Montenegro -- Securities Classification Regulatory Overview

Montenegro has established a legal framework for digital assets, including the classification of certain tokens as securities, largely influenced by its aspiration for European Union (EU) membership and the EU's Markets in Crypto-Assets (MiCA) regulation, as well as existing financial market legislation (MiFID II equivalent).

The primary legislation governing digital assets in Montenegro is the Law on Digital Assets (Zakon o digitalnoj imovini), adopted in March 2023. This law aims to regulate the issuance, trading, and custody of digital assets, distinguishing between different types based on their characteristics.

Legal Test Used (Howey Test Equivalent)

Montenegro does not employ a direct "Howey test" equivalent in the common law sense. Instead, it uses a definitional approach based on whether a digital asset falls under the existing definition of a "financial instrument" as defined in the Law on Capital Market (Zakon o tržištu kapitala), which transposes the EU's MiFID II directive.

The core test is: Does the digital asset possess the characteristics of a financial instrument as defined by the Law on Capital Market?

Under the Law on Capital Market, financial instruments typically include:

1. Transferable securities: Shares, bonds, and other instruments negotiable on the capital market.
2. Money market instruments.
3. Units in collective investment undertakings.
4. Derivatives.

The Law on Digital Assets further clarifies this by defining "digital assets" broadly and then making key distinctions:

• Virtual Currency: Defined as a digital representation of value that is not issued or guaranteed by a central bank or public authority, is not necessarily attached to a legally established currency, and does not possess the legal status of currency or money, but is accepted by natural or legal persons as a medium of exchange and which can be transferred, stored, and traded electronically.
  • Crucially, virtual currency is explicitly stated to not be a financial instrument under Montenegrin law.
• Other Digital Assets: Any digital representation of value or rights that is not a virtual currency. This category can include security tokens and potentially utility tokens that do not qualify as virtual currency.

Therefore, a digital asset is classified as a security token if it represents rights and obligations akin to those of traditional financial instruments, regardless of its digital form. The substance over form principle applies.

Which Tokens Are Considered Securities

Tokens are considered securities (often referred to as security tokens) if they meet the definition of a financial instrument under the Law on Capital Market. This includes, but is not limited to:

• Equity Tokens: Digital representations of ownership interests in a company, granting rights such as dividends, voting rights, or a share in liquidation proceeds.
• Debt Tokens: Digital representations of debt instruments, such as bonds or debentures, entitling holders to periodic interest payments and repayment of principal.
• Tokens granting rights to profits or revenues: If a token promises a share of future profits or revenues from an enterprise, and its primary purpose is investment.
• Tokens used in collective investment schemes: If a token represents a unit or share in a fund or similar investment vehicle.

Tokens generally not considered securities:

• Virtual Currencies: As explicitly defined, they are not financial instruments.
• Pure Utility Tokens: Tokens that strictly provide access to a product or service within a specific ecosystem, without any investment characteristics, dividend rights, or claim on the issuer's assets, may not be classified as securities. However, careful analysis is required to ensure no embedded investment features.

Registration/Exemption Requirements for Token Issuers

If a token is classified as a security token, its issuance and offering are subject to the same strict requirements as traditional securities under the Law on Capital Market, supervised by the Securities and Exchange Commission (KHOV) of Montenegro.

1. Prospectus Requirement: Issuers of security tokens must generally publish a prospectus approved by the KHOV before making a public offer or listing the token on a regulated market. The prospectus must contain detailed information about the issuer, the token, and the risks involved, ensuring investor protection.
2. Authorization: Issuers of security tokens may need to obtain specific authorizations or licenses from the KHOV, depending on the nature of the issuance and the entity involved.
3. Exemptions: The Law on Capital Market provides for certain exemptions from prospectus requirements, typically for:
   • Small offerings below a specific threshold value.
   • Offerings exclusively to qualified investors.
   • Offerings to a limited number of persons.
   • These exemptions are analogous to those found in traditional securities law and are applied on a case-by-case basis.

For non-security digital assets (e.g., virtual currencies, or certain utility tokens), the Law on Digital Assets introduces a separate regulatory regime, aligning with MiCA principles:

• White Paper Requirement: Issuers of non-security digital assets making a public offer in Montenegro must publish a "white paper" and notify the KHOV. The white paper contains information about the issuer, the project, and the characteristics of the digital asset, but is less stringent than a full prospectus.
• Authorization for Service Providers: Entities providing services related to digital assets (e.g., operating digital asset exchanges, custody services, advisory services) must obtain authorization from the KHOV.

Secondary Trading Rules

Secondary trading of security tokens is subject to the same rules as traditional financial instruments, overseen by the KHOV:

• Regulated Markets/MTFs: Security tokens must generally be traded on regulated markets or multilateral trading facilities (MTFs) authorized and supervised by the KHOV. These platforms must adhere to rules regarding market integrity, transparency, and investor protection.
• Licensed Operators: Crypto exchanges or platforms facilitating the trading of security tokens must be licensed by the KHOV as investment firms or market operators.
• Market Abuse Rules: Regulations concerning market abuse (insider trading, market manipulation) apply to security tokens.
• AML/CFT Compliance: All trading platforms and service providers dealing with digital assets (whether securities or not) are subject to stringent Anti-Money Laundering (AML) and Counter-Terrorist Financing (CFT) regulations, overseen by the Administration for the Prevention of Money Laundering and Terrorism Financing, in accordance with the Law on Prevention of Money Laundering and Terrorist Financing.

Enforcement Examples

As the Law on Digital Assets is relatively new (2023), and the Montenegrin digital asset market is still developing, specific public enforcement examples directly related to the classification and unregistered offering of security tokens are not widely available in public records yet.

However, it can be expected that the KHOV would enforce the regulations by:

• Issuing cease-and-desist orders: Against entities making unauthorized public offers of security tokens or operating unlicensed trading platforms.
• Imposing fines: For non-compliance with prospectus requirements, licensing obligations, or market abuse rules.
• Withdrawing licenses: For authorized entities found to be in serious breach of regulatory requirements.
• Referring cases for criminal prosecution: In instances of severe fraud or market manipulation.

Enforcement actions would typically follow the precedents set for traditional securities violations, emphasizing investor protection and market integrity. The KHOV, as the primary regulator for financial markets, would be the key authority.

Specific Legislation and Regulatory Guidance URLs

It's important to note that accessing Montenegrin official gazettes can sometimes be challenging for non-Montenegrin speakers/users. The official texts are usually published in the "Službeni list Crne Gore" (Official Gazette of Montenegro).

1. Law on Digital Assets (Zakon o digitalnoj imovini):

   • Published in Službeni list Crne Gore, No. 27/2023.
   • Often available on legal databases or the websites of relevant ministries or the KHOV.
   • Direct link to official gazette might require specific subscription or navigation on their site.

2. Law on Capital Market (Zakon o tržištu kapitala):

   • Published in Službeni list Crne Gore, No. 1/2018, 17/2019, 72/2019, 81/2020. This law transposes MiFID II.
   • Search "Zakon o tržištu kapitala Crna Gora" for relevant versions.

3. Securities and Exchange Commission (Komisija za hartije od vrijednosti - KHOV):

   • Official website: https://www.khov.me/ (Information and laws often available under "Propisi" or "Aktuelnosti").

4. Central Bank of Montenegro (Centralna Banka Crne Gore - CBCG):

   • Official website: https://www.cbcg.me/ (Responsible for financial stability and payment systems, but KHOV leads on securities).

5. Law on Prevention of Money Laundering and Terrorist Financing (Zakon o sprečavanju pranja novca i finansiranja terorizma):

   • Published in Službeni list Crne Gore, No. 68/2022.
   • Search "Zakon o sprečavanju pranja novca i finansiranja terorizma Crna Gora".

Montenegro's approach reflects a proactive stance to integrate digital assets into its regulatory framework, aligning with broader EU trends, particularly MiCA, to ensure market integrity and investor protection.