Estonia revoked licenses from 500 crypto companies: how will this affect the industry

Why Estonia revoked cryptographic licenses

According to Bloomberg, regulators suspect that crypto companies are using their platforms to carry out illegal transfers and money laundering. Madis Raimand, head of the Estonian Financial Supervision Service (FIU), told the publication that the actions taken are “the first step in putting things in order on the market, which will allow us to solve the most pressing issues and allow only those companies that can be controlled by Estonian supervisory authorities to work in Estonia ”.

Bloomberg refers to data from the FIU annual report for 2019, according to which industry risks increased last year amid “extremely fast” growth in the number of crypto service providers. Of the 56 supervisory inspections in 2019, 34 were related to crypto companies. In the comments to the publication, Reimand referred to “several cases” of alleged theft of customer funds and the provision of financial services abroad without proper permission, but did not cite the names of specific companies.

Back in May last year, the country's Minister of Finance Martin Helme noted that the department has learned the lessons presented by the banking sector and is ready to withstand international risks, of which cryptocurrencies are one of the main ones. Here, he probably alludes to the case of a major Danish bank, Danske Bank, which at the beginning of 2019 was charged with laundering $ 220 billion through an Estonian branch. Then and now the authorities say that the measures taken are aimed only at reducing the risks of money laundering and are not created to impede the development of the crypto industry in the country.

It is important to emphasize that so far, FIU has revoked licenses only for companies that have not started their activity six months after obtaining permission. The regulator believes that they can use the obtained licenses to carry out illegal activities outside the country. Nikolai Demchuk, AMLBot lawyer, in his blog notes that this decision is in accordance with §75 “Cancellation of permission” of the Estonian law “On Prevention of Money Laundering and the Financing of Terrorism”, which regulates cryptocurrency business. Therefore, there is no talk of any targeted oppression of the crypto business by the Estonian authorities - the regulator only complies with the requirements of the law.

Viktor Pershikov, analyst at 8848 Invest, believes that by revoking licenses from dubious companies, “ Estonia insures itself against reputational risks and counteracts the criminal activity of fraudsters under the auspices of comfortable regulation in the country. Estonia will not follow the path of prohibitions, but rightly tightens the screws with the goal of leaving real businesses in the country that pay taxes, create jobs and increase the prestige of Estonian regulation . ”

It is possible that these 500 companies were not going to start full-fledged operational activities. In 2018?2019, the country saw a sharp increase in the issuance of licenses - it was much easier to get them than permits in other countries. It is not surprising that companies who did not intend to play honestly could take this opportunity.

A year ago, the head of the Estonian Financial Supervision Authority, Kilvar Kessler, noted that the country's authorities issued a lot of crypto licenses in a short period and now they are trying to understand what the companies that received them actually do. This is normal practice for Estonia: from 2010 to 2020, the authorities consistently put things in order in the payment services and quick credit markets - now the turn has also reached cryptocurrency companies.

Daria Nosova, partner and head of the FinTech O2 Consulting Practice, said that over the past few years, Estonian cryptographic licenses have been very popular among crypto companies (primarily exchangers and exchanges), because they cost almost nothing. So, for little money it was possible to purchase ready-made companies with one or two licenses, with a full package of documents and a nominee director.

“The factor of simplicity and cheapness leaves almost nobody indifferent, especially a starting business. However, miracles, as you know, do not happen. In order to really and legally work, it is necessary to comply with the conditions that primarily related to compliance with the law on combating money laundering and the financing of terrorism (AML / CFT). Not everyone knows, but in the anti-money laundering sphere there is a presumption of guilt, which means that the burden of proving the legitimacy of one’s business lies with the business. For many, this is a big and sad surprise. Sellers of Estonian companies with licenses are often silent about this, ” said the expert.

Alexander Zaitsev, founder of Raison.ai, a crypto-asset management platform registered in Estonia, believes that revoking licenses is “a step forward in the development of the Estonian crypto industry”. He supports more stringent regulatory measures: thanks to them, the crypto industry is legally equal to traditional financial institutions.

“Until recently, obtaining a license for the crypto business was really too simple. Because of this, trust in the entire crypto industry has been eroded by a large number of scammers and other unreliable players. Quality crypto businesses suffer because counterparties fear the word “crypto” and refuse to cooperate. In particular, there are difficulties with opening bank accounts, ”said the entrepreneur. -But there is nothing wrong with the fact that 500 companies that have not started their activity in six months have lost their licenses. Projects that were under development and simply did not have time to go into production can re-apply for a license and get it. Raison.ai and I had the same case: we were three days late with the start of operations on the platform and received a license again, this is not a problem. Those companies that did not intend to conduct business lost their licenses for the better - with their presence in the registry they only compromised it and discounted the very essence of licensing. ”

Estonia tightens crypto license requirements

Recall that Estonian licenses were the easiest way for crypto companies to work legally in Europe in a regulated market. But over the past few years, Estonian authorities have been working to tighten legislation aimed at combating money laundering and other criminal activities - the crypto industry is no exception.

Regulators have brought Estonian legislation in line with FATF regulations and a number of AML standards, including the Fifth European Union Anti-Money Laundering Directive (AMLD5) , which entered into force on 10 January 2020. The regulations oblige crypto sites to register with supervisory authorities, identify their customers and pass on to the authorities the addresses of user wallets.National legislation in the field of the crypto industry should not contradict this. Moreover, some Member States have already received warnings from the EU Commission: the Netherlands, Spain, Portugal, Slovenia, Romania, Slovakia, Hungary and Cyprus. Estonian regulators clearly do not want to replenish this list.

In May 2019, authorities adopted the Law on Combating Money Laundering and the Financing of Terrorism, tightening control over the issuance of cryptographic licenses. The law entered into force on March 10 this year - until July 1, all registered companies will have to bring their activities and documents in accordance with its requirements.

Here are the main provisions of the new law:

 From 60 to 120 days, the time for considering a license application has been increased and this period can be extended

 From € 345 to € 3300 the amount of the license fee has been increased;

 The authorized capital has been increased to € 12,000;

 The company and its subdivision must be located in Estonia (rent an office in the country), at least one member of the board must live in the country, have a residence permit or citizenship;

 The regulator issues one license instead of two. Previously, companies received two permissions - a “virtual currency to fiat exchange service provider” and a “virtual currency wallet service provider”. Now, only one license is issued - the “virtual currency service provider”;

 Registered companies are equated with financial institutions and must comply with the KYC / AML procedures and other rules adopted for such organizations;

 Companies must cooperate with an AML officer who will monitor compliance with all Estonian legislation in the field of combating money laundering;

 The absence of problems with the law of the founders of the company. The management of the company must document the absence of a criminal record and a spotless business reputation.

This is not an exhaustive list. FIU may request additional documentation and information, as well as confirmation of the company's integration in the Estonian market. In case of non-compliance with the rules, the regulator cancels the license. Estonia is not alone in this. The Dutch authorities also adopted new anti-money laundering legislation in late April in accordance with AML standards and FATF regulations. Companies that will not comply with them after May 18 will cease operations.

Toughening the requirements for issuing cryptographic licenses is not a sudden decision by the Estonian authorities. The companies had two years to prepare and rebuild. However, Reimand in his comments to Bloomberg warned that more than 50% of the remaining 900 companies with digital assets could lose their licenses, " since they do not have operations in Estonia and their managers are located outside the country ."

How tightening regulation will affect Estonian cryptocurrency market

Experts interviewed by us believe that tightening regulation and increasing requirements for registered companies will positively affect the country's cryptocurrency market.

Viktor Pershikov talked about how crypto companies that want to work in Estonia after July 1 will have to reorganize. Firms will have to form a real office with employees, have a significant authorized capital for the country, and maintain regular financial statements for the financial police and the Estonian regulator.They will also implement strict KYC / AML policies, while the KYC / AML officer will have to be present in the office (for now this is an optional requirement and specialists can be outsourced, but in the future companies will be required to attract an officer on an ongoing basis) and regularly report on all customers of the company to the appropriate authorities. This will require additional costs for the compliance department, as well as for the implementation (with a large flow of customers) of the automated KYC / AML systems, which must also be licensed in the EU.

Thus, only those companies that really want and can do business in Estonia, have sufficient capital, are ready to tackle the issue of liability insurance and customer insurance . “A huge number of small companies based in Estonia with ambiguous activities will have to leave the jurisdiction - the costs of compliance with the new AML rules and the implementation of anti-money laundering requirements are significant, and the absence of a strong bull movement on the cryptocurrency market leaves many crypto businesses out of work due to lack of income. However, those businesses that have come into the field seriously and for a long time and are ready to take responsibility for the end customer will hardly experience any changes in the Estonian approach to cryptocurrency and business in the country, ”- the analyst summed up.

Alexander Zaitsev believes that after the entry into force of new requirements for cryptocompanies, firms do notCompliant with regulatory requirements, transfer business from Estonia to another jurisdiction. He believes that the crypto business, which is fully in line with the new requirements, can only welcome the tightening of regulation. Companies that from the very beginning implemented the strict requirements of the FATF and AML directives into their structure understood that this would become a necessity in the future.

“We are for unscrupulous players to leave the market and make way for those who provide quality services. Thus, they will help the development of high-quality crypto companies, which, after the market has improved, will be able to work with higher-level counterparties (banks, etc.). Clients will have more confidence in the crypto business, because the quality of work with cryptocurrencies will increase, there will be less cases of scam and fraud. Digital currencies will cease to be perceived as something insecure and, accordingly, crypto companies will be able to attract more customers. As a result, the Estonian cryptocurrency market will move to a new stage of development - from chaotic growth to consolidation of the best players , ”concluded the entrepreneur.

Estonia continues to be a crypto industry friendly country

As you can see, the Estonian authorities are not going to hinder the development of crypto business in the country. They are forced to tighten the requirements for permits due to the need to comply with pan-European legislation. Despite the tightening of regulations and requirements for licensed companies, Estonia continues to be a digital state friendly to crypto business.

“Tighter licensing is Estonia’s attempt to take the crypto industry to a new level and become a leader among other countries friendly to this industry, ” said Alexander Zaitsev. Daria Nosova also says that “there is no talk of hindering the development of the crypto industry in Estonia. The necessary streamlining and natural cleansing of the market takes place . ” Tighter requirements were expected for those companies that wanted to stay on the market; they had been preparing for this for a long time.

The transition to comprehensive regulation of the cryptocurrency industry in the European Union is an important step for the entire market. The EU regulatory framework regarding cryptocurrencies is becoming more unified, more developed and more and more consistent with the requirements of the traditional financial market. Therefore, the time for relatively simple, inexpensive and fast cryptographic licenses has passed. Now any company that wants to store or trade digital assets must not only obtain a license from a national regulator, but also meet the requirements for traditional capital markets.

Tighter requirements will most likely affect small companies. Large sites have already been rebuilt or have the necessary resources for this. But small and medium will not be easy.