of the loan.

In our view, the potential solution with regards to the above may be:

1) Reservation of lender’s funds by its foreign bank until the loan is duly reported,

2) Holding of lender’s funds by the local bank until the loan is duly reported,

3) Adoption of amendments to the Loan Reporting Guidelines25 for crowdlending purposes, and

4) Obtaining an official opinion of the NBS confirming that the funds may be held by third party

until the loan is duly reported or alternatively, enactment of the decision by the NBS in which

mechanism of disbursement of financial loans through third parties would be specifically

prescribed for the crowdlending purposes.

The option under no.1 above would involve the cooperation of foreign banks or other

payment service providers, which would place a reservation on the funds of crowdinvestors until

the loan is duly reported with the NBS. Such reservation would trigger what looks like a

deduction of the loan amount from the funds available at the bank account of the crowdinvestor.

Although the funds would still be at the account of the investor, the reserved loan amount would

be restricted from use. This procedure would ensure that the funds necessary to complete the

investment remain available until the reporting is processed. However, this should be checked

with the foreign banks/payment service providers to determine its feasibility.

If possible, it would be used in the crowdlending campaign in the following way:

• The investor enters the project and makes a payment,

• Its issuing bank places a hold on the respective amount until the relevant crowdlending

campaign is declared successful and the loan is duly reported,

• Once the NBS confirms due reporting of the loan, the borrower’s bank or the platform

informs the issuing bank which in turn disburses the funds to the borrower.

The option under no. 2 above involves the engagement of a local bank which would be the

cooperating partner of the crowdlending campaign and the bank which would hold the account of

the borrower to which the loan funds would be disbursed. This option would consist of the

following steps:

• The crowdinvestor enters the project and makes a payment under the not-yet-reported

loan,

• The funds are kept on hold by the borrower’s bank until the loan is reported,

• Once the NBS confirms due reporting of the loan, the bank releases the funds to the

borrower.

To understand the above steps, one must first apprehend the general procedure of execution of

foreign payment transactions in Serbia. Specifically, the inflow of foreign payments based on

24 Financial loans are the loans where a creditor disburses the funds to the borrower’s bank account.

25 Guidelines on filling out foreign loan credit business forms (“Official Gazette of RS” No. 102/2018) (“Loan

Reporting Guidelines”).

Page 28 of 71

payment orders is generally conducted in the following manner:

• A foreign entity makes a payment to the resident (i.e. payment beneficiary),

• The resident’s bank receives the funds but does not release them to the payment

beneficiary yet,

• Instead, the bank contacts the payment beneficiary requesting it to state the legal ground

on which it received the funds (i.e. declare or provide the legal basis for the executed

payment- in case of the loan the beneficiary should provide loan application number)

within one business day,

• Once the beneficiary provides the adequate information and/or documentation, the bank

disburses the funds to the payment beneficiary.

In case of payments by a foreign lender on the basis of a cross-border loan, the bank cannot

disburse the funds to the resident borrower unless the NBS has approved the loan reporting and

awarded a loan application number to the respective loan. As the reporting procedure is

conducted through the borrower’s bank (i.e. the bank that receives the payments under the loan)

in this case the bank is already in possession of the required documents and is fully aware of the

legal basis of the inflow. However, if the loan was not previously reported with the NBS and the

lender disbursed the funds to the borrower, the bank credits the so-called foreign exchange

liabilities account of the borrower (inaccessible to the borrower) until it receives the

confirmation on loan reporting26 (i.e. the loan application number). If the bank does not receive

the validation of loan reporting, it shall return the received funds to the lender’s bank.

The FX Payment Transaction Guidelines are silent on the deadline of the bank to either (i)

disburse the funds to the payment’s beneficiary or (ii) return them to the payment order issuer.

Therefore, it should be confirmed with the NBS and the potential partner bank(s) whether the

banks would be able to hold the funds for a few months during the ongoing crowdlending

campaign.

If possible, borrower’s local bank would periodically receive the funds from the crowdinvestors as

they enter into the project and keep them at the foreign exchange liabilities account of the

borrower until the campaign is declared:

• successful and, consequently, the loan reported before the NBS, after which it would

release the funds to the borrower, or

• unsuccessful, after which it would return the funds to the crowdinvestors.

Given also that the above structure resembles the escrow arrangement, it should be verified with

the local banks whether they would be interested to provide the above service and under which

conditions (including costs of such arrangements, as generally escrow arrangements with the

banks may be rather costly.)

The option under no. 3 above involves engagement of the NBS, specifically, the NBS may

amend the Loan Reporting Guidelines by introducing a specific reporting procedure for

crowdlending purposes. The NBS may allow in the Loan Reporting Guidelines a prior reporting of

the template loan agreement incorporating all of the terms of a crowdlending campaign but

without indicating the lenders and other details of the loan that will not be known at the moment

of reporting (such as for example the exact amount of the loan). Specifically:

• Before the launch of the crowdlending campaign, the borrower would file for reporting of

the template crowdlending agreement,

• Upon review of the terms under the respective agreement, the NBS would award the loan

application number to the crowdlending campaign without reporting each lender of record

and other missing data pertaining to the loan,

26 Item 9 of the Decision on Terms and Conditions of Performing Foreign Payment Transactions (“Official Gazette of

RS”, Nos 24/2007, 31/2007, 38/2010 and 111/2015) (“FX Payment Transaction Guidelines”).

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• Once a lender signs the crowdlending agreement and enters into the project it would

make payments under the previously awarded loan application number,

• All payments would be made to the borrower’s escrow account held with the local bank,

• The escrow account would be inaccessible to the borrower until the funds are fully raised,

• Once the campaign is declared successful, the funds would be disbursed to the borrower

• or, in case of failure of the crowdlending project, the funds would be returned to the

crowdinvestors and loan application number cancelled with the NBS.

If the campaign was successful, the borrower would subsequently deliver to the NBS all data on

each lender in the campaign, as well as other missing data. In this way each lender would be

reported as a lender of record prior to the maturity date and the borrower would be timely

enabled to effectuate repayments of the loan.

In this scenario the FX Payment Transaction Guidelines should also be adjusted as to include a

code under which the borrower would be able to transfer the money from the escrow account

to the lenders in case the campaign is not successful, the investors withdrew its investment in line

with its 14 days-recession right (please see Section 5.3.2.5 below) or if the borrower refuses the

offer of the particular investor.

It should be noted that the above scenario where the NBS will be amending the Loan Reporting

Guidelines in the above manner does not seem very likely, as so far, they were firmly at the

position that the loan may not be reported after the funds were received by the borrower, but

only before the disbursement.

Also, it should be noted that currently escrow arrangements in Serbia entail high costs, thus, it

should be checked with local banks whether this option would be commercially viable.

The option under no. 4 above would be to obtain an official opinion of the NBS whereby the

NBS would, for purposes of crowdlending, allow involvement of third parties which would hold

the funds until the reporting of the loan is completed. In this way, the investors may effectuate

payments to the foreign CONDA entity (or partner bank/payment service provider) which would

hold the funds on behalf of the investors and disburse them to the Borrower upon loan reporting.

This opinion should also include their view on which payment code should be used to return the

funds to the lenders in case of unsuccessful campaign, the investors withdrawal of its investment

in line with its 14 days-recession right (please see Section 5.3.2.5 below) or if the borrower

refuses the offer of the particular investor.

Alternatively, the above issues may be addressed in the decision of the NBS which would reflect

specifics of the crowdlending structure involving third party payment processor.

c) Interest rates

In CONDA’s model crowdinvestors are entitled to a bonus interest dependable on the

performance of the borrower and/or its enterprise value. The reporting of such interest with the

NBS may be problematic, as it is not determinable at the moment of reporting. However, the

applicable bylaws27 provides for reporting of “other specific interest rates” and in our opinion

CONDA’s variable interest rates may be confined under that category. In addition, due reporting

of such interest rates may be denied by the NBS if it deems that such interest rates are

exorbitant. Moreover, the nature of bonus interest under the CONDA model significantly differs

from the nature of ordinary interest. Specifically, the CONDA interest rates which depend on

borrower’s performance represent financial return on quasi-equity financing dissimilar to general

debt financing and as such may be under more strict scrutiny of the NBS.

In our view, possible solutions with regards to the adequate reporting of CONDA’s interest rates

may be:

27 Items 15 and 16 of the Loan Reporting Guidelines.

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1) Adoption of the amendments to the FX Payment Transaction Guidelines for crowdlending

purposes,

2) Adoption of amendments to the Loan Reporting Guidelines for crowdlending purposes, and

3) Initial reporting of the interest rate as specific “other specific interest rates” type and consequent

amendment of such reporting, if needed.

Option under no. 1 above involves engagement of the NBS, specifically, as we outlined in point

e) of Section 5.3.2.1, crowdlending may also be construed as a direct investment due to its quasi-

equity nature. Further, bonus interest rates are, in their essence, closer to payments of dividends

than loan interest rates. However, the FX Payment Transaction Guidelines currently do not

provide for an adequate payment code in respect of the income arising out of the direct

investments other than revenue from participation in equity. The prescribed list of payment codes

is significant as any cross-border payment may be executed only if in line with the said list.

Otherwise, the banks may refuse to effectuate such cross-border payments as non-compliant with

the FX Regulation. Therefore, the NBS may amend the FX Payment Transaction Guidelines which

defines the list of permitted payment codes by either (i) broadening the scope of payment code

no. 150 (payments of revenue from equity participation) to include all payments arising out of

direct investments or (ii) introduce a new payment code for crowdlending purposes (i.e.

payments of bonus interest rates).

Option under no. 2 also involves engagement of the NBS. Specifically, the NBS may amend the

Loan Reporting Guidelines by introducing a specific reporting procedure for crowdlending

purposes which would, among other, regulate variable bonus interest rates and other issues

related to the loan reporting in crowdlending projects.

Option under no. 3 above does not involve any legislative amendments, however, the feasibility

of this option should be confirmed with the NBS. Specifically, the NBS should be consulted on

whether it would allow the reporting of such indeterminable “other specific interest rate” type,

especially given its specific nature significantly disparate from regular loan interest rates.

d) Reporting costs

Loan reporting costs consist out of the NBS fee, the fees of the respective local bank through

which the reporting is conducted and document translation costs.

The NBS fee amounts to RSD 5,000 (approx. EUR 40) per loan application while other costs

would have to be determined on a case-by-case basis as they depend on the volume of submitted

documentation and the fees of the respective commercial bank. The NBS fee and other costs are

charged at the time of initial reporting as well as the reporting of each loan amendment.

e) Subordinated loans

Cross-border loans with a maturity of five years or longer (provided that they have the

characteristics of subordinated claims, such are loans granted under CONDA platform) are

regarded under the FX Regulation as direct investments. The provisions of the FX Regulation and

the applicable bylaw28 are somewhat ambiguous and do not provide for clear guidance on

whether a subordinated loan granted by persons other than the shareholders of the borrower

should be regarded as direct investments. This legal gap may leave room for interpretation of

crowdlending investments as direct investments for the following reasons:

• crowdlending represents hybrid lending with both debt-and-equity-like features,

• investors are enabled to participate in the company’s success through performance-driven

bonuses,

• interest payable under the crowdlending framework resembles to dividend payments

rather than the ordinary loan interest rates.

28 Decision on Reporting on Foreign Credit Transactions (“Official Gazette of RS”, Nos 56/2013 and 4/2015)

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Direct investments are subject to certain ex post reporting requirements and in practice,

subordinated loans (regardless of whether they are granted by the shareholder or other persons)

are only reported through the ex-ante loan reporting procedure. Therefore, even if qualified as

direct investment under the FX Regulation, crowdlending would still be subject to loan reporting

requirements.

f) Debt-to-equity conversion

Certain arrangements under CONDA model envisage debt to equity options of the investors.

Generally, such arrangement should be fine from the perspective of FX Regulation and other

applicable Serbian regulations. However, it should be noted that in case of such conversion

receivables based on loan principal would be considered as monetary share capital, whereas the

receivables based on interest rates and bonus payments would be considered as in-kind share

capital. Therefore, material receivables of the investors (i.e. bonus interest rate) may only be

converted to in-kind share capital.

g) Conclusion of a cross-border loan

Cross-border loans may be concluded only in written or electronic form. The exact requirements

for reporting of e-form loan would depend on the approach of the NBS, since this exception was

introduced in the FX Regulation as of April 2018 and is not yet reflected in the NBS bylaws

regulating reporting procedure nor sufficiently tested.

CONDA platform entails online contracting whereby the crowdinvestor submits an offer to

conclude the loan agreement by either (i) clicking the corresponding button on the Website or

(ii) submitting a subscription form in writing.

As elaborated in more detail in Section 5.2.2.1., loan reporting procedure requires submission of

certain documentation in original copies. Therefore, conclusion of CONDA loan agreements may

be more burdensome in case of submission of subscription forms as the borrower would have to

gather signatures of all contracting parties prior to reporting and, consequently the disbursement

of the loan.

On the other hand, mere clicking of an online button most probably would not suffice for

purposes of entering into a cross-border loan agreement in an electronic form. Specifically,

although the FX regulation does not further elaborate on the manner of entering into a loan

agreement in an electronic form, we were advised informally by the NBS that such e-loan would

have to be electronically signed (i.e. by way of electronic signature). Note that obtaining of a

qualified electronic signature in Serbia requires personal presence while the use of a foreign

qualified electronic signatures has not been tested in practice yet.

Therefore, if CONDA model is to be established in Serbia, it would be advisable to consult the

NBS on the exact requirements for the execution of a cross-border loan in the electronic form

and the manner of its reporting. Exploiting this newly introduced possibility to enter into e-loans

would significantly contribute to the fast-paced dynamic of online contracting envisaged under the

CONDA model.

Alternatively, as mentioned the agreements may be executed by a handwritten signature,

gathered and countersigned by the borrower and filed in original copies to the NBS.

h) Foreign financial loan purposes

Serbian borrowers can use foreign financial loans only for purposes explicitly provided by

applicable regulations. These are as follows:

1) payment of import of goods and/or services;

2) performing of investment works abroad;

3) repayment of previously utilized foreign loans;

4) direct investments out of Serbia;

5) purchase and lease of real estate in foreign currency in Serbia;

6) conversion of borrowed funds into local currency (i.e. Serbian Dinar) for use in Serbia;

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7) other purposes prescribed by the NBS, such as other investments abroad, purchase and

sale of local securities in foreign currency, financial repurchase, processing and production

of agricultural goods or financing of export of goods/services, etc.

In case multiple purposes are reported, specification determining total amount planned for each

purpose has to be provided for the reporting purposes. The initially submitted statement

specifying the purpose/s of the loan may be changed subsequently if the borrower wishes to

change the initially reported purpose(s). However, any such change of purpose should be

reported to the NBS through the local commercial bank.

If the reporting of cross-border crowdlending is conducted after the target funding is achieved

and campaign has been affirmed successful, there should be no specific issue with the declaration

of purpose(s). However, the Serbian borrower should consider the above rules on financial loan

purposes, monitor its allocation of the funds and conduct subsequent reporting of changes with

regards to loan purpose(s), if any.

i) Cross-border loan repayment

The FX Regulation sets mandatory minimum tenor and grace period in case a foreign financial

loan is taken from a creditor with a seat/domicile outside the European Union. We have outlined

the repayment restrictions in case of non-EU lenders below.

Foreign financial loans taken for purpose(s) listed under nos. 4 to 7 in point h) of this Section

above must not be repaid in full before the expiry of one-year + 1 day as of drawing of funds. In

the case of multiple drawings, a one-year + 1-day term is calculated for each drawing separately.

This means that for each drawn amount, a one year + 1-day term has to expire between the

drawdown and the repayment of that amount.

For the said types of foreign financial loans, the FX Regulation also sets minimum grace periods if

they are to be repaid in instalments. Specifically, the first instalment must not be repaid before the

expiry of six months as of drawing of funds (whereby in the case of multiple drawings, the 6

months’ period is calculated separately for each drawing). Repayment instalments during the

above one-year term have to be "proportionate" (the meaning of the term "proportionate" is not

completely clear, but in practice it is interpreted by the NBS as referring to equal or

proportionally increasing instalments).

Exceptionally, for the loans that Serbian legal entities and entrepreneurs take for financial

repurchase, processing and production of agricultural goods or financing of export of

goods/services, no minimum tenor applies while minimum grace period is three months.

Note that the above repayment restrictions are not applicable to the early repayment due to the

breach of the loan agreement but apply to the mandatory and voluntary prepayments.

Until the latest changes in the FX Regulation (introduced in April 2018), the above repayment

restrictions were applied regardless of the lender’s domicile (i.e. including lenders from EU).

However, these legislative changes did not address the situations whereby a loan is granted by

both EU and non-EU lenders. In our view, in such case repayments of loan to non-EU lenders

would have to be made in line with the above tenor and grace periods whereas the repayments

to the remaining EU lenders may be made freely. Therefore, the framework agreements on

crowdlending would have to be carefully drafted so to divide borrower’s repayment obligations

to EU and non-EU lenders. Alternatively, the framework agreements on crowdlending may

comply with the Serbian repayment restrictions for all lenders or the platform may entirely

exclude non-EU entities as the lenders.

Additionally, in CONDA’ business model the investors almost simultaneously make offers to the

borrower and execute the corresponding payments for the granted loan. Thereafter, the

borrower is entitled to either accept or reject the investors’ offers. In case of rejection, the

payments made by the investors shall be refunded. Moreover, if the funding threshold is not

reached, the funds already disbursed to the borrower would have to be refunded to the

investors. Also, in some case the loan agreement provides for early repayment (termination) of

the loan, which may take place before expiry of the mandatory tenor of the loan. The above

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outlined repayment restrictions may hinder the execution of refunds to the non-EU investors

regardless of the basis of the refund (i.e. the rejected offer, failure of campaign or any other

reason for prepayment of the loan). Therefore, refund options should be discussed with the NBS.

In our opinion, the following solutions should be considered:

1) Adoption of the amendments to the FX Payment Transaction Guidelines for

crowdlending purposes so to include new payment code which will enable refund of the

rejected offer and adoption of amendments to the Loan Reporting Guidelines for

crowdlending purposes so to enable early prepayment of the loan before expiry of the

mandatory tenor, and

2) Exclusion of non-EU investors from the campaign.

The option under no. 1 above involves engagement of the NBS which would introduce a

specific payment code in the FX Payment Transaction Guidelines applicable to refunds to non-EU

investors in case the funds have been received by the borrower, but the borrower rejected the

offer. It would be also required that the NBS to amend the applicable bylaws and introduce a

specific reporting procedure for crowdlending purposes whereby it would allow early

prepayments to non-EU investors prior to expiry of mandatory tenor explained above.

The option under no. 2 above does not involve any legislative amendments but may

significantly reduce the market of investors.

j) Assignment of cross-border loans

Any amendment or termination of the foreign financial loan has to be reported with the NBS

within 10 days as of the amendments or termination of the loan agreement. Any such change may

be applied only for future and not retroactively for the period prior to reporting of the change. In

case of failure to report changes of the reported loan to the NBS, the borrower may be subject

to monetary fines for commercial offence as outlined in point c) of Section 5.3.2.2 below.

In practice, this is especially important in case of change of the reported lender (i.e. assignment of

loan receivables) or any changes in the principal loan amount, interest rates, and other amounts

payable under the reported loan because the reported data needs to match the data on the

respective payment order. Failure to report any such amendments to the previously reported

loan causes practical inoperability of such loan amendments since no funds may be wired in or out

of Serbia based on them.

Cross-border assignment/transfer of receivables is explicitly allowed (except for the resident –

natural persons), but only for receivables that originally had cross-border nature. The assignment

to a non-resident of receivables from the local transaction between the residents is regarded by

the NBS as unpermitted under the FX Regulation.

This means that local lenders may assign the receivables from crowdlending transactions involving

Serbian borrowers only to local entities and would be restricted from assigning them to foreign

lenders.

In addition, certain formal requirements apply to the permitted assignment/transfer of a cross-

border loan.

Firstly, the assignment/transfer document should contain certain mandatory elements which are

rather straightforward - details on parties, amount and currency of the claim/debt and legal basis

of claim/debt. Secondly, the debtor has to provide a written statement that it was notified about

the transfer. In practice including these formal elements in the assignment document may cause

practical issues, as such elements may be indeterminable at the time of assignment. This may be

especially problematic in case of crowdlending whereby the exact amount of assigned claim may

not be determined until the date when the enterprise value and the bonus interest rate are

estimated.

Finally, it should be emphasized once more that the proper assignment of a cross-border loan

entails prior reporting of the new lender of record before the NBS. In practice, this requires the

involvement of the resident borrower unless any cross-border payments arising out of such

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assignment will be executed on the basis of a final court decision. This may prove to be overly

burdensome for the borrower, since it has to pay the reporting costs each time there is a change

of the lender (NBS and commercial bank fees). Therefore, the Serbian borrower would have to

be on board with the assignment of crowd investment and to timely file for reporting of loan

amendment whenever a crowdinvestor exits the investment and a new investor steps in.

Otherwise, if the assignee is not duly reported with the NBS, the borrower’s local bank will

refuse to effectuate voluntary payments to the new lender.

In addition to the above, more stringent regime applies for the assignment/transfer of cross-

border loans taken by a Serbian public company, a legal entity with the state-owned capital or a

legal entity in the process of restructuring or privatization, in which case a prior consent of the

Serbian government and debtor is required. The FX Regulation does not further specify the term

state-owned capital and it may be interpreted that even a company which is minority owned by

the state (e.g. the state may hold 5% or even less of shares) would be required to obtain a

government consent.

CONDA model entitles the crowdinvestors to assign their receivables under certain conditions.

In line with the above, such assignment would be further conditioned by the specific assignment

requirements in light of the foreign exchange restrictions. Specifically, such formal requirements

require specification of certain data (such as the exact amount owed by the borrower) which may

be indeterminable at the moment of assignment. Moreover, the new lender would have to be

reported with the NBS in order to enable transfer of the loan. This reporting requires the

involvement of the borrower and entails additional reporting costs.

Unlike other foreign exchange issues such as the loan reporting and lack of adequate payment

codes which may be resolved by amendments to the applicable bylaws of the NBS, the rules on

assignment are provided under the Law on Foreign Exchange Operations and would require

changes to the law itself. This means undergoing a lengthy process of amending the law and

requires the involvement of, among other, the Serbian government and the National Assembly.

For the above reasons and given that the transferability of crowdlending receivables represents a

non-essential feature of crowdlending, we would advise that the assignment is explicitly excluded

under the crowdlending agreements.

Additionally, CONDA’s model envisages payment of fee for the processing of bonus interest

owed by the investor to the platform. However, such fee is charged to the borrower after being

deducted from the amount of bonus interest payable to the investor. This would represent an

assignment of debt by the investor to the borrower which is subject to the above outlined foreign

exchange requirements. Therefore, we would advise either:

• clearly stating in the agreement that the fee for processing of bonus interest is owed by

the borrower and charged to the borrower, or

• charging this fee directly from the investor.

k) Currency

The cross-border loan may only be disbursed in the foreign currencies prescribed as convertible,

specifically: Australian dollar (AUD), Canadian dollar (CAD), Chinese yuan renminbi (CNY),

Croatian kuna (HRK), Czech koruna (CZK), Danish krone (DKK), Hungarian forint (HUF),

Japanese yen (JPY), Kuwaiti dinar (KWD), Norwegian krone (NOK), Russian rouble (RUB),

Swedish krona (SEK), Swiss franc (CHF), Pound sterling (GBP), US dollar (USD), Romanian leu

(RON), Turkish lira (TRY), Bulgarian lev (BGN), Convertible mark (BAM), Euro (EUR), and Polish

zloty (PLN)29.

Local loans (i.e. loans approved by a local creditor to a local borrower) may be denominated in

29 Exceptionally, only international financial organizations and development banks or financial institutions founded by

the foreign countries may grant the financial loans in Serbian Dinars.

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foreign currency but are generally payable in Serbian Dinars30.

Therefore, foreign crowdinvestors would be able to make investments in the above listed

permitted currencies. On the other hand, local crowdinvestors would be obliged to grant the

loan in Serbian Dinars. Although there should be no specific issue with regards to dividing the

currency applicable to local and foreign investors, the currency rates would have to be observed

and considered when determining whether the funding threshold was achieved and later for

payments to the investors. Further, due to the cross-border loan reporting requirements

inapplicable to the local loans, we would advise that the borrower concludes separate agreements

with foreign and local investors.

5.3.2.2. Legal Accountability / Licensing

a) Investors

Generally, pursuant to the Law on Banks only licensed banks are allowed to provide loans (i.e.

credits) as a business activity in Serbia31. The applicable regulations provide for no guidelines

on what may be deemed as a business activity of lending. Reasonable interpretation is that

other entities are entitled to grant loans as long as the volume of such lending activities cannot

be construed as a business activity i.e. the prevailing activity which generates significant income

when compared to other activities of the relevant entity.

Serbian Law on Obligations recognizes two very similar agreements – loan (“zajam” in Serbian)

and credit (“kredit” in Serbian) agreements. Although they are almost identical, certain

differences between the two should be considered:

• only banks may grant credits, and

• credit agreements involve only lending of money, whereas loan agreements may also

be in-kind (i.e. lending of other replaceable items).

In practice, the companies widely use intercompany loans as a means of intra-group financing.

Such loans are considered to be fine from the perspective of compliance with banking

regulations (i.e. not considered as credits). Moreover, in case of interest-free intercompany

loans such may hardly be construed as credits as no interest is charged.

However, in case of entities granting loans to other non-affiliate entities the risk of considering

such activities as unauthorized granting of credits is increased. This may especially be of

relevance in case of crowdlending activities whereby the lenders are investing with an aim to

earn significant profits. Thus, if one is vastly engaged in crowdlending and made a living out of

such investments, it may be considered as performing unauthorized business activity of lending.

A person who grants loans without an appropriate license and legal authorization, may be

punished for a criminal offense of a prison sentence of up to five years. Although criminal

sanctions capture both residents and non-residents in case of crimes committed in Serbia, it is

questionable how foreign investors would be sanctioned in practice given their remote online

presence in crowdlending. However, local investors, on the other hand, would have to take a

more prudent approach when assessing whether their activities are against the banking

regulations in Serbia.

Given the above, investors would have to refrain from immense involvement in crowdlending

to avoid potential criminal responsibility. In our view, as long as the investor’s total income is

not solely or predominantly based on crowdlending activities and the volume of loans granted

is not overly excessive, it should not be considered as providing loans as a business activity.

30 Although in some cases disbursement of loans in the above listed foreign currencies are allowed for certain specific

purposes, they are not part of our analysis as they would have to be granted by the local bank which we understand

would not be the case in crowdlending campaigns.

31 Exceptionally, limited lending activities are allowed under certain conditions to licenced payment services providers

in line with the Law on Payment Services (Official Gazette of the Republic of Serbia Nos. 139/2014 and 44/2018).

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However, the borderline of acceptable quantity of lending in the above context would have to

be determined on a case-by-case basis. Given that the NBS may raise this issue if crowdlending

develops in Serbia, it should be previously consulted on this matter.

b) Platforms

Although there is a global lack of regulations with respect to crowdlending, in some

jurisdictions the crowdlending platforms require certain licenses in order to perform their

activities. We observed several different fields of law with a view to determine whether the

crowdlending platform would be obliged to obtain any licences under the Serbian law.

In particular, we analysed the banking rules, payment services regulations and the regulations

concerning investment companies.

With respect to the banking regulations, as the platform is a mere intermediary between the

borrowers and lenders (which is not recognized under the regulations as the banking activity)

and does not provide any loans itself, it should not be subject to licencing requirements.

Further, we also observed the payment services regulation to identify whether it may come

into play within the operation of crowdlending platforms like CONDA. The PS Law aims to

promote the development and use of innovative online and mobile payments in Serbia. Thus,

the PS Law should be analysed in the context of payment features available at crowdlending

platforms. After evaluating the payment mechanisms of CONDA’ model, we concluded that

the platform is not involved in the payment process between the borrowers and lenders, and,

thus, would not require a licence for payment service providers. Specifically, CONDA does

not enter into possession of any funds transferred between the investors and borrowers. On

the contrary, CONDA is only an intermediary between the participants while all payments

under a campaign are executed via banks of borrowers and lenders.

With regards to the regulations concerning investment companies, one of the main aims of the

CM Law is the protection of investors. Given that crowdlending involves high-risk investments

whereby the borrowers are mainly non-qualified and inexperienced investors we considered

whether the platform would be required to obtain a licence for investment company.

Under the CM Law the licenced investment companies provide investment and auxiliary

services linked to financial instruments (i.e. services related to investments that do not involve

financial instruments are not governed by the CM Law).

Although the crowdlending agreement resembles a debt-based financial instrument as its value

is derived from the value of the company (borrower), in our view it should not be regarded as

a financial instrument due to, among other, the fact that it is not tradeable on a regulated

market.

Moreover, the features of the crowdlending agreement seem to be out of scope of the

definition of a financial instrument under the CM Law. Consequently, crowdlending should not

be deemed as a regulated activity of providing investment services under the CM Law.

Given that the crowdlending platform is not as such recognized under the law and that in our

view may not be confined under any category of the licensed activities, there are no specific

liability or accountability of the platform toward investors or the borrowers, other than

contractual liability which arises from the contracts signed with the investors and the

borrowers.

c) Borrowers

The accountability of borrowers in crowdlending would mostly be related to their non-

compliance with the FX Regulation, including but not limited to the obligation to report loans

advanced by foreign investors. The breaches of the FX Regulation are generally sanctioned as

an offence subject to monetary penalties that may range up to RSD 2,000,000 (approx. EUR

17,000) for the company and up to RSD 150,000 (approx. EUR 1,200) for the responsible

officer.

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In addition to the monetary penalties, for each foreign offence the court is bound to order

protective measure, namely the seizure of objects by which the offence has been performed or

was intended to be performed or the objects which result from the offence. However, the

scope of applicability of this measure is not yet clarified in practice.

The liability for foreign exchange offences is mostly on the side of a local resident. Although

certain offences capture non-residents as well, those rules are more theoretical. A general

precondition for a foreign legal entity (and its responsible officer) to be liable for an offence

committed in Serbia is that the foreign legal entity has some form of local establishment, such

as a representative office or branch.

5.3.2.3 General Contract Law

a) Types of agreements

As indicated in point a) of Section 5.3.2.2 above, both loan and credit agreements are regulated

by the Serbian Law on Obligations. Nonetheless, the general legal concepts of autonomy of will

and the contractual consent allow for stipulation of other types of agreements not expressly

regulated. In that sense, the said law does not impose any limits to the amounts of the loans.

Specifically, one of the classifications of agreements in legal theory is into typical agreements

and atypical (unnamed) agreements. The typical agreement has a term established by law and

its essential elements are regulated thereunder (e.g. credit and loan agreements). The atypical

agreement, on the other hand, is unregulated and allows the contracting parties to tailor the

agreement to their specific needs.

Therefore, stipulation of crowdlending agreements which in our view may not fully fall under

any of the typical agreements as they represent a hybrid form between a loan agreement and

an equity arrangement should be in line with the said concept of freedom of contracting.

b) Interest rates

Loans may be granted by any entity, including natural and legal persons, and the stipulation of

interest is optional (i.e. loans may be interest-free), whereas credits are advanced by the banks

and always bear interest.

Further, there are no usury laws which specify maximum interest rates32. However, there are

certain general rules under the Law on Obligations which may affect interest rates in certain

cases.

The main example is the rule that loan sharking agreements (i.e. predatory lending whereby a

lender takes advantage of a borrower in a poor material situation, or by using borrower’s

insufficient experience, recklessness or dependence, to stipulate for exorbitant interest rate)

are null and void. Alternatively, the aggrieved party may request the reduction of the

exorbitant interest rate before the court within five years as of the conclusion of the

agreement. This rule is rarely invoked in practice in commercial transactions due to the

difficulty to meet the burden of proof.

Another more general principle under the Law on Obligations is that the mutual obligations of

the parties should be proportionate. Serbian courts are entitled to decrease interest rate on

this basis upon request of the aggrieved party, if breach of the proportionality principle is

proven considering all circumstances of the case. In practice courts sometimes do decrease

the interest through a verdict, if they are of the opinion that the interest was excessive.

In CONDA’s model investors are entitled to bonus interest dependable on the performance

of the borrower and/or its enterprise value. As mentioned, the nature of bonus interest under

the CONDA model significantly differs from the nature of ordinary interest. Specifically,

32 The Law on Obligations specifies only maximum interest rate for loans among individuals (Article 399), which we

understand is not of interest.

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CONDA interest rates which depend on borrower’s performance represent a type of financial

return on quasi-equity financing dissimilar to general debt financing. Stipulation of such hybrid

interest rates may potentially cause the borrower to pay a disproportionately high sum as a

price for the loan. Consequently, there is a risk that the borrower challenges CONDA’s bonus

interest payments on the basis of disproportionality of mutual obligations. In such scenario, the

court would be entitled to decrease the sum payable by the borrower if it deems so.

For the loans granted to consumers (i.e. individuals, farmers and entrepreneurs) special

consumer protection laws apply which provide, among other, that unfair contractual terms are

null and void. However, in our opinion this should not be applicable to the relations between

the investors and borrowers under CONDA’s model because the loans are granted to legal

persons rather than the consumers.

c) Monitoring of loan breaches and termination thereof

Lenders are entitled to terminate the loan agreement if the borrower uses the loan proceeds

contrary to the previously agreed purpose. This rule may be of relevance for crowdlending if

the loan agreement obliges the borrower to utilize the funds in line with a specific project. For

instance, the borrower submitted a project of improving its dental clinic requesting a loan in

order to buy additional dental equipment. However, once the borrower receives the funds it

consumes them for purchase of cars. In such scenario, the lender would have the right to

terminate the loan by law. Nevertheless, it is questionable how the investor would establish a

monitoring system to determine whether the loan is utilized in line with its purpose. Similarly,

any supervision of the borrower’s compliance with the loan terms would be difficult to

establish, especially in the cross-border context.

Taking this a step further and assuming that the investor managed to discover that the

borrower breached its obligations under the loan agreement, the only legal tool for the

investor to claim due fulfilllment of its obligations and damage compensation would be through

lengthy court proceedings.

CONDA’s model involves an extraordinary termination right in case of disposition of essential

assets by the borrower. This means that the investor may cancel its investment and request

premature and complete repayment of the loan together with the accrued interests if the

borrower disposes of its operationally essential assets. However, given the lack of appropriate

out-of-court mechanisms serving to administer due fulfillment of contractual obligations by the

breaching party, it is uncertain to what extent would the investors benefit from the above-

mentioned rights.

5.3.2.4 AML & KYC

AML and KYC requirements in Serbia are primarily regulated by the AML Law which imposes

obligations for:

1) banks,

2) authorised money exchange offices,

3) investment fund management companies,

4) voluntary pension fund management companies,

5) financial leasing providers,

6) certain insurance related companies and agents,

7) broker-dealer companies,

8) organisers of special games of chance in casinos and through electronic communication

means,

9) auditing companies and independent auditors,

10) e-money and payment institutions,

11) intermediaries in the trade and lease of real estate,

12) factoring companies,

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13) entrepreneurs and legal persons providing accounting services,

14) tax advisors,

15) public postal service operator headquartered in the Republic of Serbia,

16) entities engaged in the sale, purchase and transfer of virtual currencies (and the

intermediary services thereof).

Given the above list and under the assumption that the crowdlending platform would not be

established as any of the above regulated entities, the AML Law should not apply to CONDA

platform.

However, the AML and KYC requirements would have to be complied with by the local bank

involved in the crowdlending campaign. The main obligations of the bank under the AML Law

would include KYC checks with respect to the Serbian borrowers and Serbian investors,

monitoring of their business transactions and reporting suspicious transactions to the Anti-

Money Laundering Administration.

Further, the AML Law provides for enhanced KYC measures if a bank is implementing new

services or business practices. Specifically, prior to the launch of a new service the bank shall

conduct an AML risk analysis with respect to such service and undertake additional measures

to mitigate and manage such potential AML risks.

Bearing in mind the inventive way for emerging growth companies and start-ups to acquire

financing through crowdlending and that the platforms are primarily an internet marvel

involving a large number of worldwide web offers, the bank would most likely be obliged to

conduct the above-mentioned enhanced KYC measures.

Although local banks are in any case obliged to monitor and observe their customers (i.e.

Serbian borrowers and Serbian investors), it is questionable how they will manage to carefully

and critically examine the use of online platforms which are a fertile territory for suspicious

activities. Discovery of suspicious transactions may be especially intricate to the banks in

crowdlending as the project campaigns are based on online transactions whereby the identity

of foreign lenders and the origin of their funds may be challenging to determine. In the possible

scenario whereby crowdlending gets to be the standard, the potential for fraud, money

laundering and terrorist financing will increase.

Given the global growing concern in relation to the AML and KYC requirements and the

efforts of Serbian authorities to combat against money laundering and terrorism financing, we

cannot exclude the risk that the NBS and other authorities deem that the crowdlending may

be problematic in light of the AML Law.

5.3.2.5 Consumer Protection

CONDA’s model provides for a rescission right of the investors which are qualified as

consumers under the applicable law. Precisely, such investor may withdraw from its investment

within 14 days as of the acceptance of his offer by the borrower. This authorisation of the

investors may have a significant impact on the campaign if, once the funding is raised, a

substantial number of investors cancel their investments and cause the total loan amount to fall

below the funding threshold. Therefore, we analysed the relevant consumer protection laws to

identify the scope of their applicability to crowdlending.

As outlined in Section 3. above, the main regulation concerning consumer protection are the

Consumer Protection Law, the Financial Services Related Law and Distant Financial Services

Related Law. The definitions of a consumer (i.e. potentially the investor), the merchant (i.e.

potentially the borrower) and the financial service (i.e. potentially crowdlending) under these

laws are to some extent intertwined and, seemingly, none of these should capture the

relationship between borrowers and lenders under CONDA’s model. The protections

established under these laws should be targeting the opposite participant (i.e. the borrower).

However, legal persons cannot be considered as consumers and, hence, borrowers are

ineligible to enjoy the rights granted under these laws.

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Nevertheless, the provisions of Consumer Protection Law would govern the relationship

between the investors that are individuals and the platform operator. Given that CONDA’s

model involves online and distance contracting, the investors (individuals) would be entitled to

terminate the cooperation with CONDA within 14 days as of the conclusion of agreement on

provision of intermediary services. Therefore, although the Consumer Protection Law should

not apply to the agreements between the investors and lenders, it is questionable how their

cooperation would endure if an investor terminates its relationship with the platform operator

that facilitates the entire crowdlending and fundraising process. For this reason, we would

advise granting the investors the 14 days withdrawal right in the agreements between the

lenders and investors that are individuals.

Additionally, the scope of foreign laws governing consumer protection in countries of

residence of potential investors should be checked with the respective foreign legal counsels.

Specifically, it should be ascertained if a foreign investor may be qualified as a consumer under

the laws of its resident country. If yes, it should be further identified whether such regulation

may be extra-territorially applied so to capture crowdlending in Serbia.

This is also important from the perspective of the FX Regulation as mentioned in point i) of

Section 5.3.2.1. Specifically, certain loan repayment restrictions apply to loans taken from non-

EU countries. Due to these restrictions, a loan may not be voluntarily prepaid until the expiry

of one year + 1 day as of the withdrawal of the loan. In a potential scenario whereby once the

funding target is achieved, certain investors withdraw from their commitment and request a

refund, it is questionable how such repayments would be made to non-EU investors.

Therefore, this should be further discussed with the NBS to determine the possible solutions.

For our recommendations on this matter please see point i) of Section 5.3.2.1.

Finally, the platform as a merchant, would have certain obligations under the Consumer

Protection Law which are aimed at strengthening the so-called positive discrimination in favour

of consumers (i.e. individual as investors). The main obligations of the platform are provision of

certain pre-contractual information to the investors, clear indication of prices (if any), issuance

of receipts and refraining from unfair business practices. Finally, it should be noted that all of

the correspondence with local investors, including the terms of use, would have to be drafted

in Serbian.

5.3.2.6 Data Protection

The business model of crowdlending platforms requires the processing of personal data

pertaining to several categories of individuals, primarily of platform operator’s employees and

private lenders, in certain models of borrowers as well, but also the ones pertaining to

individuals representing the parties which are legal entities (lenders, borrowers, payment

providers and other service providers). As a result, the platform operators, in their status of

data controllers, must ensure their operations comply with the applicable data protection

rules.

The Data Protection Law presents a copy of the EU General Data Protection Regulation

(GDPR) to a large extent, as most of the GDPR rules were transferred “as is”, often without

the much-needed harmonization with the Serbian legal framework. In addition, the GDPR's

recitals were not copied or otherwise implemented in the new law (potentially creating a

number of issues in its future interpretation), and it also failed to regulate certain important

data protection aspects (such as video surveillance) which are regulated in the EU via other

community and national pieces of legislation.

Finally, the GDPR itself is also directly applicable to companies based in Serbia, to the extent

they process personal data belonging to individuals in the EU, and provided that such

processing is connected to offering services to those individuals or monitoring their behaviour.

We understand the analysed business model would involve such offering of services to EU

private lenders (e.g. via targeted advertising on social networks, enabling the receipt of

payments from EU countries in EUR etc.), due to which the platform operators would need to

comply with GDPR rules as well. Bearing in mind that Data Protection Law is almost

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completely harmonized with the GDPR, our below analysis will cover the requirements

applicable under both of these acts, with pointing out specific differences explicitly only where

relevant.

This study will present a brief overview of the key rules and requirements that platform

operators need to comply with, divided into the following chapters: (i) data processing

principles, (ii) legal grounds for data processing, (iii) data subjects’ rights, (iv) data governance

and security obligations, (v) data transfer, and (vi) sanctions and enforcement.

a) Data processing principles

Every processing of personal data has to comply with certain general principles, irrespective of

whether the data is processed on the basis of data subject’s consent or any other legal ground.

These principles serve not only to aid the interpretation of other, more specific rules (which is

often the case in other areas of law), but also present direct obligations for the companies,

with fines prescribed for failure to comply with them. As a result, they need to be considered

in relation to all processing operations implemented by platform operators.

These principles are as follows:

• Lawfulness, fairness and transparency. Data controllers are required to process

personal data “lawfully, fairly and in a transparent manner”, which requires them to

provide a detailed list of information to data subjects about the processing of their

personal data (including information on data controller’s identity, processing purpose,

data subjects’ rights, who they share data with, etc.). All this information must be

provided in clear and plain language and be easy for data subjects to access and

understand. For example, this means that a customer privacy policy must be published

on the platform’s website, containing all the prescribed information, but drafted

concisely and without using complex legal language – a task which is often hard to

achieve in practice. Similar applies for employees’ privacy notice, which should be

made available to platform operator’s employees (e.g. by sending e-mails to employees,

publishing on company’s intranet etc.).

• Purpose limitation. Personal data can be collected only for specified, explicit and

legitimate purposes, and not further processed in a manner incompatible with those

purposes. For example, if the platform operator collects contact and identification

data, payment and other details from a private lender for the purpose of performing

intermediary services and enabling the execution and performance of loan agreements,

it would not be permitted to later sell this data to third parties which would use them

for their own direct marketing or other purposes (unless data subjects were informed

so in advance and have provided their consent).

• Data minimization. This principle requires that data processed must be adequate,

relevant and limited to what is necessary for realization of the processing purpose.

This means that platform operators must limit the collection of data from the

beginning only to those which are indeed required for the functioning of the platform,

as otherwise they may be in breach, even if they obtain the customer’s consent for

that. For example, this principle would not be met if the customers would be required

to share info on their sexual preferences, religious beliefs or type of food or movies

they like, as this would clearly be irrelevant for functioning of the platform.

• Accuracy. The collected personal data must be accurate and, where necessary, kept

up to date – this means that platform operators must ensure there is a process in

place enabling the rectification or deletion of inaccurate data without delay, especially

upon customer’s request.

• Storage limitation. It is prohibited to keep one’s personal data indefinitely. On the

contrary, data must be kept in a form which permits identification only as long as it is

necessary for the realization of the relevant processing purpose. Therefore, platform

operators must prepare a data retention schedule for different types of data they

collect and ensure that data is deleted or anonymized after the relevant retention

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terms have expired.

• Integrity and confidentiality. Processing of data must be organized in a way that

ensures appropriate security, including protection against unauthorized processing and

accidental loss or damage. This requires the implementation of technical or

organizational measures appropriate to the relevant risks, including in particular the

use of IT systems with characteristics that ensure the customers’ and employees’ data

is safe, and their regular updating in order to address the technological developments.

• Accountability. The data controllers are responsible not only for complying with the

above principles, but also for being able to demonstrate this compliance to supervisory

authorities. This means that platform operators must have in place certain

documentation evidencing that appropriate measures have been implemented, such as

data protection policies and records of processing activities, reports on data

protection impact assessment performed, procedures for data breach notification, etc.

b) Legal grounds for data processing

Data controllers can process personal data only if there is a valid legal ground for the relevant

processing. Specifically, processing needs to be based on one of the following grounds:

• Data subject’s consent. As opposed to the existing law, which recognizes only

hand-signed consent in the written form, the new Data Protection Law and the GDPR

explicitly introduce other consent forms as well, such as online (e.g. by ticking the box)

and oral consent, or consent given by other clear affirmative action. In all of these

cases, the data controller must be able to demonstrate that the data subject has indeed

consented to the processing of his data for a specific purpose and needs to inform

them that they can withdraw the consent at any time.

On the other hand, the conditions for obtaining consent have become much stricter under the

above acts – it must be freely given, specific, informed and unambiguous. For example, there is

a presumption that consent will not be valid unless separate consents are obtained for

different processing operations and purposes, where appropriate (i.e. catch-all clauses will not

be valid). The request for consent, when presented in a written document, must be clearly

distinguishable from all other matters, and drafted in clear and plain language, which in practice

means it would not be valid if stipulated using complicated legal terms or placed in the middle

of a 10-pages long contract. In addition, consent will not be considered freely given if the

performance of a contract is conditional on the consent to the processing of personal data that

is not necessary for its performance (for example, if becoming the platform’s customer is

conditional on the consent to receive direct marketing messages), or if there is a clear

imbalance of power between the data controller and the data subject (e.g. when consent is

provided to one’s employer or to a state authority).

A typical example where consent must be obtained is for sending direct marketing messages to

individual customers, as such a consent is explicitly required under Serbian law.

• Performance of a contract. This is one of the most commonly used processing

grounds, as it permits data processing which is necessary for the performance of a

contract to which the data subject is party, or in order to take steps at the request of

the data subject prior to entering into a contract. In most cases the platform operators

could rely on this legal ground for processing the customers’ personal data, as long as

they perform only the processing that is indeed necessary for performing intermediary

services and enabling the execution and performance of loan agreements. For example,

this would permit the processing of customer’s contact and identification data,

payment and other details etc. needed for the above purpose, but not sending direct

marketing or processing data on religious beliefs (as that would definitely not be

necessary for the relevant purpose).

• Compliance with data controller’s legal obligation. A typical example would be

the processing of employees’ data in order to maintain the mandatory employment

records, pay the relevant taxes and social contributions, etc.

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• Protection of one’s vital interests. This is an exceptional legal ground, covering

cases when processing is necessary for the protection of vital interests (such as life,

health etc.) of a data subject or another individual.

• Performance of a task carried put in the public interest or in the exercise of official

authority vested in the data controller.

• Legitimate interest. This legal ground can be used when processing is necessary for

the purposes of the legitimate interests pursued by the controller or by a third party,

except where such interests are overridden by the interests or fundamental rights and

freedoms of the data subject. This means that the existence of a legitimate interest

would need careful assessment of each specific case, in order to evaluate their

legitimacy in comparison with data subject’s interests and rights. In practice, such an

interest would exist when platform operator would undertake processing in order to

ensure network security or fraud prevention, or for transmitting personal data within

its group of companies for internal administrative purposes (including the processing of

customers’ and employees’ personal data).

Data controllers that rely on “legitimate interests” should maintain a record of the assessment

they have made, so that they can demonstrate that they have considered the rights and

freedoms of data subjects.

Processing of special categories of personal data (racial or ethnic origin, political opinions,

religious or philosophical beliefs, trade union membership, genetic data, biometric data where

processed to uniquely identify a person, data concerning health, data concerning person’s sex

life or sexual orientation) is generally prohibited, unless data subject has provided his explicit

consent, or if the conditions for using one of the prescribed exceptions is fulfillled (such as for

the protection of vital interests of a data subject, or for carrying out the data controller’s

obligations in the field of employment and social security). However, our understanding is that

special categories of data will not be processed by platform operators.

c) Data subjects’ rights

The existing right of individuals to receive information about the processing of their personal

data has been significantly expanded under the new Data Protection Law and the GDPR.

Specifically, data controllers must provide transparent information to data subjects concerning

the intended data processing in a more comprehensive manner, and in particular must inform

them of certain rights and facilitate their exercising. The information needs to be provided in a

concise, intelligible and easily accessible way, using clear and plain language. However, this will

be hard to achieve given the fact that the elements that need to be included in the information

are quite excessive, which should be carefully addressed by the platform operators when

drafting their information notices. The relevant information should be provided in writing, or

by other means (including electronic, where appropriate).

One of the specific information that needs to be provided to data subjects is whether their

data will be shared with third parties, and for which purposes. In practice, this means that e.g.

the platform operators would need to inform the customers that their data may be shared

with certain service providers (e.g. provider of IT services, payment providers etc.), but also

with the entities to which receivables may be assigned.

In addition to these general right to information, the data subjects also have the following

specific rights:

• Right of access. Data subject is entitled, with certain restrictions, to obtain the data

controller’s confirmation whether his personal data are being processed, to access the

data (i.e. to obtain its copy free of charge) and to be provided with supplemental

information about the processing (such as about the purpose of processing, categories

of data, data recipients, etc.).

• Right to rectification. Data subjects can require a data controller to rectify

inaccuracies in personal data held about them.

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• Right to erasure (“right to be forgotten”). Data subject has the right to request

from data controller to erase his data in certain specified situations, where the

processing fails to satisfy the relevant legal requirements (e.g. when data is no longer

necessary for the specific purpose, or when data subject withdraws his consent or

successfully objects to processing based on legitimate interest). If the data controller

has made personal data public, and where it is obliged to erase the data, he must also

inform other data controllers who are processing the data that the data subject has

requested erasure of those data. The obligation is intended to strengthen data

subject’s rights in an online environment.

• Right to restriction of processing. Data subject is entitled to request from data

controller to restrict further processing of his data in certain cases, such as when the

data subject disputes data accuracy, objects to processing based on legitimate interests,

or when the processing is unlawful but the data subject objects to erasure and

requests restriction instead. In such cases the relevant personal data may (except for

storage only) only be processed with the data subject's consent, for the establishment,

exercise or defence of legal claims, for the protection of the rights of another natural

or legal person or for reasons of important public interest.

• Right to data portability. The right to data portability gives an individual the right to

demand that the controller provides him with his personal data, or to transmit them

directly to another controller, in a machine readable format, if the relevant processing

was automatic and based on consent or the fulfillment of a contract.

• Right to object. Data subject is entitled to object to the following specific types of

processing: (i) direct marketing, (ii) processing based on legitimate interests or

performance of a task in the public interest/ exercise of official authority, including

profiling based on those provisions, and (iii) processing for research or statistical

purposes. Out of these, only the right to object to direct marketing is absolute (i.e.

there is no need to demonstrate grounds for objecting, and no exemptions which

allow processing to continue).

• Right not to be subject to a decision based solely on automated processing.

This right ensures that data subject will not be subject to a decision based solely on

automated processing, including profiling, which produces legal effects concerning him

or similarly significantly affects him (such as an automatic refusal of an online credit

application). Exceptionally, this does not apply if that decision is: (i) necessary for

entering into, or performance of, a contract between the data subject and a data

controller; (ii) authorised by the law to which the controller is subject and which also

lays down suitable measures to safeguard the data subject's rights and freedoms and

legitimate interests; or (iii) based on the data subject's explicit consent.

As a general note, the data controllers are generally required to act upon the data subjects’

request for exercising the above rights free of charge and without undue delay, and in any

event within one month (exceptionally this may be extended by two further months where

necessary, taking into account the complexity and number of the requests). This mean that the

platform operator would need to ensure there is a proper process and allocation of duties in

place to enable the timely performance of its obligations upon customer’s request, which may

be a difficult task in case there is a large number of customers using the platform.

d) Data governance and security obligations

Both the GDPR and the new Data Protection Law introduce a number of specific operational

obligations for the data controllers, aimed to ensure better protection of individuals’ privacy,

which create a significant administrative, organisational and financial burden for the companies.

As a general note, data controllers are required to adopt technical and organisational measures

to comply with their data protection obligations (and to review and update them where

necessary), as well as to be able to demonstrate that compliance. Typical examples of such

measures would include the implementation of appropriate data protection policies, adherence

to approved codes of conduct and certification mechanisms, operating a regular audit program,

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as well as other measures mentioned below within this section.

The key specific obligations imposed include the following:

• Data protection by design and by default. Data protection by design requires the

data controllers to adopt, as well as maintain and update when needed, appropriate

measures - such as pseudonymisation, data minimisation, staff training programmes

etc., which will integrate the safeguards necessary for processing. Data protection by

default, on the other hand, requires the controllers to adopt measures so that, by

default, only the processing which is necessary for the specific purpose will be possible

(e.g. that opt-in check-box for direct marketing is not pre-ticked, or that, by default,

privacy settings on one's social network profile do not make his data public). From the

perspective of structuring the platform’s operational model, it is important to note and

implement these requirements in advance, as any incompliance detected after the

platform is already up and running would be significantly harder to address.

• Designating a representative in the EU. Considering that the analysed business

model would likely target private lenders in the EU as well (e.g. via targeted advertising

on social networks, enabling the receipt of payments from EU countries in EUR etc.),

the platform operators would need to comply with GDPR rules as well. This in

particular imposes the obligation to designate in a written form the operator’s

representative in the EU, to be addressed (and be liable for any incompliance as well, in

addition to the platform operator) by the EU supervisory authorities and data subjects

for all questions relating to the data processing.

• Rules on engaging data processors. In cases when data controller wishes to

engage a service provider to perform certain processing activities on its behalf (i.e. a

data processor), he is required to use only the processor providing sufficient

guarantees that processing will meet the strict legal requirements and ensure the

protection of the data subject’s rights. Such engagement must be based on the written

agreement (including in electronic form), containing a list of mandatory elements (such

as the subject-matter and duration of the processing, the type of personal data and

categories of data subjects, list of security measures, processor’s obligations to act only

upon instructions of the controller and assist him in ensuring and demonstrating

compliance, permitting audits etc.). The data processor will not be entitled to engage

any sub-processors without a prior specific or general authorization of the data

controller.

In the analysed business model, this would require the platform operators to structure the

agreements with its service providers (e.g. providers of IT services, payment processors etc.)

in compliance with the above obligation, which often prolongs the negotiation on the

engagement terms and limits the number of providers that are able to meet the requested

conditions.

• Maintaining records of processing activities. The new Data Protection Law and

the GDPR remove the existing obligation to register personal databases with the Data

Protection Authority, which was mostly ignored so far in Serbia anyway. Under the

new rules, data controllers (and processors) are only required to internally maintain

the database records, without notifying the authorities. Even that obligation will not

apply to companies with up to 250 employees, unless (i) the processing they carry out

is likely to result in a risk to the rights and freedoms of data subjects, (ii) the

processing is not occasional, or (iii) the processing includes the special categories of

data or personal data relating to criminal conviction and offences. Taking into account

the analysed business model, it seems that none of these exceptions would be

applicable to platform operators, i.e. that they would be required to maintain the

relevant records in most cases (an exception may be the employment records, where

certain sensitive data is often processed).

• Security of processing. In general, data controllers need to implement adequate

technical, and organizational measures in order to ensure a level of security

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appropriate to the risks their processing operations are facing, taking into account in

particular the state of the art, the costs of implementation and the nature, scope and

the purpose of processing.

The measures may include, as appropriate, pseudonymisation and the encryption of personal

data, the ability to ensure the ongoing confidentiality, integrity, availability and resilience of

processing systems and services, disaster recovery and business continuity plans, a process for

regularly testing, assessing and evaluating the effectiveness of implemented security measures,

etc.

• Data breach notification. Data controllers are generally required to document each

data breach they face, as well as to notify the Data Protection Authority of most of

them, without undue delay and, when feasible, within 72 hours after becoming aware

of the breach. In addition, data processors must notify the controllers of the breach

without undue delay. If the personal data breach is likely to result in a high risk to the

rights and freedoms of individuals, the controller is also required to communicate the

personal data breach to the concerned individual as well, without undue delay.

However, this does not apply if the controller has implemented appropriate technical

and organizational measures (e.g. encryption) which rendered the relevant data

unintelligible to any unauthorized person, or if the notification would involve

disproportionate efforts, in which case a public communication or a similar measure

must be made in order to properly inform the individuals. In relation to the analysed

business model, the platform operators would need to implement appropriate process

for addressing these obligations.

• Data protection impact assessment. Data protection impact assessment is an

evaluation of the impact of the planned processing operations on the protection of

personal data and must be conducted by the data controllers before any “high risk”

processing activity is commenced (especially using new technologies). High risk

processing encompasses in particular (i) systematic and extensive evaluation of one’s

personal aspects based on automatic processing, (ii) large scale processing of sensitive

data or criminal convictions or offences, and (iii) large scale, systematic monitoring of

public areas. Out of the above three examples, we can imagine the one under item (i)

may be relevant for the platform’s operation model, if such automatic processing is to

be used.

If the impact assessment indicates that processing would result in a high risk in the absence of

measures to mitigate the risk (such as where individuals may encounter significant or even

irreversible consequences), the controller is also required to consult the Data Protection

Authority prior to starting with the processing.

• Appointment of a data protection officer. Under certain circumstances the data

controllers (and data processors as well) are required to designate a data protection

officer, whose primary tasks are to ensure compliance with the data processing

legislation and to communicate with the Data Protection Authority and the data

subjects on all data protection matters. This obligation applies if: (i) the processing is

carried out by a public authority, (ii) the core activities of the controller/processor

require the regular and systematic monitoring of data subjects on a large scale, or the

large scale processing of special categories of personal data or data relating to criminal

convictions and offences. Our opinion is that none of these cases would apply to

platform operators, and therefore that appointing a data protection officer would not

be mandatory in the analysed business model.

The data protection officer may be employed or engaged under a service contract, and in any

case must have sufficient expert knowledge. A group of companies may appoint a single data

protection officer, provided that he is equally accessible by each company. The controllers and

processors are required to ensure his independence in the performance of his tasks, meaning

that no instructions may be given to him, that he reports directly to the manager of the

controller/processor and that he may not be dismissed or penalized for performing his tasks.

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e) Data Transfer

In order to lawfully transfer personal data from Serbia abroad on a regular basis, data

controllers need to ensure that one of the following grounds is met:

• personal data is to be transferred to a country that ratified the Council of Europe

Convention for the Protection of Individuals with regard to the Automatic Processing

of Personal Data (all European countries did so; note that GDPR limits this to EU/EEA

countries only);

• data transfers are performed to a country included on the EU list or the Serbian

Government's list of countries providing an adequate level of data protection (this

would include e.g. Canada, Israel, as well as USA - if the data recipient is Privacy Shield

certified);

• data transfers are performed to a country which has a bilateral agreement with Serbia

regulating data transfers (note that this ground would not suffice to meet the GDPR

requirements, but only the ones imposed by the new Data Protection Law);

• the transfer is based on the standard contractual clauses prepared by the Serbian Data

Protection Authority (note that GDPR requires the use of EU’s standard contractual

clauses instead, in relation to which the Serbian ones will likely be different);

• the transfer is based on binding corporate rules or a code of conduct approved by the

Serbian supervisory authority, or on certificates issued in accordance with the new

Data Protection Law (note that GDPR requires the use of the appropriate

rules/certificates/ codes approved/issued in accordance with EU rules);

• the Serbian Data Protection Authority has issued a specific approval for the transfer to

be performed on the basis of an agreement between the data exporter and the data

importer (the GDPR requires the approval to be issued by the competent EU member

state’s data protection authority); and,

• the data subject has explicitly consented to the proposed transfer, after having been

informed of the possible risks.

Taking into account that in the platform operators are subject to both the new Data

Protection Law and the GDPR, which do contain certain differences with respect to grounds

under which data transfers are permissible, the safest option would be to either not transfer

data out of Serbia in the first place, or to transfer data to either EU/EEA countries or to

countries on the EU adequacy list. On the other side, it seems this would not always be

possible, e.g. when personal data pertaining to Serbian borrowers (either individual ones or

company’s representatives) are transferred to lenders based in third countries – for such cases

it would be safest to use the Serbian standard contractual clauses (once they are prepared)

and/or seek to obtain the relevant transfer consents from such data subjects, were feasible.

f) Sanctions and Enforcement

The new Data Protection Law is generally harmonised with the GDPR in almost all aspects,

with certain local specificities, except with respect to sanctions. Specifically, the maximal fines

which may be imposed on companies by Serbian authorities are up to approx. EUR 17,000,

while the GDPR enables the EU authorities to issue fines up to EUR 20 million or 4% of the

company's global annual turnover (whichever is higher). In both cases the Data Protection

Authorities are authorised to issue warnings to data controllers and data processors, order

the correction or deletion of the collected data, rectification of other detected irregularities

etc., and also directly fine the controllers and processors in certain situations.

Formally speaking, under the Law on Administrative Procedure, the Serbian Data Protection

Authority is also authorised to enforce its orders by threatening the company with a fine of up

to 10% of its annual income in Serbia, in case it fails to comply with the order. This is a

relatively new option for Serbian authorities that has not yet been tested in practice, to the

best of our knowledge, and therefore is more of a theoretical than actual risk. In general, the

actual level of enforcement of data protection rules in Serbia is rather low at the moment, and

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therefore the risk of incompliance is not substantial.

As far as GDPR’s fines are concerned, their enforcement towards Serbian companies does not

seem feasible at the moment, given that there is no bilateral international agreement in place

permitting this. This does not mean that EU authorities cannot otherwise sanction Serbian

platform operators in case they breach the GDPR, e.g. by blocking the access to the platform

from the relevant EU country, or by EU courts awarding civil damages to EU data subjects

filling the compensation claims against the platform operators (which court decisions are

already generally enforceable in Serbia). However, there is no sufficient practice so far in this

regard, as GDPR started to apply less than a year ago, and therefore we are yet to witness

how its extra-territorial application will be handled.

5.3.2.7 Collection of Claims

In general, in terms of Serbian legislation, duration, effectiveness and type of collection process

depend (i) on the fact whether the claim is secured with the pledge or mortgage over debtor’s

assets or not, (ii) on the type of document out of which the claim arises (notary public deed,

final and binding court judgment or settlement, written agreement etc.) and (iii) on legal status

of the debtor (whether it is an active operating company or insolvent company in bankruptcy

proceedings). There are 3 types of collection proceedings before Serbian courts: litigation,

enforcement and bankruptcy proceedings.

Besides court proceedings, there are collection agencies in Serbia offering their services in

collection of claims. Their assistance involves sending warning notes to debtors and telephone

communication with debtors via specialized call centre, however these are methods limited to

out of court activities because they are not entitled to represent creditor before the court and

also this method may potentially have negative consequences to reputation of the creditor. It is

important to emphasize that these out of court collection activities do not interrupt statute of

limitations period of the claim. Due to mention limitations of out of court activities, collection

agencies usually have their own cooperating lawyers who deal with collection process before

the court, in order to offer complete service in terms of collection.

a) Litigation proceedings

In CONDA case, lenders grant unsecured subordinated loans to borrower, based on the loan

agreement. Therefore, in terms of Serbian legislation, lenders have unsecured claims based on

a loan agreement. If such unsecured claim is not voluntarily paid by the Borrower, each Lender

itself would have to file the claim to the competent court and initiate litigation proceedings

requesting from the court to oblige the Borrower to pay the due obligation to the Lender. In

Serbian litigation proceedings party in the dispute may be represented by its authorized person

or by the attorney at law, therefore the platform could not act as Lenders’ representative

before the court. The platform may offer to Lenders assistance of their cooperating Serbian

lawyer. When registering to the platform, Lenders could sign the power of attorney to the

attorney at law cooperating with the platform and deliver such power of attorney to the

platform in original. In order to optimize the process in case of default, authorized lawyer may

file one joint claim on behalf of all Lenders against the Borrower requesting from the court to

oblige the Borrower to pay certain due amount of money to each represented Lender acting

as plaintiff. Depending on the type of Lenders (private individuals or companies) joint claims

would have to be filed to the courts of general competence or to commercial courts. Within

litigation proceedings the Lender would have to provide sufficient evidence to prove its claim

valid in terms of legal basis of the claim and requested amount. Litigation proceedings usually

last 2-3 years before reaching final decision. Once obtained, final decision could be used as

enforceable title to initiate enforcement proceedings against the debtor. Litigation proceedings

consider court and legal fees, which amount may vary from app. EUR 1,000 – 5,000 per each

Lender, depending on the amount of the claim, complexity of the dispute and type of

proceedings (litigation before the court of general competence or before the commercial

court), considering EUR 50 as minimum amount of the claim and EUR 5,000 as maximum. For

example, if the claim amounts to EUR 100, court and legal fees (per lawyers’ tariff) until

reaching a final decision in commercial disputes usually would amount to app. EUR 1,000

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(including court fees for filing of the claim app. EUR 50, for the appeal or response to the

appeal approx. EUR 50, fees for court decisions EUR 50, court expert fees approx. EUR 200 –

400, legal fees for preparation of the claim EUR 50, 2-3 submissions during the proceedings

EUR 150, 4-5 hearings approx. EUR 350 and preparation of the appeal or response to the

appeal, EUR 100). Court fees are fixed costs in the amount prescribed by the respective law,

but legal fees may be arranged between the platform and its cooperating lawyers on success

fee basis etc. In disputes before the courts of general competence these costs are slightly

lower due to lower court fees, other costs and fees are the same for both types of litigation

proceedings.

b) Enforcement proceedings

After obtaining a final court judgment, Lender is entitled to initiate enforcement proceedings

against the Borrower in order to settle the claim through sale of Borrower’s assets or seizure

of Borrower’s bank accounts. If there are sufficient assets for settlement of the claim,

enforcement proceedings usually last up to 6 months as of filing the motion for enforcement.

Enforcement proceedings are urgent and filing of the appeal by the Borrower against the

decision on enforcement does not delay the enforcement proceedings. Enforcement

proceedings consider court, legal and public bailiff fees and also award of public bailiff for

successful settlement of the claim, which are covered by the enforcement creditor in advance

and later refunded by the debtor. The amount of costs in enforcement proceedings vary

depending on the amount of the claim from approx. EUR 200 up to approx. EUR 1,500.

c) Bankruptcy proceedings

In case the Borrower undergoes bankruptcy proceedings, every pending enforcement or

litigation proceedings against the Borrower would be interrupted and all creditors would be

obliged to register themselves as creditors in bankruptcy proceedings. Thus, each Lender

would have to file its bankruptcy claim to the court within strict deadline prescribed by the

Law on Bankruptcy, in order to avoid preclusion of the claim. The investors may be

represented in the bankruptcy proceedings by their authorized representatives or by the

attorney at law, therefore the platform could not act as Lenders’ representative in the

bankruptcy proceedings. The platform may offer to Lenders assistance of their cooperating

Serbian lawyer, similarly, as explained above in relation to the litigation proceedings. Since

Lender’s claim is unsecured, it would be classified in 3rd repayment rank of unsecured

creditors. This means that unpaid Borrower’s employees’ salaries for 1-year period before

undergoing bankruptcy and unpaid obligation to tax authorities for 3 months before

bankruptcy, would have to be settled in full amount from Borrowers’ assets, before

distributing the rest of proceeds for settling the unsecured creditors. In bankruptcy

proceedings in Serbia, unsecured creditors’ claims are settled in the amount less than 30% in

most cases. Costs of bankruptcy proceedings for Lender are insignificant, maximum courts fees

for filing the bankruptcy claim amounts to EUR 30. Bankruptcy proceedings usually take 2.5

years until the debtor’ assets are sold, and creditors settled from the proceeds.

In situation when the Borrower undergoes bankruptcy before the period for reaching the

target amount expires and when certain number of Lenders have already placed their

investments to the escrow account of the borrower, opening of bankruptcy proceedings

would not automatically terminate crowd funding process and money would not be returned

to Lenders automatically, but the process would be continued and the target amount could

potentially be reached after opening of bankruptcy proceedings and target amount would be

transferred to the Borrower’s bank account and will become bankruptcy estate. In this

scenario, there is a difference between Lenders who concluded loan agreements with the

Borrower before opening of bankruptcy proceedings and Lenders entered into loan

agreements after opening of bankruptcy proceedings. Lenders who entered into loan

agreements after opening of bankruptcy proceedings would not be considered as bankruptcy

creditors, the Borrowers’ obligations would be considered as obligations of bankruptcy estate

and are settled with priority compared to other obligations of the Borrower. On the other

hand, terms of repayment for Lenders who entered into loan agreements before opening of

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bankruptcy proceedings depend solely on the will of the bankruptcy administrator of the

Borrower. The Lender who entered into loan agreement before bankruptcy proceedings is

entitled to ask bankruptcy administrator of the Borrower whether he would comply with the

loan agreement and if bankruptcy administrator rejects to comply with the loan agreement,

Lender would have to file the bankruptcy claim and would be classified as unsecured creditor

in terms of settlement. If the bankruptcy administrator accepts to comply with the loan

agreement, Lender would have the same rights as if he entered into loan agreement with the

Borrower after opening of bankruptcy proceedings. In any event, after the Borrower

undergoes bankruptcy, unless its creditors support adoption of the reorganization plan, its

possibilities to comply with the loan agreement in bankruptcy proceedings with bankruptcy

administrator managing the company, are remote, whereby the funds on the escrow account

will not be ring-fenced from the bankruptcy.

Finally, the CONDA agreements stipulate that in the event of bankruptcy, the Lenders shall

subordinate their claims and may not seek satisfaction thereof prior to all other investors

(other than the remaining Lenders). Instead, they may settle their claims only on coequal terms

with the shareholders of the Borrower. Under Serbian law, subordination of claims in case of

bankruptcy is allowed only to a certain extent. Specifically, Lenders may warrant subordination

to other investors however, their claims would have to be settled before the unsecured claims

based on loans granted by an affiliate company within two years prior to the opening of the

insolvency proceeding, save for the loans granted by entities that perform lending activities

within their regular business activities. Only after the settlement of all such claims, shall the

shareholders realize their claims.

d) Security instruments

The unsecured and unsubordinated debts of a Serbian company generally rank pari-passu

among themselves. The secured debts, on the other hand, rank higher than the unsecured

debts of the company in respect of the secured assets based on the “first in time, first in right”

principle. This means that liens have priority in the order that they are filed in the respective

registry and the holder of the lien with the highest priority is paid first from the proceeds of

the foreclosure sale.

The main security instruments available under the Serbian law are:

1) mortgage over immovable property;

2) securities pledge;

3) share pledge;

4) receivables pledge;

5) accounts pledge;

6) movables pledge; and

7) IP rights pledge

In addition to the above security instruments that provide priority in ranking to the secured

creditor, there are two additional security instruments that are commonly used in practice

although they do not provide any priority to its holder, these are:

1) security assignment of receivables

2) surety; and

3) promissory note.

All of the listed security instruments have certain local specific issues and/or advantages as

outlined below. Further, security instruments may be enforced in a court or, under certain

conditions, out of-court procedure (except for surety and security assignment).

Mortgage may be established over an immovable asset, such as land, completed building or

over a building under construction once a final construction permit has been issued. Mortgage

is established by registration with the Real Estate Cadastre maintained by the Serbian Geodetic

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Authority. In practice, mortgage is usually established on the basis of a mortgage statement

executed by the owner of the respective immovable. The mortgage statement needs to

contain certain mandatory elements and to be in the notarial deed form. The general statutory

deadline for the registration of mortgage is five days, however, in practice it might be delayed,

depending on the efficiency of the competent cadastre and the completeness of submitted

documents. Registration fees of the Real Estate Cadastre are based on a sliding scale, as they

depend on the value of the secured claim, but at the moment, cannot exceed RSD 159,200

(approx. EUR 1,350) per registration application. Additionally, establishment of mortgage

entails high notarization costs for which depend on the value of the real estate and may go up

to RSD 600,000 (approx. EUR 5,000).

Securities pledge covers pledge over different types of securities i.e. financial instruments,

among others, over shares/stocks of the joint stock companies. Securities pledge is registered

with the Serbian Central Securities Register, Depository and Clearing House and is carried out

through a licensed broker. The registration of first-ranking pledge is effected normally within

one day, while registration of pledges of lower ranking may take a couple of days. Registration

costs for securities pledge depend on the respective broker and may amount to roughly

100,000 RSD (approx. EUR 850).

Pledge over receivables/accounts/movables is registered with the Pledge Registry kept

with the Serbian Business Register Agency and the statutory deadline for the registration is five

days as of submission of complete documentation. Pledge registration costs also depend in the

value of secured claim but may go up to approx. EUR 200 per registration application.

It should be noted that the accounts pledge is generally inefficient and currently unreliable

security instrument whose enforcement is not sufficiently tested. Specifically, the accounts

pledge may be established only up to the amount of funds deposited on the bank account at

the moment of the creation of pledge. It is not entirely clear how the funds on the pledged

account can be used and what is the impact of such use on the pledge. In addition, the banks

allow collection from the bank accounts based on promissory notes regardless of the pledge

over such accounts. In this respect, it should be noted that the promissory notes do not have a

formal ranking under the Serbian law. The account bank may also have certain customary

priority rights over the pledged bank accounts. Finally, in case of insolvency of the debtor, all

debtor’s accounts are blocked. At the request of the insolvency administrator, the bank opens

a new account of the insolvent debtor and transfers the blocked funds of the insolvent debtor

to the new bank account. Due to the overriding nature of the insolvency regulations, there is a

significant risk of losing the priority rights (for the previously established bank account pledge)

with respect to the funds transferred to the newly opened bank account.

Pledge over share is established in the same registration procedure as pledges over

receivables/accounts/movables. However, pledge over shares is not granted by the borrower

company but its shareholder(s). Additionally, signatures on the agreement on pledge over

shares have to be certified before the notary. The takeover procedure in respect of the

enforcement of the pledge over share in the limited liability companies has not yet been

sufficiently tested in practice. The Pledge Law provides for the court-appointed administrator

which will take care of the pledged asset until the settlement of the secured claims. However,

the position and authorizations of such administrator are not further defined under the

applicable laws and regulation. It is reasonable to expect that the takeover/administration will

be similar to the concepts present in more developed legal systems, such as receivership or

custodian possession in common law, as well as to the procedure mandated by the Serbian

asset forfeiture legislation. However, there is no practice which might confirm these

expectations.

Pledge over IP rights is established in the similar registration procedure and costs as

pledges over receivables/accounts/movables but are registered with the Serbian IP Register.

The assignment of receivables could be carried out if the receivable is freely transferrable.

The receivable is assigned without the consent of the debtor (the debtor only has to be

notified on the assignment), unless the original creditor and debtor have agreed that such

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consent is necessary. Accessory rights, such as interest or security interests, are transferred

along with the assigned receivable. However, in order for such security instruments to remain

fully effective and enforceable by the recipient. Assignment of receivables might be used as an

alternative to receivables pledge, however it lacks the benefit of publicity, as it is not registered

in any register. Additionally, as mentioned in point j) of Section 5.3.2.1 above, the assignment

of receivables may be problematic in cross-border setting, since the all mandatory elements

that have to be included in the assignment documents may not be determinable in the moment

of assignment and also because the assignment of receivables as security is conditional (i.e. will

be triggered only upon default of the borrower), while assignment under the FX Regulation

only regulates definitive assignment where the assigned receivables are completely transferred

to the assignee. Also, the assignment to a non-resident of receivables arising out of local

transactions is regarded by the NBS as unpermitted under the FX Regulation.

Surety is established by conclusion of the surety agreement between the guarantor and the

lender and, same as the assignment of receivables, does not need to be registered in any

register.

Promissory notes are commonly used in practice as security instruments, since they enable

efficient collection of funds from the issuer’s account (if there are available funds) and blocking

of all issuer’s accounts in Serbia (if there are no sufficient funds on the accounts). However, a

promissory note must be registered by the issuer with the NBS in order to provide the holder

thereof with the benefit of the expedited enforcement. Registration costs for promissory

notes are not material but the exact amount should be checked with the local banks.

This expedited forced collection is performed by submission of a promissory note to the bank

where the debtor has its bank accounts. The bank then pays to the creditor the sum

designated in the promissory note. If there are no sufficient funds on the bank account, the

collection is carried out through the forced collection i.e. the blockade of all debtor’s bank

accounts in Serbia. During the blockade all monies received on any account of the debtor are

automatically distributed to the creditors which have initiated the blockade. The order for the

priority of collection is determined at the time of the receipt of the orders for forced

collections by the NBS (and not by the order of issuance of the promissory note). However,

the holders of promissory note are not regarded as secured creditors in the insolvency

procedure, but as ordinary, unsecured, creditors. Only creditors which have security inscribed

in the public register are treated as secured creditors in insolvency.

In light of the above, due to a large number of investors in crowdlending it may be quite

troublesome to provide security instruments to all investors of a campaign. In case of

syndicated loans, usually one of the lenders assumes a role of a security agent who acts on

behalf of all lenders. Potentially, one of the lead lenders may be appointed as a security agent

that would act on behalf of all investors in a campaign. This would ease the administrative

process as it would avoid filing of numerous applications by each investor and would also

significantly reduce the costs of security registration. The security agent would then be

registered as the pledgee/mortgagee in the respective registries. However, as a prerequisite, all

secured parties would have to provide an authorization to the security agent which should be

done in a notarised and (if applicable) legalised/apostilled form. Additionally, the secured

parties would have to enter into an agreement with the security agent whereby they would

regulate their rights and obligations, including the manner of distribution of collected claims.

However, please note that the concept of a security agent has not been tested in practice yet

with respect to the promissory notes. Additionally, although promissory notes may be more

effective due to the expedited forced collection, such procedure requires foreign investors to

open non-resident bank accounts in Serbia. Consequently, this calls for AML and KYC checks

of such foreign investors which checks, as explained in Section 5.3.2.4 above, in practice

require physical presence of the respective party. Finally, prior to repatriation of funds from

the investors’ non-resident account in Serbia to its foreign bank account, such investor would

need to obtain a tax certificate that it fulfillled all tax obligations related to the respective

transaction in Serbia.

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Given all of the above and considering that crowdlending aims to spare the participants of

administrative burdens and targets SME’s and start-ups which usually may only offer limited

assets as collaterals (if any), the viability of securing the investors’ claims would be doubtful.

Further, this goes against the generally subordinated nature of loans in crowdlending.

5.3.3 Tax analysis of Business Processes (Compliance of Business Processes with Serbian tax

Laws and Double Tax Treaties)

Bearing in mind all previously stated in connection with the Business Case No.1, possible tax

consequences of defined model will be presented further on:

CONDA platform services

According to afore presented model, services that will be provided by CONDA could be

considered as agency services in connection with financing procedures.

Bearing in mind that CONDA platform will be managed and in ownership of Serbian legal

entity, such services provided to Borrowers could lead to some tax consequences.

Corporate income tax – In general, corporate income tax liability will be determined based on

the profit disclosed within companies’ profit and loss account. Such profit should be further

adjusted with the proper application of relevant provisions of the Corporate Income Tax Law,

then the adjusted profit will represent taxable base for determining tax liability by applying the

15% corporate income tax rate.

Taking into consideration that Serbian legal entity will generate revenue in connection with

services provided to Borrowers, particular revenues will be considered as taxable with the

15% corporate income tax rate. If the Serbian legal entity and a Borrower are treated as

related parties (according to related party definition prescribed by the Corporate Income Tax

Law), realized transaction should be tested in accordance with the transfer pricing rules.

Value added tax – Generally, subject to VAT could be any transaction that include providing of

goods or services by the taxpayer. Bearing in mind that CONDA platform service fee would

be charged to Borrowers, such fee will represent the VAT base and 20% rate would be applied

(the tax base is the amount of compensation which service provider receives for performed

supply. The tax base should also include excise duties, customs duties and other import duties,

as well as other public revenues, excluding VAT, as well as all related expenses charged by the

VAT taxpayer to the recipient of goods and services).

However, and as it is prescribed if the Serbian entity that runs CONDA platform could be

considered as an agent of a Borrower in the credit transaction, in such case (if the CONDA

platform service fee is considered as an agency fee), there is a possibility that realized fee could

be exempt from VAT taxation. Namely, in accordance with the relevant provisions of the VAT

Law, it is stipulated that, VAT shall not be paid in the trade of money and capital on

transactions such as mediation in transactions regarding deposits, current and transfer

accounts, payment orders, as well as payment transactions and remittances.

Payment of interest to resident and non-resident individuals

According to Serbian legislation, interest paid to an individual on the basis of loan agreement, is

considered as income from capital of that individual and it is taxable by 15% of personal

income tax. Tax base is gross income (paid interest increased by owed tax).

The payer of interest, Borrower, as Serbian legal entity, has the obligation for submission of

corresponding tax return and payment of this personal income tax at each payment of interest.

Having this in mind, the Borrower could face with great demands related to administration of

interest payments if there is a great number of Lenders.

Furthermore, in case of payment of interest to non-resident individuals i.e. individuals who are

tax residents of countries with which Serbia has concluded agreements on the avoidance of

double taxation, provisions of these agreements should be considered at payment of interest.

Namely, if these individuals provide residency certificates, proving they are tax residents of

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countries with which Serbia has concluded agreements on avoidance of double taxation, the

Borrower can apply the preferential rate prescribed by these agreements for taxation of

interest at payment of their income. The applicable preferential rates could be in range

between 0 and 15% depending on each double tax agreement.

CONDA platform also offers investors the opportunity to invest in hybrid loans with success

participation i.e. investors are also entitled to bonus interests and increased principle amount

depending on the company success. Please note that Serbian legislation does not provide the

particular definition for this type of income and thus, its tax treatment cannot be determined

without any doubt. The uncertainty lies in distinction of type of income i.e. whether it should

be treated as interest, dividend or certain other type of income, which would consequently

have an impact on its taxation. Namely, the main issue with this respect would arise at

payments made to non-residents coming from countries with which Serbia has concluded

double tax agreements given the fact that it should be determined which specific article from

these agreements should be taken into account for the purpose of taxation/exemption of this

income in Serbia.

Payment of interest to resident and non-resident legal entities

Based on the legislation that regulates tax practice in the Republic of Serbia, profit or revenue

generated by legal entities (Serbian residents/non-residents) will be taxable in accordance with

the relevant Corporate Income Tax Law provisions at the 15% tax rate.

Legal entities Serbian residents – Generally and taking into consideration Corporate Income Tax

Law provisions, revenue that will be realized from payment of interest should be taxed with

the rate of 15%.

Legal entities Serbian non-residents – In accordance with the Corporate Income Tax Law, it is

stipulated that the income of non-resident legal entity realized from the resident legal entity

based on:

1) dividends and profit shares in a legal entity;

2) royalties;

3) interest;

4) lease and sub-lease of immovable property and movable property on the territory of

Serbia;

5) market research services, accounting and auditing services and other services in the field

of legal and business consultancy, regardless of where they are provided or used, or

where they will be provided or used, is subject to Serbian withholding tax at

20% tax rate. If a foreign legal entity, resident of so called “tax haven”, performs services

to the Serbian legal entity, the income from these services is subject to 25% withholding

tax.

Bearing in mind previously stated, income that non-resident legal entity realised from the

received interest should be taxable at the 20 or 25% withholding tax rate. Nevertheless, if the

non-resident legal entity is registered in the country that has concluded Double Tax

Agreement with the Republic of Serbia, such revenue could be tax with the preferential tax

rate that could be in range of 0 to 15% depending on each double tax agreement. However,

provisions of these agreements should be considered at payment of interest. Namely, if these

legal entities provide residency certificates, proving they are tax residents of countries with

which Serbia has concluded agreements on avoidance of double taxation, the Borrower can

apply the preferential rate prescribed by these agreements for taxation of interest at payment

of their income.

If a non-resident legal entity and a Borrower are treated as related parties (according to

related party definition prescribed by the Corporate Income Tax Law), realized transaction

should be tested in accordance with the transfer pricing rules and it is possible to have impact

on a determined amount of withholding tax liability.

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CONDA platform also offers investors the opportunity to invest in hybrid loans with success

participation i.e. investors are also entitled to bonus interests and increased principle amount

depending on the company success. Please note that Serbian legislation does not provide the

particular definition for this type of income and thus, its tax treatment cannot be determined

without any doubt. The uncertainty lies in distinction of type of income i.e. whether it should

be treated as interest, dividend or certain other type of income, which would consequently

have an impact on its taxation. Namely, the main issue with this respect would arise at

payments made to non-residents coming from countries with which Serbia has concluded

double tax agreements given the fact that it should be determined which specific article from

these agreements should be taken into account for the purpose of taxation/exemption of this

income in Serbia.

6. Business Case No. 2

6.1 Introduction

Bitbond is a crowdlending platform originating loans for entrepreneurs, micro and small

businesses currently in Europe, the Americas and select African and Asian countries. Since

2013 it has brokered over USD 15.3 mil.33 worth of loans to over 3.200 borrowers in more

than 80 countries. It offers investment opportunities to both retail (from EUR 5) and

institutional investors on the one side and relatively large variety of loan types to borrowers

on the other.

It is licensed since October 2016 by German regulator BaFin as a financial institution (asset

broker) and operates from Berlin under German law. Their goal for the following years is to

become a truly global lending platform focused on immense micro-SME market worldwide.

Innovative technologies, like blockchain and machine learning, and partnerships with large

eCommerce marketplaces (Stripe, Delivery Hero, Jumia) are utilized to make a safe, user

friendly and time and cost-efficient solution easily applicable to both developed and emerging

markets.

6.2 Business Model of Bitbond Platform

Customer Segments – Bitbond targets two main Customer Segments, Borrowers and

Lenders, both being of equal importance as usual for platform-based business models. Lenders

can be further differentiated in three sub-segments of institutional, retail and strategic lenders.

Typical borrower on Bitbond’s platform is an entrepreneur or a micro company generating

large part of revenues through eCommerce platforms (marketplaces) and is usually affected by

the lack of funding supply due to traditional lenders’ focus on larger enterprises (Funding Gap).

Vast majority of borrowers are in retail or gastronomy industry, using services like Amazon,

eBay and Etsy (retailers) or Delivery Hero and Foodpanda (gastronomy) as main sales

channels, while the rest of them offer large variety of services in transportation, hospitality and

other industries. It is important to note that actual loan applicants on Bitbond platform are not

the actual companies but their owners personally, which allows also non-incorporated

entrepreneurs to apply.

Geographically, Bitbond is focused on developed European markets (Germany, UK, France and

Italy) with significant activities in North America and Sub Saharan Africa, but there is no

customer segmentation based on location since borrowers from different geographies have

needs, characteristics and behaviours similar enough not to require significantly different Value

Proposals, Channels and Customer Relationships.

On the lender side there has been a significant structural development over the years. While

33 On 20th February 2019.

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originally intended to target retail lenders, nowadays over 90% of loan origination comes from

institutional/professional lenders (asset and portfolio managers).

There is, however, another group of professional, or better to say non-retail, strategic lenders

Customer Segment consisting of companies providing services to Bitbond’s typical borrowers.

Companies like Jumia, a Kenyan marketplace provider with business model similar to

Amazon’s, uses Bitbond’s platform to give financial support by lending money to its users,

mostly e-shops selling goods through their website. Members of this Customer Segment also

include point-of-sales (POS) providers, eCommerce marketplaces, payment service providers

(incl. banks), services marketplaces (incl. artists) etc.

Value Propositions – Borrower Customer Segment requires quick and convenient access to

business financing that suits the needs of micro and small businesses. Accessibility to finance

for the underserved segment of micro and small enterprises and closing of the so-called

Funding Gap is the main Value Proposition of Bitbond. Since Bitbond is available globally34, this

Value Proposition is offered to borrowers on markets, where the accessibility problem is most

pronounced.

Due to the small borrower size and their low cash reserves, quickness in application

processing is of essential value and the second most important Value Proposition of Bitbond

after funding accessibility. Statistics showing that approx. 83% of loan volume are working

capital loans and approx. 98% of loan volume has maturity of 12 months or less, support the

claim that funding is used for short term activities requiring swift reactions and readily available

liquidity.

From the perspective of the other Customer Segment, the lenders, favourable risk-return-

trade off provided by utilization of innovative technologies both in underwriting and loan

servicing, on the one hand, and automated investment tools (enabling diversification across risk

classes, geographies, industries, maturities etc.) on the other. For professional investors

Bitbond offers an additional asset class, with relatively high yields and low volatility, adjustable

to portfolio manager’s investment criteria.

For retail investors there is one additional Value Proposition, beside those related to

professional investors, namely accessibility of investment opportunities. The possibility to

invest amounts as small as EUR 5 in short term loans opens a new investment option for retail

investors with small amounts at their disposal and high requirement for liquidity.

Strategic lenders utilize lending through Bitbond’s platform as means to an end of revenue

boosting, since they can increase commissions income by financing their users and helping

them sell more of their goods.

Channels – When it comes to raising awareness of Bitbond’s Value Propositions and enabling

customers to evaluate them, Bitbond relies heavily on indirect Channels, namely their strategic

partners. These partners conduct preselection of their users and connect them with the

source of finance thus work as a marketing and sales channel for Bitbond. Furthermore, they

provide their user’s historical business records, thus helping Bitbond to do a better job at

borrower scoring, but they can also help in matters relevant to collection since they have

control over the borrowers account on their marketplace service. Bitbond’s goal is to

generate more than 60% of loans through established partnerships by end of 2020.

Apart from indirect channels provided by strategic partners, Bitbond also uses more direct

channels such as digital marketing (Google ads, content writing, search engine optimization,

etc.) for reaching borrowers and retail lenders, but also relies heavily on its network and

agents to access institutional investors.

Payment providers are an important channel for execution of Bitbond’s service, especially since

34 With some local limitations.

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they increase the time and cost efficiency of this business model significantly. By using

cryptocurrency exchanges to facilitate cross-border transactions, Bitbond has found a way to

reduce transaction costs and still keep these transactions secure, time efficient and globally

available.

After the loan has been issued and loan administration services have to be provided, Bitbond

relies on direct, both internal and external, channels. While the servicing process is being

performed internally, for debt collection Bitbond uses both collection agencies and strategic

partners (with access to borrower’s eCommerce accounts).

Customer Relationships – Borrower Customer Segment is served to the most part with

automated self-service, with minimal personal assistance, in form of convenient online loan

application completed in only 15 minutes, optimized for mobile and desktop. This automated

process enables the Value Proposition of quick access to loans, since the recurring borrowers

are able to get the application approval and pay out within 30 minutes. The first-time

borrowers might have to wait longer (even up to 14 days in extreme cases), but most of the

first-time applicants get the credit decision within 24 hours.

Lenders Segment is approached in several, more differentiated ways. Bitbond establishes

Customer Relationships with institutional and strategic lenders through professional networks

and agents, providing them dedicated personal assistance in this phase. Afterwards, these

lenders use automated services with minimal reliance on personal support. Customer

Relationships with retail lenders are much more automated and self-service oriented.

However, Bitbond offers personal customer support to retail lenders and builds an investor

community through forum and blog.

Customer Relationships affect Bitbond’s profitability to very high extent, and not only in terms

of costs for their establishing and maintenance. Due to the fact that registration, scoring, KYC

and ALM processes constitute a significant amount, especially compared to relatively low loan

amounts, Bitbond generates a much larger margin with recurring borrowers. In the other

Customer Segment, presence of large institutional lenders or important strategic partners,

requires careful relationship maintenance, since losing each one of them would have a stark

effect on money available for lending. Establishing and maintaining good Customer

Relationships is crucial for Bitbond’s business model.

Revenue Streams – Bitbond has two main revenue streams and others less significant. In the

borrower Costumer Segment origination fee is charged per issued loan. To the lenders

Bitbond charges the repayment fee which is a certain percentage of all repayments according

to the loan’s repayment plan. The repayment fee becomes due at the time of the actual

repayment.

There are also other potential Revenue Streams like loan insurance brokerage commissions,

but at the moment this study is conducted, these streams are still in development. With the

increase of loan origination and more active presence in emerging markets with their specifics,

Bitbond will probably be able to find more Revenue Streams.

Key Resources – Most valuable resource of Bitbond is their scoring and underwriting

technology that enables them to deliver their main Value Proposition, quick access to funding.

They have developed a technology that uses verifiable data sources from borrower’s bank,

eCommerce, social media and even service rating (Yelp, Tripadvisor, Google Analytics)

accounts, that are available in a uniform way across many countries. This help them conduct an

automated, quick and globally uniform scoring and underwriting process, as one of the Key

Activities.

Other Key Resources include the technical infrastructure in form of the Bitbond platform and

their automated investment tool, as well as their human resources and industry network.

Lastly, the funding secured from their shareholders, providing sufficient capital resources

required for rapid growth, can also be considered a Key Resource, since sustainability of

Bitbond’s business model depends highly on the loan origination volume.

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Key Activities – Due to outsourcing of non-core competencies to specialized Key Partners

(KYC-service providers, collection agencies, payment providers, fraud detection and security

specialists, etc.), Bitbond has focused on the Key Activities they master best. As previously

mentioned, establishing and maintaining Customer Relationships is crucial for Bitbond’s both

top (revenue) and bottom line (profitability). Thus, Bitbond’s Key Activities include marketing

the platform to both borrowers and lenders through all the Channels available.

To maintain these relationships the Value Propositions, have to be delivered seamlessly and

reliably. This is why Bitbond considers loan servicing and customer support their Key

Activities.

Key Partnerships – Bitbond builds its growth strategy on expanding both the number of

partnerships and the complexity of their cooperation. They have built cooperation with POS

providers, eCommerce marketplaces, banks, payment service providers, services/arts

marketplaces, lending comparison portals etc. and through partnerships with global, trusted

brands Bitbond gains a Channel for raising awareness about their Value Propositions and

steady inflow of customers. These partners also provide them with borrower’s business

enabling Bitbond to conduct sophisticated creditworthiness assessment in an automated and

timely manner. By keeping control over borrower’s eCommerce accounts, partners are also

able to help with collections.

In turn, these strategic partners can offer a global lending solution to their clients, boost

merchant sales and create an additional revenue stream. However, as mentioned before, they

do not only empower borrower acquisition, but also act as lenders and cooperate with

Bitbond as a separate Customer Segment.

Apart from strategic partners, several suppliers can also be considered Key Partners. KYC

service providers, collection agencies, payment service providers, fraud detection and security

specialists, etc. By outsourcing these processes to companies specialized in respective fields,

Bitbond is aiming to both optimize their processes and reduce costs.

Cost Structure – Fixed costs take a major share in total cost structure. Office expenses,

audit costs, salaries, rents, licenses, accounting and legal services constitute the fixed costs

block.

Due to outsourcing of many activities, however, Bitbond has managed to increase the share of

variable costs. Furthermore, Key Partnerships with highly specialized suppliers, enable them to

benefit on their economies of scale.

Business Model Canvas – Summarized in the business model canvas, the Bitbond business

model looks like this:

Key Partners Key Activities Value Propositions Customer Relationships Customer Segments

Sales Access to funding Personal assistance Lenders/Investors

Platform management Quickness Automated services Borrowers

Banks

Customer support Global accessability Community Strategic partnersPayment providers

Point of sales providers

Key Resources Channels

Strategic partners

Collection agencies Digital marketing

Platform

Own sales force

Collection agencies

Cost Structure Revenue Streams

Loan origination fees

Success dependent transaction fees charged to investors

Dedicated personal

assistanceInvestment opportunity

with attractive risk-

return-profile

eCommerce

marketplaces

Lending comparison

portals Scoring and underwriting

technology

Automated investment

tool

Networking and

partnership building

Fixed costs: salaries, rents, licenses, recurring accounting and

legal services, etc.

Variable costs: KYC & KYB providers, collection agencies,

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Figure 8: Bitbond Business Model Canvas

6.3 Business Process Analysis

6.3.1 Description of Business Processes

Bitbond’s process of loan application, issuance and repayments are all presented on the following graph,

with all steps.

Figure 9: Bitbond business processes

Process is initiated by the borrower, who fills out an online application optimized for mobile

or desktop (expected application time 15 minutes) and sends it to Bitbond. Automated fraud

checks (IP, user device etc) are activated right after the application has been submitted and

obvious suspicious applications are automatically rejected.

No audited financial statements are needed in the process, since the borrowers connect their

business accounts to get approved. The data from borrower’s business accounts enable an

individual risk assessment, i.e. merchants with a strong profile pay lower interest rates. The

borrowers go through KYC procedure, which includes video identification, as well as manual

and automated application review. During automated review scoring application calculates cash

flow-based default probability and suggests a credit rating.

In scope of manual review Bitbond analyst reviews uploaded documents and suggested

borrower score. In case there are any inconsistencies, analyst contacts applicant to discuss

them. If there are no red flags analyst makes the final decision on score and debt capacity

based on maximum monthly annuity the borrower can afford (based on data from his business

accounts, he gave access to). After final.) an email is sent to the borrower to inform them

about the score. Interest rate is set automatically based on: borrower score, market terms and

loan terms.

After the loan has been issued borrowers repay the loan in monthly instalments. In case of

repayment delays the in-house dunning process is activated, while after 90 days delay overdue

loans are regarded as defaulted and are either collected in-house or handed over to collections

partner automatically.

Payment processing is an important element of Bitbond’s business processes since blockchain

based payment infrastructure gives reach to customers worldwide. All payments on Bitbond

run via cryptocurrency exchange providers (Investors and borrowers do not need to handle

cryptocurrencies themselves), which makes the payment process much simpler, available

globally and much less expensive. The payment process going through Tempo Money Transfer

payment service is presented in the picture below.

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Figure 10: Bitbond payment processing

As will be shown below, certain differences in CONDA and BITBOND crowdlending schemes

may trigger distinct implications from a regulatory and legal perspective. Despite the fact that

both CONDA and BITBOND are based on generally similar notion that involves open calls for

loan financing through an internet platform, several dissimilarities between the two may cause

diverse obstacles in their implementation in Serbia.

6.3.2 Legal Analysis of Business Processes (Compliance of Business Processes with Serbian

Laws)

6.3.2.1 Cryptocurrencies

Given that BITBOND’s models is based on lending in cryptocurrencies (as opposed to fiat

currencies), we have outlined below a general overview of legal issues with cryptocurrencies in

Serbia which would are likely to prevent the establishment of a platform similar to BITBOND

in Serbia.

Cryptocurrencies are not expressly regulated in Serbia, however, over the past few years the

NBS issued several conservative statements regarding cryptocurrencies stating that:

- Cryptocurrencies does not represent a lawful means of payment in Serbia and it is an

unregulated virtual currency,

- Cryptocurrencies does not represent e-money as it is outside of the scope of

Electronic Money Directive – 2009/110/EC and Payment Services Directive –

2007/64/EC,

- Cryptocurrencies is not a lawful currency in Serbia, and it will not replace euro or any

other currency,

- Investments and holding of cryptocurrencies are not regulated and therefore it is

undertaken at own risk,

- NBS does not have the legislative authority to regulate cryptocurrencies exchanges

and transactions,

- NBS considers that the law on prevention of money laundering should apply.

Additionally, the Securities Commission of the Republic of Serbia also issued a warning to the

cryptocurrency investors outlining the main risks connected to cryptocurrency investments

such as fraud and volatility risk, inadequate data protection mechanisms etc.

In the absence of regulation of cryptocurrencies in Serbia, it remains unclear how they should

be legally treated. In our view, due to their specific nature cryptocurrencies may be treated as

an intangible commodity similar to a software. Although this standpoint is widely adopted in

Serbia, in practice cryptocurrencies transactions are currently performed mostly by individuals

and in legally grey zone. Exceptionally, a few restaurants accept payments in bitcoins and

several bitcoin ATMs were set up in a couple of cities, however their legal compliance remains

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dubious. Additionally, to our knowledge, there is only one provider of intermediary services in

relation to cryptocurrencies whose operation the NBS scrutinizes in practice.

Bearing in mind the above, it is questionable whether a platform which is based on

cryptocurrencies transactions would be legally viable and its implementation may be relatively

complex and legally dubious.

6.3.2.2 Foreign Exchange

The FX Regulation and the applicable bylaws governing cross-border loans are silent on in-kind

loans. As mentioned, the FX Regulation is in practice interpreted as a closed set of rules

meaning that anything not regulated thereunder shall be considered as unpermitted. Thus,

cross-border in-kind lending may be deemed as contrary to the foreign exchange regulations.

In practice, if one took a cryptocurrencies loan from abroad this would most probably be

under the radar of the NBS, however, in case of rapid growth and development of

crowdlending, a platform like BITBOND is unlikely to pass undetected by the NBS.

Further, if cryptocurrencies are deemed as commodity and BITBOND loans as in-kind loans

such loans would be out of scope of regulations governing the reporting of cross-border loans.

This may be construed as circumvention of the foreign exchange regulations as the nature of

BITBOND loans is, in its essence, closer to monetary loans. Therefore, it would be advisable

to discuss with the NBS the issue of cross-border loan reporting with regards to this specific

type of in-kind lending.

Moreover, the same reasoning for the potential evasion of the FX Regulation applies to the

repayment restrictions applicable in case of non-EU investors as these are not directly

applicable to in-kind loans. Moreover, it may be also construed that lending through

cryptocurrency is designed to circumvent general FX rule that loans between residents may be

given only in Dinars.

In BITBOND’s model, the platform charges fees for repayment processing to the investors.

Specifically, BITBOND retains certain percentage of all repayments made by the borrower

before they are transferred to the investor. Thus, this model envisages certain type of set-off

between the platform and investors. Cross-border set-off is also subject to certain restrictions

under the FX regulation, whereby set-off is possible only for certain types of receivables and

following the prescribed procedure. The nature of set-off between the platform and the

investors is dubious, as it involves offsetting of cryptocurrencies (investor’s claim) and service

of repayment processing (platform’s claim) and it remains unclear whether it would be

permitted in the cross-border context. Therefore, it would be advisable to establish a different

mechanism for fee payments that would not involve cross-border set-off.

Additionally, if cryptocurrencies are qualified as commodity, the foreign exchange rules on

import/export may be triggered. Precisely, the FX Regulation prescribes that if a commodity is

not imported/exported within one year as of the payment date, such payments are deemed as

commercial credits and loans and are subject to reporting to the NBS. However, it is

questionable whether cryptocurrencies are subject to import/export due to unclear customs

treatment thereof. Nevertheless, it could be argued that cryptocurrencies purchased and

delivered online are not subject to customs regulation as they do not physically cross the

customs territory. In such case, the reporting requirements under the FX Regulation should

not be triggered.

Given all of the above and bearing in mind that the utilization of cryptocurrencies is inevitable

under the Bitbond model, it seems unlikely that the implementation of Bitbond’s crowdlending

model would be feasible in Serbia.

6.3.2.3 Legal Accountability / Licensing

a) Lenders

As explained in Section 5.2.2.9 above, one of the main obligations under credit agreements is

lending of money, whereas loans may also be in-kind (i.e. lending of other replaceable items).

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Unlike CONDA’s model, Bitbond’s investors do not lend funds but cryptocurrencies. Under

the assumption that cryptocurrencies are intangible commodity Bitbond loans may be qualified

as in-kind loans. Given that in-kind loans are not on the banking regulatory radar, in our

opinion lenders registered with Bitbond should not be subject to banking regulatory

constraints even if they acted as investors in their professional capacity.

b) Platforms

Same as under the analysis of CONDA model, we observed several different fields of law to

determine whether the Bitbond platform would be obliged to obtain any licences under the

Serbian law.

In particular, we analysed the banking rules, payment services regulations and the regulations

concerning investment companies.

With regards to the banking regulations, same as the operator of CONDA platform, the

Bitbond platform operator does not advance any loans nor credits nor performs any other

banking activity and, as such, is out of scope of the Law on Banks. Moreover, in case of Bitbond

platform the risk is even lower given that it involves in-kind loans in line with our analysis

under Sections 6.3.2.1 and 6.3.2.2 above.

On the other hand, as Bitbond platform processes the repayment of the cryptocurrencies loan,

the interest payments and possible compensation payments, the risk of triggering licensing

requirements with respect to payment services is increased. Specifically, as a prerequisite for

the participation in the marketplace, Bitbond sets up a cryptocurrencies account for all users

for the administration of cryptocurrencies loans. Moreover, prior to repayment dates the

borrower funds its cryptocurrencies account and BITBOND automatically transacts

repayments from the borrower's cryptocurrencies account and credits the payment to the

lender’s cryptocurrencies account.

The above described feature of Bitbond platform resembles to licenced money-remittance

services under the PS Law. However, the prerequisite for provision of money-remittance

services requires the transfer of funds which transfer is not present in the Bitbond model.

Instead, Bitbond conducts transfer of cryptocurrencies (i.e. intangible commodity) and as such

should be out of scope of the PS Law. However, as mentioned in Section 6.2.2.1 the NBS

expressed its concern in relation to cryptocurrencies and stated that they do not represent a

lawful means of payment in Serbia. Therefore, cryptocurrencies-based business models would

be problematic and practically demanding to implement given the conservative approach of the

regulator.

Additionally, Bitbond platform cooperates with certain foreign cryptocurrency exchange offices

via which its users fund their cryptocurrencies accounts. To our knowledge, currently there is

only one online cryptocurrency exchange office operating in Serbia in the legal grey zone.

However, the said platform is still underdeveloped, and it seems that the purchase/sale of

cryptocurrencies thereunder takes several working days. Further, the sale of coins on the local

exchange platform requires submission of certain documentation such as corporate resolution

on the purchase of cryptocurrencies, documentation on the origin of coins and the legal basis

for their purchase, etc. For these reasons, it seems like participation of a local exchange

platform would hinder the fast-paced transacting model of Bitbond platform.

On the other hand, if a foreign exchange office is involved, it is questionable how the transfer

of funds between the borrower and the foreign exchange office would be conducted from the

perspective of the FX Regulation. As explained, each cross-border payment requires a

corresponding payment code prescribed by the FX Payment Transaction Guidelines. Further,

the borrower would be obliged to submit evidence on legal basis for the respective payment

to its commercial bank. Although, the borrower may conclude a framework agreement with

the bank by which it would be released from submitting the said documentation, it would still

be required to keep the required documents in its records. The supervision over foreign

exchange operations of residents is conducted by the NBS as of January 2019 and its scope is

yet to be seen in practice. Theoretically, the NBS may request the documentation on the basis

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of cross-border transactions of the borrowers which, if executed contrary to the FX

Regulation, may lead to a fine for commercial offence. Additionally, the NBS may question the

legal nature of the cross-border purchase/sale of cryptocurrencies, hence, the risk remains

that the NBS construes BITBOND transactions as evasion of cross-border loan reporting

requirements.

Finally, with regards to the regulations concerning investment companies, same as with

CONDA’s model, in our opinion operator of the Bitbond platform would not be required to

obtain a license for investment companies. Even if not qualified as intangible commodity, it is

unlikely that cryptocurrencies may deemed as a financial instrument under the CM Law.

c) Borrowers

As elaborated in more detail in Section 6.3.2.2 above, the main issue with the implementation

of Bitbond platform in Serbia is the circumvention of foreign exchange regulations, the main

being loan reporting procedure and repayment restrictions in case of non-EU lenders.

Therefore, the risk that the NBS holds the borrowers responsible for the evasion of the FX

Regulation cannot be excluded and should be further discussed with the regulator.

6.3.2.4. General contract law

Unlike CONDA’s model, Bitbond’s crowdlending is based on loans in cryptocurrencies (as

opposed to the monetary loans). Under the assumption that cryptocurrencies may be treated

as intangible commodity such loans may be regarded as in-kind loans recognized under the

Serbian Law on Obligations. Namely, the Law on Obligations allows lending of other

replaceable items which are of such nature that any of the same number, weight, or measure,

may be considered the same thing (e.g. wine, oil, corn, gold). If cryptocurrencies are regarded

as intangible commodity and, thus, as replaceable items, Bitbond loans, in turn, may be qualified

as in-kind loans.

Further, charging of interest to the obligations involving replaceable items is explicitly

permitted under the Law on obligations and would enable the in-kind lenders to gain profit out

of their crowd-investments.

Nevertheless, even if the implementation of Bitbond platform in Serbia would be viable, in-kind

lending is not widely used in practice in Serbia and may, therefore, cause unpredictable

practical issues.

Additionally, same as in CONDA’s model, there is a risk that the borrower challenges the

payment of high interest rates on the basis of disproportionality of obligations of the borrower

and lender.

6.3.2.5 AML & KYC

The new AML Law (applicable from 1 April 2018) for the first time introduced entities

providing services concerning the sale, purchase and transfer of virtual currencies through

internet platforms as obligors. Therefore, under the assumption that the implementation of

BITBOND’s model in Serbia would be viable, the platform may be subject to the AML & KYC

requirements under the AML Law. Although this novelty is recently introduced and is yet to

be tested in practice, we outlined below certain impediments if the platform was subject to the

AML Law.

The main obligations of the platform under the AML Law would include KYC checks with

respect to the Serbian borrowers and Serbian investors and monitoring of their business

transactions, reporting suspicious transactions to the Anti-Money Laundering Administration,

regular professional education, training and development of employees, record and data

keeping, designating AML compliance officers, establishing adequate internal AML controls, and

other AML actions and measures. In practice, conducting KYC checks in relation to the

investors may be challenging. Specifically, as the investors are entering into crowdlending

campaigns online and without any physical presence, it is questionable whether the platform

would be able to conduct the necessary KYC checks required by NBS. Although the AML Law

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sets certain principles for verification of customer’s identity electronically, currently in practice

non-face to face verification is not allowed.

The main principle under the AML Law is that the customer’s identity is verified in person.

Although the AML Law provides for the exception when the transaction may be executed or a

customer business relationship established through its proxy, in such case the identity of the

proxy would have to be verified in person. Moreover, in this case the platform would have to

perform enhanced customer due diligence measures.

Another exception provided under the AML Law is that the customer’s identity may be

verified on the basis of a qualified electronic signature issued by the certified body in the

Republic of Serbia or an equivalent foreign qualified certificate. However, obtaining qualified

electronic signature in Serbia requires personal presence while the use of foreign qualified

electronic signatures has not been tested in practice yet.

Nevertheless, the NBS has the authority to adopt a bylaw that would determine the manner of

customer identity verification by means of electronic communication and with no personal

presence of the respective customer in certain cases. Although there were rumours that the

NBS is in the process of drafting of such bylaw, no drafts were made publicly available yet.

Therefore, it seems that until the NBS adopts the adequate bylaws it is practically

unmanageable to comply with the AML Law with respect to the online investors.

6.3.2.6 Consumer Protection

For analysis of consumer protection regulations with respect to the potential withdrawal rights

of the investors please see the Section 5.2.2.4. under CONDA’s model above.

6.3.2.7 Data Protection

For obligations of the platform with respect to data protection, please see our analysis for

CONDA platform in Section 5.2.2.5. above.

6.3.2.8 Collection of Claims

Bitbond platform, in section Underwriting & Loan Servicing, explains that loans that are 90

days overdue are considered as defaulted loans. Defaulted loans are either being collected in-

house by Bitbond itself or handed to Bitbond’s collection partners automatically. For debt

collection, Bitbond’s partners are experienced debt collection agencies who process claims for

all countries using own operations or partners. Thus, in Bitbond platform, the Lender does not

have any direct relations with the Borrower in terms of collection proceedings, it is completely

covered by Bit Bond or collection agencies and exclusively before German courts, even for

cross border loans by using EU wide legal instruments such as orders rendered by German

courts and executed in the country of Borrower (Small Claim Procedure (“SPC”), European

Payment Order (“EPO”) and European Account Preservation Order (“EAP”)).

As for Bitbond collection procedure, we would have to emphasize some specifics of Serbian

legislation for collection proceedings and some specifics due to the fact that Serbia is non-EU

country due to which Bitbond collection procedure is not compliant with Serbian legislation.

First of all, Serbian Law on Civil Procedure prescribes that a party may be represented in court

proceedings by attorney at law. In case the party is a legal entity, it may be represented by its

employee who has passed the bar exam, by its director or by attorney at law. Therefore,

Bitbond or its partnering collection agencies would not be allowed to represent Lenders in

collection proceedings before Serbian courts. However, this obstacle could be remedied with

Bitbond engaging cooperating Serbian law firms, and with Lenders, when registering to Bitbond

platform and concluding loan agreements, signing general power of attorneys for Bitbond

Serbian lawyers, authorizing them to represent Lenders in collection proceedings before

Serbian courts against the Borrower.

Second specific of Serbian legislation is that, due to the fact Serbia is a non-EU country, foreign

court decisions are not directly enforced before Serbian courts. Such decisions need to be

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recognized by Serbian court in order to become legally binding in Serbia in collection

proceedings against the Borrower. Foreign court decision will be recognized before Serbian

court if there is reciprocity between Serbia and the country of decision origin in terms of

recognition of court decisions, if such decision is not contrary to Serbian Constitution and if

the opposing party had been given the opportunity to participate the proceedings which

resulted with the decision that is to be recognized. There is a legal assumption on existence of

the reciprocity, but in case the court doubts in it, Serbian Ministry of Justice is competent to

render binding opinion on existence of the reciprocity between Serbia and particular country

of decision origin. However, collection procedures mentioned in Bitbond business model (SPC,

EPO and EAP) seem like urgent proceedings in which debtor’s participation before rendering

of the decision is not necessary and for this reason mentioned court decisions would most

probably be rejected and not recognized by Serbian courts. As a consequence of rejection, the

Lender would have to initiate litigation proceedings before Serbian court by filing the claim

against the Borrower, requesting from the court to oblige the Borrower to pay the due

amount in accordance with the loan agreement. As for collection of the Lenders’ unsecured

claims against the Borrower in litigation, enforcement and bankruptcy proceedings before

Serbian courts, the requirements, duration, costs and the procedure are the same as explained

for CONDA business model.

6.3.3 Tax analysis of Business Processes (Compliance of Business Processes with Serbian tax

Laws and Double Tax Treaties)

Bitbond Platform services

If Bitbond does not incorporate its business in the Republic of Serbia, then the services that

will be provided to borrowers will not be taxable in the Republic of Serbia. However, and

based to the service model, Bitbond will perform services for a Borrower that is resident of

the Republic of Serbia and such model will be considered as business to business. Based on the

VAT rules in the Republic of Serbia, the B2B model (services performed from non-resident

business to resident business) would not require registration for VAT (it will be considered as

an option), bearing in mind that in such circumstances a company that is considered as a

service recipient will be obliged to apply reverse charge mechanism.

Payment of interest to resident and non-resident individuals

According to Serbian legislation, interest paid to an individual on the basis of loan agreement, is

considered as income from capital of that individual and it is taxable by 15% of personal

income tax. Tax base is gross income (paid interest increased by owed tax).

The payer of interest, Borrower, as Serbian legal entity, has the obligation for submission of

corresponding tax return and payment of this personal income tax at each payment of interest.

Having this in mind, the Borrower could face with great demands related to administration of

interest payments if there is a great number of Lenders.

Furthermore, in case of payment of interest to non-resident individuals i.e. individuals who are

tax residents of countries with which Serbia has concluded agreements on the avoidance of

double taxation, provisions of these agreements should be considered at payment of interest.

Namely, if these individuals provide residency certificates, proving they are tax residents of

countries with which Serbia has concluded agreements on avoidance of double taxation, the

Borrower can apply the preferential rate prescribed by these agreements for taxation of

interest at payment of their income. The applicable preferential rates could be in range

between 0 and 15% depending on each double tax agreement.

Payment of interest to resident and non-resident legal entities

Based on the legislation that regulates tax practice in the Republic of Serbia, profit or revenue

generated by legal entities (Serbian residents/non-residents) will be taxable in accordance with

the relevant Corporate Income Tax Law provisions at the 15% tax rate.

Legal entities Serbian residents – Generally and taking into consideration Corporate Income Tax

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Law provisions, revenue that will be realized from payment of interest should be taxed with

the rate of 15%.

Legal entities Serbian non-residents – In accordance with the Corporate Income Tax Law, it is

stipulated that the income of non-resident legal entity realized from the resident legal entity

based on:

1) dividends and profit shares in a legal entity;

2) royalties;

3) interest;

4) lease and sub-lease of immovable property and movable property on the territory of Serbia;

5) market research services, accounting and auditing services and other services in the field of

legal and business consultancy, regardless of where they are provided or used, or

where they will be provided or used, is subject to Serbian withholding tax at 20%

tax rate. If a foreign legal entity, resident of so called “tax haven”, performs services to the

Serbian legal entity, the income from these services is subject to 25% withholding tax.

Bearing in mind previously stated, income that non-resident legal entity realised from the

received interest should be taxable at the 20 or 25% withholding tax rate. Nevertheless, if the

non-resident legal entity is registered in the country that has concluded Double Tax

Agreement with the Republic of Serbia, such revenue could be tax with the preferential tax

rate that could be in range of 0 to 15% depending on each double tax agreement. However,

provisions of these agreements should be considered at payment of interest. Namely, if these

legal entities provide residency certificates, proving they are tax residents of countries with

which Serbia has concluded agreements on avoidance of double taxation, the Borrower can

apply the preferential rate prescribed by these agreements for taxation of interest at payment

of their income.

If a non-resident legal entity and a Borrower are treated as related parties (according to

related party definition prescribed by the Corporate Income Tax Law), realized transaction

should be tested in accordance with the transfer pricing rules and it is possible to have impact

on a determined amount of withholding tax liability.