Estonia Cracks Down on 500 Crypto Companies

Estonia Cracks Down on 500 Crypto Companies

Published: June 20th, 2020

Concerned that crypto firms could use their local credentials to provide cover for fraud committed elsewhere, Estonian financial regulators have spent the past three months stripping more than 500 companies of their operating licenses.

Estonia, a fintech trailblazer and both a eurozone and European Union member, says it was forced to take firm action against financial crime of all kinds after evidence arose that Danske Bank A/S had funneled billions of dollars of illicit cash through the accounts of its local office.

Financial regulators have now turned their sights on companies that exchange and store cryptocurrencies like Ethereum and Bitcoin. Estonia was one of the first EU coutries to embrace the crypto industry with open arms. It created Europe’s first dedicated crypto licensing regime back in late 2017.

Crypto Boom

Estonian crypto-asset licensing has triggered a surge in demand, but it appears that the country’s enthusiasm for crypto make have allowed a few dodgy entities to sneak past regulators.

Madis Reimand, chief regulator at Estonia’s Financial Intelligence Unit (FIU), said in a statement that its ‘ …the first step in tidying up the market, allowing us to address the most urgent issues and restrict permits to companies that can be properly regulated and supervised.”

Reimand told reporters that the clampdown designed to clean-up elements the crypto industry. He noted that the government doesn’t want to hobble the sector, just minimise the risks associated with money laundering by tightening-up regulatory scrutiny.

The FIU’s annual report, which was released last week, failed to cite specific examples of wrongdoing, saying only that sectoral risks had risen in the previous 12 months due to extremely rapid growth in the number of service providers. Of the 50-plus supervisory inspections carried out by the FIU last year, 34 were directed at crypto companies.

At the time, Reimand’s unit did report several cases of suspected embezzlement and unlawful provision of financial services to clients outside the country.

So far, the crackdown has focused on firms that failed to start operations in the country within six months of receiving a license. Stricter rules have also been enacted by the Estonian parliament after repeated warnings from FIU supervisors about surging license issuance starting from 2018.

The Estonian Financial Supervision Authority also raised concerns last year that easy-to-get crypto licenses might be used to ‘add credibility to nefarious schemes.’

More than half of the country’s remaining crypto companies could lose their operating permits if they can’t demonstrate they have a legal, operational, and management presence in Estonia.

An ambitious licensing regime

Some 900 licensees won approval to operate within the first year of Estonia opening the fast-track crypto programme. A rush to say ‘yes’ to so many applicants, so quickly, could be partly to blame for the current woes.

Before regulators swooped in, Estonia was seen as a haven for digital currency companies. The small country was among the first on the continent to embrace crypto, licensing more than 1,400 businesses between 2017 and 2020.

But with the Dankse Bank scandal still in the headlines, Estonian regulators are cracking the whip in an effort to reduce risks related to money laundering. The country’s parliament also passed a law recently that makes securing a crypto license much harder.

Crypto watchers initially applauded the Baltic country’s progressive approach to regulating the space, though many startups complained that local banks were reluctant to offer regular services.

The FIU, which issues the licences, has 30 days to review each application, but before the clampdown, approval was typically granted within a fortnight.

The main requirements for a license stem from anti-money laundering regulations and know-your-customer rules. Any company registered in Estonia operates under EU jurisdiction, so business licensees have to comply with relevant local laws as well those emanating from Brussels.

As in other countries like Switzerland, where business ministries have tried to encourage investment and innovation by creating a crypto-friendly environment, traditional financial institutions were initially slow to catch up with legislators and kept the nascent industry at arm’s length.

Access to business banking services is still a major hurdle for Estonian fintech businesses, many of which have been forced to conduct banking through foreign banks and payment providers.

Those issues weren’t enough to dull investor interest, and many VCs have been attracted by the generally favourable conditions Estonia provides for crypto and fintech startups generally.

Last year the FIU granted licenses to trading platform Coinmetro for wallet and exchange services. A few months later, Ibinex, which develops trading software and white label blockchain finance solutions, obtained a license. Later in the year, the FIU approved licences for two new cryptocurrency exchanges, B2bx and Ironx.

Scaling back

Perhaps anticipating future problems, in 2017 the country’s Money Laundering and Terrorist Financing Prevention Act also came into force – legislation seen by many as the legal enabler that allowed Estonia to become the first EU country in to regulate circulation of cryptocurrencies and create a licensing regime for companies in the sector.

At one point, the tiny nation announced plans to issue a national cryptocurrency called Estcoin. Politicians in Tallinn were forced to climb down, however, thanks to EU pressure. In response to the announcement, European Central Bank President Mario Draghi said that ‘No (eurozone) member state could be allowed to introduce its own currency' – which was, in fact, a fundamental requirement for eurozone membership.

According to Estonia’s new crypto firm licensing rules, permits can only be approved after three months. The cost of a license is now €3,300 versus the previous fee of €300. Any cryptocurrency company registered in Estonia will also need to incorporate in the country.

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