How will the EU crypto regulation affect Estonia’s crypto firms?

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The upcoming pan-European crypto regulation freshens up Estonia’s dilemma of how to tackle the risks involving crypto assets but still stay attractive for companies that foster innovation in the crypto business; Estonian World spoke to legal experts and representatives of the crypto companies to find out what’s the way forward.

In the crypto world, Estonia has been one of the forerunners. Taking advantage of very relaxed regulations, at its peak there were, although many dormant, around 2,000 crypto companies registered in Estonia. Around 1,300 cryptocurrency licences were granted in 2020 alone.

Now, according to the data by the Estonian Financial Intelligence Unit, there are around 160 virtual currency service providers that have a valid licence – including some who have met the new requirements enforced by the law in March 2022, and some who have submitted documents, but proceedings are still ongoing.

The first game changer was the amendment of the law in 2019 as it turned regulations stricter. The reason for the change was that Estonia as a cryptocurrency hotspot turned out to be more like an offshore country in the “crypto world” context. Also, experts pointed out the anonymity of cryptocurrency and the need to consider the risk that money with criminal origin is circling around.

“The Estonian state did not benefit from the situation [with so many dormant crypto companies] – it meant no jobs, no tax money; often only fictitious connections with Estonia and a potential for reputational damage, and systemic risk,” Marko Kairjak, a partner of the Ellex Raidla law firm, said.

Marko Kairjak, a partner at the Ellex Raidla law firm.

So, the Estonian state decided to end this “crypto party” and introduce stricter regulations. In June 2021, the Financial Intelligence Unit got the new head, Matis Mäeker, who set the institution’s priority to control the risk associated with virtual currency service providers with stricter legislation. 

This, on the other hand, raised critical questions from the crypto firms – was Estonia trying to curtail the whole crypto sector? The Estonian Cryptocurrency Association asked for a seat at the table – to frame a regulation that would be effective in preventing money laundering, but also law-abiding companies would survive.

The current wording of Estonia’s Money Laundering and Terrorist Financing Prevention Act came into force in March 2022.

More protection to investors

At the same time, the European Union has finalised its first attempt to bring crypto-assets, crypto-asset issuers and service providers under a regulatory framework for the first time. The goal is to protect investors and preserve financial stability, while allowing innovation and fostering the attractiveness of the crypto-asset sector.

It is hoped that this new framework – the Markets in Crypto-Assets Regulation, abbreviated as MiCA – will bring more clarity, as some member states already have national legislation for crypto-assets, but so far there has been no specific regulatory framework at the EU level.

Both lawyers specialised in financial law and the Estonian Cryptocurrency Association said the regulation is long awaited.

“In Estonia, we have had virtual currency licence policy already for years – so from our point of view, it is important that the regulation establishes additional requirements for cryptocurrency service providers and this way, the crypto asset investors get more protection,” Anneli Krunks, a senior associate at Ellex Raidla, specialising in banking and financial law and financial technology, said.

Anneli Krunks, a senior associate at the Ellex Raidla law firm.

She added that, based on the new EU policy, service providers must apply for a licence from a competent authority by applying with relevant data and documents – and, similarly to other regulations in the financial sector, there are additional requirements for managers, owners and organisation of the cryptocurrency service provider – including systems, processes and procedures.

But the regulation also provides rules about offering of crypto assets and lays out many long-awaited definitions that will unify rules regarding crypto assets.

“To sum up, MiCA is not only a rulebook for the cryptocurrency service providers, but for the whole crypto asset market, blanketing not only the service provision market but the technology of digital ledger in its core form,” Krunks noted. She added that having received an operating licence in one member state, the cryptocurrency service provider can extend its operating licence to another EU member state and thus offer its services across Europe.

“This makes cryptocurrency service providers able to enjoy the same benefits of a level playing field, as other financial market service providers do – such as banks, investment firms and payment service providers. This is a long hoped-for solution and will benefit the EU and also Estonia, ending a period of uncertainty,” Marko Kairjak added.

A balance between strict and smart

In Estonia, the issuing of business licences and obligations related to business activities of virtual currency service providers are mostly regulated in the country’s Money Laundering and Terrorist Financing Prevention Act.

Raido Saar, a board member of the Estonian Cryptocurrency Association, an NGO, has been one of the critics of a stricter regulations, but he noted that the association and the Estonian Financial Intelligence Unit had the same goal – a fair play on the market.

“Now, the requirements are so tight that the value of the licence is very high. This is a political decision; the government has decided so to prevent money laundering,” he said.

But he also pointed out that low risk may kill innovation and added that it’s very important to have smart regulations, so there’s balance between the risks and innovation. “The question on the table now for Estonia is to decide to what extent we allow innovation here, because the risk goes always hand-in-hand with innovation.”

An event involving the Estonian Cryptocurrency Association in Tallinn, with Raido Saar second from the right. Photo by the Estonian Cryptocurrency Association.

Saar noted that MiCA would definitely affect the crypto sector. “I have participated in the EU working team for a year and I think the pan-European framework is essential, because in many countries there have not been any regulations in this sector before,” he said.

The following steps

MiCA is directly applicable to all EU member states and it will bring additional changes to the existing Estonian crypto legislation.

Kristen Leppik, an advisor in the Estonian finance ministry’s financial services policy department, said the virtual currency service providers in Estonia must most probably apply for the new licence in 2024.

“A number of additional requirements that are not stipulated by the existing Estonian regulation will apply to them – a protection of clients’ assets or requirements for providing information, for example,” he said. Leppik added that it was difficult to evaluate whether all current virtual currency service providers could meet the requirements of the EU regulation – he reckoned that probably several of them would have to stop their activities.

Concurrently, the Estonian finance ministry has for years worked on its own draft law that would regulate cryptocurrency and crowdfunding. It has undergone several discussions and approvals, but it has not yet been adopted as a law.

“We continue to evaluate in which form to proceed with this draft, including which aspects of crypto property, its related services, and crowdfunding services should and could be regulated by Estonian law. One such issue is crowdfunding based on consumer credit, which is not covered by the EU crowdfunding regulation,” Leppik said.

Anneli Krunks from Ellex Raidla noted that adoption of the EU regulation had reached its final stage. “The regulation should soon reach the plenary session of the European Parliament, where it will probably be approved. The regulation then comes into effect after a 12- or 18-months period, depending on the field,” she explained.

The European Parliament’s plenary hall. Photo by Marius Oprea on Unsplash.

The EU law allows member states to start applying the regulation in relation to cryptocurrency service providers before the end of the 18-month transition period. Krunks thinks it is likely that several countries will also use such an option.

Marko Kairjak said that it remained to be seen whether MiCA brings the competitive edge to the EU against other parts of the world in the use of crypto assets and the underlying technologies.

“Furthermore, the next few years would also show whether Estonia shall benefit from MiCA and whether it could reinstate Estonia as the place to go for crypto asset innovation – or would other EU jurisdictions pop up as places to go for digital innovation.”


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