Regulatory environment for CASPs in Croatia and Serbia - Fireside chat

hi guys hi everyone who should start uh ladies first okay good so I see that the the day is coming to an end but hopefully we will not be boring with this I would call it fireside chat and exchanging the experiences between two wasps uh one me in Croatian and European regulatory environment and alexos in Serbia non regulation environment so EU EU candidate EU candidate of course permanent EU candidate and you were before the EU in the regulation point of view so can you start first maybe mik is already boring probably yes maybe I should uh give a quick overview uh what what was happening prior to to regulation so we started operating in 2012 obviously there was no regulation whatsoever anywhere in the world back then and Serbia was not exception uh as far as I can remember the first mention of uh of crypto by any regulator or any institution in Serbia was in October 2014 uh when uh National Bank uh said that uh crypto is not real money it's not backed by anyone no one guarantees its value and stuff like that what what other things you would accept expect for them uh so it was uh it was totally wild west but uh it was uh it was fun and it was very interesting uh because um there was also more freedom and uh uh more more room for creativity and uh we were we were first uh let's say hit by regulation in 2018 uh when we became um the the AML regulation was forced on us which was um I mean that was a trend back then everywhere in the world because in 2017 there were a lot of icos and a lot of a lot of scams and uh Regulators got uh they freaked out everywhere and then they started F fat involved got involved with their recommendations and the fifth taml directive just transposed throughout the Europe and even broader yes so so that's that's when it uh started for us and uh that's when we started doing uh kyc and AML on a very primitive level to be honest compared with uh what we're doing today and then uh the the law was introduced here in late 2020 uh that was when the law passed uh the bill passed the National Assembly and then in 20121 it was it was really put into put into place we went through a process of of acquiring the license which took about year and a half and uh here we are now I mean uh we were among the first uh European countries to have a crypto regulation which is very unusual because for example we were 15 years late to allow PayPal to to operate in Serbia so we are not really um innovators when it comes to or early adopters when it comes to uh fintech and uh Innovations in that field so uh it was uh it was uh more uh let's say more logical to expect uh otherwise so to to to have to be one of the last European countries to have a regulation but we were among the first uh there are some benefits to that there are also some um some problems because uh when you're among the first you you cannot learn from the mistakes of others you have to make those those mistakes and uh there were few mistakes that that were made and uh that uh we still suffer from but maybe before before uh I continue with with some details maybe uh you should share you should share your story and how how the regulation evolved in Croatia uh what what what were the first contacts you have with regulators and how it uh became complicated over time well it became complicated with the IML as you already said yourself uh as far as Croatia is concerned we as a part part of the European Union were obliged to transpose the fifth IML directive to our uh local legislation but we were a bit late with that so we started with the Amendments of our national anti-money laundry act uh with the beginning of the 2020 and that was the first time the CPS crypto asset service provider and crypto in general was mentioned in any regulation in Croatia uh only two uh business uh uh operations were in enacted and that was exchange of crypto to uh Fiat and uh wallet service so we didn't even have crypto to crypto uh there was no registration process our regulator uh was and still is creation uh Financial Services supervisory agency which is Hana uh and back then um there was no active supervisory uh activities from our regulator um the the the law didn't prescribe any specific uh obligations in uh relation to our business or in CPS in general we were just like all others like banks exchange offices we had all the same obligations uh and that changed with the beginning of the last year 2023 uh enormously uh in aspect that we now mandate our IML act uh in a way that we enacted a fully uh full registration process for casps uh before Hana but also only in the aspect of the anti-money laundry so we do not have like a registration before National Bank or licensing operation uh process we only have registration uh during the which process uh the regulator uh asserts whether you uh fulfill all the obligations prescribed by the IML act meaning that you have all internal documents procedures that you have full kyc process in place that you use proper softwares etc etc due diligence obligations and so on but uh with that act we took a step to Wards Micah in a way that we uh initiated the procedure of uh uh assessing the fit and proper for the physical persons in the vasp you know for management board uh beneficial owners they need to prove that they are not convicted for all those crimes stated in the IML act which is a step forward beyond the only the anti-money laundry regulations Al also we have to have a full organizational structure education of our employees uh business operation plans etc etc so now it is a bit complicated it's a complex procedure but I get a feeling that's not so complicated like here in Serbia it's a bit easier probably um well um I it wouldn't surprise me to be honest I don't know the details so how how you operate but it wouldn't surprise me because it's it's really complicated so I I cannot imagine it being much more complicated uh maybe uh if you agree maybe just to to give a kind of overview what what changed with the regulation uh I can give you my my uh my thoughts on that and uh my experience uh the first thing that hit us as I said was AML uh AML regulation back in 2018 and to be honest it only had negative effects on our business uh because we were uh all of a sudden we were forced to do to get to kyc which we were not uh obliged to do before that and it obviously turned uh some number of customers away because they wanted to stay Anonymous and the other problem was that uh in Serbia it is still not possible to use providers such as onid or some sub uh for uh clients on boarding we can do video identification but uh it means that some person has to do video call so you cannot do that automatically but we were allowed to do that only last year uh from 2018 to 2023 we were actually obliged to do uh kyc in customers physical presence which is really tricky for online business so it was it was uh really bad for our business so uh 2017 was obviously great here for anyone in crypto and then in 2018 we had a combination of uh IML regulation kicking in and bare market so it was a really bad really bad year uh then in 2021 when we uh when we got the crypto regulation there are some positive and some negative effects uh positive effects are mostly in uh working with u companies because we we saw a big increase in uh in that type of clients so a lot more companies uh uh ins in yes because U the regulatory Clarity was uh What uh encouraged them to get into the space we had some companies asking about investing in crypto before we had regulation but it almost always ended with their accountant saying please don't do that I don't know what to do with that so uh once we had regulation that was the positive effect of the regulation uh negative effect obviously uh more uh more paperwork more expenses uh on that end and also one uh one uh interesting thing is that uh a certain number of customers was uh was driven away from our from our platform when regulation kicked in because of taxes it's not that we didn't have taxes uh crypto taxes before regulation came and uh we even had a worse tax treatment but it wasn't uh being apped because uh most of the people in Serbia actually thought that uh cryp selling crypto was not a taxable event before we had the law but it actually was taxable um as other income which is worse uh than it is today but uh today they have a uh they have a perception that okay now it's regulated so now we have to pay taxes so we better trade on binance because what we do on binance is invisible to our tax authorities what we do on ecd obviously is more visible so uh we lost some uh some number of customers because of that and generally it um it slowed down Innovation process for us very much because uh for every new feature that we introduce we have to get regulatory approval which usually takes months so it's uh it's hard to plan development it's hard to plan uh uh adding new features or new new services so that yes much much complicated than in Croatia as I said well once you get the regulation maybe it's it's going to be harder for you too it's now for now it's okay when when WEA will kick in in full we will see what will happen but yeah for example U it took us three and a half months to get registrated and you took a year and a half so it's a lot quicker um well we in uh regarding to kyc tools as you mentioned for example uh we used them back from 2020 because uh well we also didn't have uh a regulatory framework that is okay with those kind of softwares and kyc procedures it was a bit I don't know undefined but uh our regulator is very open I cannot say anything bad really and uh once you approach them and you uh uh you get to know them with the with your business and how you do your business and that you do your business diligently and that you really really uh uh abide by all the IML rules they're like okay it's it's fine you can do that you can use it as long as you uh abide by the law so in that terms we were okay now we have a new rule book on the uh uh remote on boarding so I can say that we are now fully compliant with this new rule book before Micah so that's okay uh regarding the customers and the clients uh most of our clients are physical persons rather than legal persons uh because of the fact that which you mentioned that legal persons are like oh no we do not know what to do with this as assets how do we book them how do we manage them we don't know how to do that but there are some investors and institutional investors and interest is getting bigger but for example we didn't uh experience any uh loss of clients due to the regulation it was more of a increase in uh because of the I would say better Clarity better regulatory Clarity than before and the openness of the regulator who is always uh warning the consumers and protects the consumers but also now we are publicly registrated and we we you can see everywhere that we pass the procedure and that people can uh trust our services yeah we generally don't like paying taxes here too much and nobody likes paying taxes I know but we have we have a history of uh people um getting away with avoiding taxes so there is there is a perception that uh you can get away with it here if you are uh just uh intelligent enough so uh just you know you you pretend that you're not doing anything and then if they catch you great I mean not great but you'll probably uh be forgiven some part of the tax that you owe and uh if you don't get caught even better yeah so I think I don't know what's your U what's your perception but I think that uh the unregulated part of the market in Serbia is way bigger than the regulated one I mean people exchanging for for cash and uh what what what is it like in Catia probably I I don't know I'm not sure because I don't want to know honestly I don't want to have any connection with that uh but yes it definitely exists I'm sure it exists and it takes uh huge part of our cake unfortunately and uh that's not good but uh it's not our job to to deal with that the state tender Regulators should deal with that yeah but I'm not sure they are even aware of the amount of businesses that are working without the uh regulations and the approval of the regulator yes I think that's a that's a global problem that Regulators spend too much time on regulated entity and uh too little resources on unregulated markets so uh we we have a huge expenses on on that end while uh some are able to operate almost without expenses and huge huge profit margins but um it's what you what you have to live with it's it's what it is and that's the consequence of Regulation and if you want to play by the rules then you suffer from the rules I would say yes uh uh as someone who is uh who is working in compliance uh what do you generally think about U especially AML rules regarding crypto and financial industry in generally how effective they are how uh are they too harsh are they too light maybe and well regarding the effectiveness of the measures they can be effective of course and they are effective if you implement them right and you are duly diligent about those measures uh I witnessed a lot of cases in which we managed to stop the transactions and clients from illicit actions and we cooperate successfully with the police authorities and with our tax administration and with our anti-money laundering office and we manag to stop some illicit actions whether it is money laundering and especially frauds we have like very good software and very good detect detecting procedures you know yourself blockchain analytics tools uh which enable us to see whether really there is some illicit actions whether this client will be frauded and we are very successful in stopping that but regarding the scope of the measures I don't think it is necessary that the scope is so big for the for the purpose intended to be that that's also that's also my opinion and uh I I like to compare with with uh let's say you ran a gas station and then someone's uh come and uh wants to to buy some gasoline obviously and then you uh first you assess uh whether uh he's likely to to drive a little bit too fast you do like risk assessment and if he drives uh BMW he's probably like 90% chance of speeding that's my experience at least I mean not as a driver of BMW but as a someone who is actively a general perception of the drivers here in the balcans yeah so so for example if if you're a BMW driver you you are automatically in a highrisk category and then you have to give a statement that you will not be speeding or if you want to buy a beer from a gas station shop then uh maybe they should report you to the police and then police Waits you at toll uh and you do Alco test and uh I mean that's how financial industry works it it sounds absurd when you uh when you give that kind of example but I don't see a difference because uh we are doing too much of uh assuming assuming yes too much of assuming and it's like uh in in law you have that uh presumption of innocence so you are you are innocent until proven otherwise and in finan financial industry you are basically guilty until you prove otherwise so you first you have to prove that you're you're not guilty and then you're able to do transaction so um it's it's not a crypto problem I mean it's a problem with the whole financial industry and if if there wasn't uh a problem then maybe crypto wouldn't even be invented than necessary but u i I'm really frustrated with uh uh with how it is evolving because it's only getting more and more complicated I mean we I think we are close to that scenario from the movie Minority Report when people will be you know prosecuted because we think they're about to commit a crime and um I mean don't want to even think about that but yes I I totally agree it's getting much bigger and bigger without any logical sense and uh uh wanted outcome is to prevent but also is to Pro uh criminal proceedings are also very important here if you are preventing then you you are preventing in order to prevent a crime but what happens in Croatia for example there are no criminal pro proceedings against any suspects who are probably committed money laundering and terrorist financing crimes so so I do everything on my side and where's the other side yeah exactly and the money laundering is not the first step uh in in some kind of criminal activity you first have to earn some money doing something illegal and then you have to launder it so uh I think uh more effort should be done to prevent that first step than to uh impose a lot of uh a lot of obligations on companies like us to to do the work that's maybe better suited for police or some other institution yes unfortunately that's the problem with the new industry that nobody understands I would say and it's a pretty much uh problem of the fear of the industry and the fear of the unknown and the a total lack of knowing of the technology and how it works because as we all know uh crypto and blockchains are transparent okay they are pseudo Anonymous and you don't know who is behind that wallet but it's possible to find out a lot of information and to collect a lot of information with blockchain analytics and to see and to have conclusions regarding the uh suspect's Behavior or your client's actions and transactions yeah hey so already 25 minutes which is not bad since we haven't haven't prepared for this at all maybe we should now just leave some some time for questions if there are any yeah for the question and you can share one so do we have any questions for our panelists I guess we were totally clear yes so you have time for final remarks if you have any yeah so what is a good state that you would say um I mean a good country that is a setting a good example in this and what is needed for us in Croatia or in Serbia to get to that point it's hard for me to say I would probably say Switzerland maybe Switzerland was like one of the Pioneers in the regarding the openness of the regulator to the technology and the technology neutral uh open-minded yeah but since we are in Europe and MAA will be in force soon we will all be in the same situation there will no longer be no better jurisdiction in Europe I'm just saying regarding Europe outside I'm really not so familiar well I I really haven't spent a lot of time examining other jurisdictions because we were um we have been always focused on Serbian markets so uh I I don't know how it is in the other markets I mean uh MAA is something that uh I I think we will also have to adjust to although we are already um adjusted to a higher degree and in some aspects we we are even more conservative than Mika so hopefully we'll uh uh we'll get yes yes we get to the to the Mika level um um how is it pronounced some some say m some say Micah M I have to say someone that only people from this region will understand mik [Laughter] mik sorry for those who don't speak Serbian or Croatian uh anyone else any other questions okay maybe maybe some final final remarks you want to start first or what should I say um it's getting harder and harder to operate a fully regulated vast business business but um I'm a strong believer that that will the regulation will bring the mass adoption the technology is here the technology will not stop and our business will be evolved and will evolve more of course we have to be aware of the burden of the regulation it is coming each day at a time more and more but it is what it is we have to handle that and look for forward uh yes my hope is that uh yes regulation is definitely uh bringing uh bringing some legitimacy to the space and that is good for Mass adoption and I hope maybe it's too idealistic but I hope that uh once we get to the mass adoption then uh then we have uh more leverage with Regulators because uh it's not the same if you have like two or 3% of the people having crypto to versus 50% of people having crypto and then you can you can negotiate on equal terms now we are not powerful enough to to get the regulation that we want we just have to abide by what they tell us and uh try to survive those for you who who who are in defi enjoy while you can thank you very much [Applause]