Challenges of Enforcement on Digital Assets
The Law on Digital Assets, as one of the pioneers in regulating the domain of digital asset rights, appropriately applies the provisions of the Enforcement and Security Act regarding the procedure of forced satisfaction of claims by execution creditors. Just as substantive regulation of the rights to digital assets has raised certain dilemmas, so too, in procedural terms pertaining to enforcement, the question arises as to how it would operate in legal practice. Which execution instrument would serve as the basis for enforcing digital assets? How are the means and subject of enforcement determined? How is the subject of enforcement (a digital asset) located and linked to its holder or the execution debtor? How can the enforcement procedure be carried out in the shortest possible time, while ensuring the execution debtor has not disposed of the digital asset in the meantime? These are merely some of the questions. Although legal opinions differ, it should be maintained that, for now—at least in Serbia—enforcement on digital assets is still difficult to realize in practice. Therefore, things should function de lege ferenda (according to law that should be) as follows.
Who Can Be an Execution Creditor and What Constitutes the Execution Basis
Potential execution creditors could, in principle, be any legal entities, although financial institutions under the control of the National Bank of Serbia should be excluded, since the Law on Digital Assets specifically prohibits them from accepting a digital asset as the object of enforcement. Accordingly, it should be assumed that dominant execution creditors would be those lenders who conduct lending via internet platforms, i.e., outside banking activities. It is indisputable that in this procedure, the holders (owners) of digital assets or their possessors would be passively legitimized. The potential basis—or execution title—would primarily consist of domestic and foreign court and arbitral decisions. It is assumed that in practice, proposals for provisional measures would frequently be submitted before obtaining a final and enforceable judgment, primarily due to the intangibility of digital assets and the duration of litigation. On the other hand, for a creditor who has established a security interest in the digital asset, an execution document is fundamentally unnecessary, since the pledged creditor will regulate, through a special contractual clause, the possibility of taking over the collateral—i.e., the digital asset.
Defining the Subject of Enforcement
Due to difficulties in identifying the digital asset and the execution debtor, the proposal for enforcement should be submitted against the debtor’s entire property so that the holder of public legal authority (the public enforcement officer) can later obtain information about digital assets suitable for realization. Although there is a statutory numerus clausus of data that public enforcement officers can obtain free of charge from state authorities and other holders of public authority, this “pool” should be supplemented with data relating to public and private keys for the control of digital assets. The idea is that public enforcement officers could access publicly available registers, upon possibly demonstrating legal interest, to collect such data. In the enforcement proposal, the subject of enforcement should, in principle, be broadly defined so that enforcement is carried out on all digital assets of the execution debtor (a determinable subject). However, if the digital asset is individually or uniquely determined—such as an NFT—the view is that the enforcement proposal should specify the subject more precisely (a determined subject).
Methods of Enforcement
Regarding the means (methods) of enforcement, it all depends on whether the creditor requests the delivery of a specific digital asset or seeks forced satisfaction of the claim through realization of the digital asset. Thus, when the execution creditor requests delivery of a specifically determined digital asset, and if it is not found in the possession of the execution debtor, the creditor could propose its valuation, after which the public enforcement officer would issue an enforcement order obligating the execution debtor to pay the creditor the appraised value of the item. On the other hand, to realize (monetize) the digital asset, it is first necessary to seize it, then register it in the appropriate registry, and finally realize it—applying the law governing enforcement on movable property, except for electronic public auction. However, the main difference between movable property and digital assets is that factual control is more difficult to establish over digital assets. In this respect, one should distinguish the situation where the subject of enforcement is a digital asset that is no longer on the internet but is stored in a so‑called cold wallet (e.g., a flash drive). With regard to such an item, enforcement can be conducted by inventory, valuation, and sale, since it is now considered a movable—tangible—item. In practice, it would be sufficient to seize such equipment because the digital asset is embedded in it, and the debtor would have a strong incentive to satisfy the debt as quickly as possible to reestablish control over the currently forfeited asset. Conversely, if the digital asset is still on the internet—held via a public key in a so‑called hot wallet—enforcement would proceed by seizure, registration, and realization, since in that case we are dealing with an intangible item.
Preventing Disposal of Digital Assets
If the holder of the digital asset disposes of it after the enforcement order has been issued, such a legal transaction should be considered void. For prevention, a provisional measure of prohibition on disposing of the digital asset should be applied. Unfortunately, the Law on Digital Assets has not prescribed a registry for recording such prohibitions. That function could be fulfilled by the institution of a depository, which performs the service of safeguarding the private cryptographic key stored in a cold wallet—essentially a password through which the digital asset is accessed. Thus, the execution debtor loses factual control over the digital assets when the public enforcement officer orders the delivery of the private key or its placement with a custodian for safekeeping.
Potential and Limitations of Enforcement on Digital Assets
In summary, digital assets are, in substantive law, suitable for forced enforcement, but in procedural law, there is still no precise regulation of the method of enforcement. This is primarily due to ephemerality and volatility—key characteristics of digital assets. Ephemerality means that a digital asset can change its holder or owner with a single click, while volatility implies that the value of a digital asset can change dramatically—what may be sufficient to satisfy an execution creditor at one moment can vary from trivial to exorbitant just seconds later. With this in mind, the principle of particular urgency should be applied, as well as shortening execution timelines. To that end, greater focus should be placed on provisional measures—particularly the prohibition on disposal—as the primary tool to thwart the execution debtor’s intentions. Finally, enforcement on digital assets would also require additional training and professional development for public enforcement officers as bearers of public authority.
