A tough new crypto law is taking effect in Estonia later this year, but the prospect of 90% of crypto firms leaving the country is nothing to worry about, the official responsible for managing it told CoinDesk.
With a population smaller than Hawaii's, the tech-friendly nation is one of the EU’s smallest members – but with an outsize presence in the crypto scene.
Already the home country of digital unicorns like Wise, Bolt and Skype, last year Estonia could claim to host 55% of the world’s registered virtual asset providers, thanks to an advanced regulatory regime and a system that offered e-residency to entrepreneurs who’d never set foot in the country.
But that could change, thanks to a new licensing regime agreed by lawmakers in December.
“We will benefit from the new law,” Matis Mäeker, director of Estonia’s Financial Intelligence Unit (FIU), told CoinDesk – but he also warned that the less professional outfits will need to shape up.
The legislation makes crypto firms, such as wallet providers and exchanges, keep hefty capital reserves, be properly governed and check customer identities. Though it took effect in March, existing companies have until mid-June to renew their authorization, for which they must submit business plans and financial data.
As of May 3, no company had yet sent in any new application and some have even sought to surrender their license, Mäeker said. (A spokesperson later clarified that there had been a couple of applications for changes, which are now being reviewed). Mäeker thinks some are finding the documentation requirements a struggle.
“Every IT system that is there should have an explanation: how it works, how it has been built,” he said. “For me, that’s self-explanatory.”
Perhaps not, though, for some of the more amateur operations run by “hippie-like” developers, he added – who he warned will need to professionalize and broaden their skills to keep up.
“We are telling market participants that it's not just a ‘dog and a man’ enterprise,” he said, adding that companies that perform functions like deposits and payments will need to manage risks just like banks do. “You need to have different experience and expertise as well, since you are protecting customers’ assets.”
His message to companies looking to register is simple: “start early and be prepared, because we are going to ask many, many questions,” he said. “This is not for us a tick-box exercise. It hasn't been for a long time now.”
Some crypto companies feel that’s not just thoroughness, but a conspiracy against their sector.
“The industry feels like there was a lot of arbitrary treatment” when interacting with Estonian regulators, Jerome Dickinson, chief legal counsel at OSOM Finance, told CoinDesk in an interview.
“Regulators are often finding ways to delay or prolong licensing processes, or worse threaten to declare their managers or shareholders unfit and improper – not on the merits but simply because they are involved with crypto,” he added.
“Extremely high” registration application fees are “perceived by many in the industry as hostile towards the space, and a double standard” when compared to those applied to conventional banks, added Dickinson.
He also takes aim at the requirement for firms to appoint a dedicated compliance officer – something that appears to be motivated by a desire to put an end to a system where multiple companies share corporate services and even physical addresses, which is proving hard to comply with in practice.
OSOM, which according to the FinTech Belgium website offers a “safe and secure” crypto trading algorithm “generating 30%-50% proven annual return,” has Estonian founders, suggesting real ties to the country – but Dickinson reckons many other companies will simply abandon ship.
Of those with existing licenses, “the feedback we are getting in the industry is that only 50 will survive – maybe more, maybe less,” he said. “Most others will be wiped out or leave Estonia.”
That’s a significant drop from the 381 licensed as of the end of December. Consolidation could bring benefits, allowing the regulator to focus and supervise better, but could also concentrate the sector on the biggest players, such as large established banks, Dickinson warned.
Mäeker takes that kind of criticism in his stride. He denies the allegation that regulators see a career in crypto as automatically suspicious – but added budding executives can’t have a previous record of money laundering or hiding data from the government.
He said he doesn’t have a “target” number of companies he wants to stay in the country, but acknowledges the current figure will go down; it’s already done so slightly, and stood at 369 in early May.
In any case, he says a fall in numbers may not be a bad thing. “We want to have more control over the entities, which basically means that we want them to be more present in Estonia,” Mäeker said, with crypto companies bringing jobs to the country rather than simply outsourcing from behind a brass plate in Tallinn.
A January study by the FIU said many of the licensed crypto firms had no staff and paid no taxes in Estonia, and had little to show in terms of money-laundering checks and alerts, even when their turnover is hundreds of millions of euros.
Mäeker doesn’t share the conviction of many crypto investors that they’re all going to make it – but says that requirements on payment companies to have at least 250,000 euros ($265,000) in capital reserves offer a safety net if companies do start defaulting.
“There will be a crisis sooner or later,” he said, noting ballooning market prices – and once that happens, he said there will be a clamor for more regulation to protect investors.
You can see why he takes this seriously. The country recently found itself at the center of an international money-laundering scandal when it turned out Danske Bank’s Tallinn branch had processed around 200 billion euros in dirty money. The Ukrainian war and accompanying sanctions only heighten the risk of illicit Russian money pouring in.
A favorable review from the Council of Europe’s money laundering unit, Moneyval, could perhaps help draw a line under the Danske affair. As we spoke, Mäeker was in the middle of a two-week visit by Moneyval inspectors – and they are particularly concerned about crypto.
Other startups are rather more optimistic about the regime than Dickinson – seeing it as a way to strengthen Estonia’s position and credibility.
It’s a “really positive” legal framework that is “clear, specific and sustainable” – and something that could enable companies to operate across Europe with ease once a new EU-level law, the Markets in Crypto Assets Regulation (MiCA), kicks in, Bernardo Magnani, CEO at Estonian crypto banking startup Striga, told CoinDesk.
“The companies that stay will be reputable,” Magnani said, adding that new requirements were a reasonable way to weed out bad apples in the sector.
“If you told me to do business with a company that doesn’t have proper management with experience, and is unwilling to invest capital, that would raise red flags,” he said.
Mäeker, unsurprisingly, seems to agree that strong regulation could ultimately prove a bonus for the sector.
“The crypto market is here to stay in the global community, and I think that they want to have a proper supervisor that knows what it's doing,” Mäeker said. “The tougher the supervisor, the better for you to sell your services because you can say that we are supervised so heavily that there is no risk for the end customers.”
“This is a good place to start a business,” he said. “But beware: Money launderers, you don't have a place here in Estonia.”
UPDATE (May 6, 2022, 14:51 UTC): Clarifies Mäeker's comments regarding applications already received.
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