Having the AML Act in Estonia, is it still crypto-friendly?

The cryptocurrency industry in Estonia through the years

Estonia is one of the first countries to venture into cryptocurrency. They are the first member of the European Union to provide standard regulations and exercise control over cryptocurrencies. Hence, Estonia was known to be one of the top crypto-friendly countries in Europe.

Three years ago, in 2019, the Financial Intelligence Unit (FIU), a council established to gather suspicious activities of individuals and institutions, released about six hundred licenses for crypto. These licenses are called Virtual Currency Service Provider licenses. When looking into Estonian law, an institution that received its license is required to do business six months after its license has been released.

Come 2020, the regulators further tighten their control by emphasizing that virtual currencies must be treated just how traditional financial firms are. This means they should also comply with Money Laundering and Terrorist Financing Prevention Act.

In 2021, Estonian authorities revoked about 2000 crypto licenses. The nation’s government made the rules even stricter by adding audited annual reports and due diligence for digital financial institutions.

Today, crypto enthusiasts are required to get a license under the new Estonia cryptocurrency regulation.

Anti-Money Laundering (AML) Act

As regulations are the weakest point of cryptocurrency, authorities are finding a way to combat this. One of the solutions they introduced is by applying Anti-Money Laundering (AML) Act in the crypto world.

Now, what is AML Act? Generally, it refers to a series of laws, procedures, and regulations a country has to unmask illegal funds that are disguised as legitimate earnings.

It was a response in the ever so growing virtual currency industry wherein tokens may be used for illegal purposes. This act has requirements that a business must comply with. In doing so, financial institutions may also develop a more sophisticated system of due diligence that would benefit both their customers and their management.

In Estonia, AML Act was applied on the 23rd of February 2022. The biggest updates regarding this are listed below.

 2 New Service Types

1. A digital currency exchange service refers to one that enables a payment transaction to be electronically executed through a digital cryptocurrency service institution in the name of the main user. Its purpose is to transfer crypto tokens from the original owner to the recipient, despite having a different or same crypto provider, or if the recipient and original owner are the same.
2. The solution of organizing public or private transactions or offering financial services concerning releasing of digital currency.

These newly introduced definitions are an addition to the current service types the industry has. Since digital currency is defined to be a service in the paradigm where virtual keys are produced for the clients or clients’ encrypted virtual keys, these are very useful in storing and exchanging digital currencies.

It was previously defined that a digital currency exchange service is where an individual’s or firm’s virtual currency can be traded for a fiat one, or vice versa, or against another digital currency.

Now, the two new types of services listed above must be interpreted in agreement with the recommendations set forth by Financial Action Task Force (FATF), an institution that implements counselling for anti-money laundering and counters terrorist financing measures. As per FATF, one’s revision is not in compliance with the regulations until they offer the listed services above.

DAO, Defi, and WEB 3.0

Decentralized Finance (DeFi) and Web 3.0 programs have always been the top concern and are in agreement that real decentralized autonomous organization (DAO) type programs must be maintained beyond the realm of regulations. This concept includes local-based apps, wherein all users must coordinate with another user to have the capacity to provide and move the service, and involves software programmers whose function is to process the verdict of the DAO to execute a role into the crypto protocol.

In the course of the conversation, the Estonian government commented the following: their country’s legislation cannot make up for the window of individuals in decentralized financial services. To emphasize, their regulations do not focus on such services and technological advancements.

The modification must be interpreted in association with the current standard of the definition of the service provider. That is, say, please see below:

• A service provider must be a single person
• Commercial activities should be within the paradigm of the professional, economic, or exchange activity of the person

More so, the digital currency institutions are required to be evaluated according to the substantial will of the institution and the type and purpose of their businesses.

Companies’ requirements to hold or apply for a license

The path of these newly introduced laws and regulations is obviously not far from their original drafts. However, they are more compassionate in some sectors. You may find the updates of the new regulation compared to the current ones below:

1. Cryptocurrency service providers are prohibited from presenting their financial services externally from their determined professional relationship.
2. A straightforward veto was programmed for accounts that do not have credible information.
3. Having a travel rule. This means that there will be a responsibility for information to be sent for outbound-going payment transactions. If in case the crypto receiver cannot accept the data sent, the provider shall conduct a course of action to track the data and have a clear analysis of risks.
4. A cryptocurrency provider shall keep the records related to the travel rule within 5 years after the last day of the business partnership.
5. More information will be required throughout the licensing period. These include income statements such as balance sheets, and also business plans, and information on the company’s Information Technology (IT) systems and other technological data.
6. Companies that are licensed are required to have an external and internal auditor.
7. A minimum amount of € 250,000 for remittance service on share capital, and € 100,000 for the rest.
8. Funds to be owned are necessary, as well as its liquidity, just like those required for credit companies.
9. Reached higher education plus a minimum of 2 years of experience in business management.

How much does the license application costs? Currently, it is about € 10000, a great increase from the initial € 3,300 only.

Please take note of the deadlines below:

• June 15th – Deadline for submission of updated documents for companies who have valid licenses. FIU may extend this for about one hundred fifty more days. Once the updated documents are submitted, licenses will be renewed. Otherwise, they will be revoked.
• March 15th – First-time application of license which will be within the scope of new regulations.

If you need more help with the licensing, we have financial experts who could help you. You may reach us at Coredo.