Estonia Cracks Down on Crypto Regulation

Byline: Hannah Parker

Photo by Czapp Árpád on Pexels.

Estonia, a nation recognised for its technological innovations and digital government services, has long been a central hub for technology. To preserve its prestigious position in the tech industry, the Estonian government has recently taken strong measures to crack down on its cryptocurrency sector. 

Formerly lauded as a top location for cryptocurrency investors, Estonia is battling to stop money laundering and maintain the integrity of its digital sector. This article discusses the reasons behind Estonia’s regulatory crackdown on cryptocurrencies and the ramifications for its position as a leading global IT centre.

Estonia’s Need for Regulation

The e-residence program in Estonia, which gives non-Estonians access to the nation’s e-services, including online tax filing, without the need for physical residency or citizenship, further strengthens the country’s reputation as a tech centre. Over 100,000 e-residents have signed up for the scheme, with significant participation from nearby nations like Finland, Russia, and Ukraine. There were speculations in 2017 about introducing an e-residents-only national cryptocurrency dubbed “estcoin” pegged to the euro. The European Central Bank, however, objected to the idea, forcing Estonia’s government to abandon the idea.

Despite portraying itself as a crypto-friendly location, Estonia was under increasing pressure to address the problem of money laundering within its borders. The impetus for regulatory action was the 2017 revelation that Estonian-based Danske Bank had enabled the movement of illegal cash totalling 200 billion euros, primarily from Russia, between 2007 and 2016. One of the most significant cases involving money laundering in European history was exposed due to this information.

In response, the European Union (EU) issued the Fifth Anti-Money Laundering Directive (AMLD5) in 2018, requiring cryptocurrency exchanges and wallet providers to adhere to anti-money laundering and know-your-client standards.

An executive at Bitcoineer concluded that this is how regulators discovered that a significant portion of the thousands of cryptocurrency businesses registered in Estonia was inactive and that the nation has primarily served as an offshore jurisdiction.  

Partner in the law company Ellex Raidla, Marko Kairjak, said, “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 potential for reputational damage, and systemic risk,

Estonia acted forcefully to control the cryptocurrency market to regain public confidence in its financial openness and deal with the fallout from the Danske Bank scandal. In March 2020, changes to the Money Laundering and Terrorist Financing Prevention Act occurred, placing Estonia’s Financial Intelligence Unit (FIU) overseeing crypto-related operations. The FIU ensured that crypto companies registered in Estonia abided by anti-money laundering, due diligence, and know-your-customer laws. The modified act also mandated that these organizations have management boards in Estonia and have a minimum share capital of 12,000 euros.

As a result, the FIU started cancelling the licenses of cryptocurrency service providers who didn’t follow the new rules. Over 1,000 cryptocurrency businesses will have their licenses revoked by the end of 2020. Many of the hundreds of cryptocurrency companies that were registered in Estonia were found to be idle and effectively functioning as offshore organizations, according to investigations. This disclosure sparked worries about harm to reputations and emphasized the necessity for thorough regulation to reduce systemic hazards.

Estonia’s New Focus on Legitimacy 

Regarding cryptocurrency startups, Estonia’s strategy changed from one of numbers to one of quality. Fostering innovation and assisting reputable companies in the industry were the main goals. This strategy attempted to weed out dishonest or non-compliant businesses and would damage Estonia’s standing as a reliable tech hub. In November 2022, a joint operation between Estonian police and the FBI of the United States resulted in the bust of a 575 million US dollar crypto fraud scheme, demonstrating the government’s dedication to legitimacy. The extradition of those responsible for such fraudulent acts highlighted the commitment to preserving a strong and legitimate crypto sector.

The European Commission was also putting the finishing touches on a comprehensive regulatory framework while Estonia took preemptive steps to control the cryptocurrency industry. The European Parliament approved the Markets in Crypto Assets (MiCA) regulation on April 20, 2023, after its introduction in September 2020. The MiCA is on track to establish itself as the first regulatory framework in the world for digital assets using decentralized ledger technology. The framework does not, however, cover the non-fungible tokens (NFTs) or the Decentralized Finance (DeFi) sector.

After the MiCA implementation and the regulatory purges’ conclusion, Estonia’s FIU reported that supervision had returned to normal. Paper assessments will no longer be the primary focus; regular on-site supervision will guarantee continued adherence to legal standards. Estonia is still dedicated to upholding strict anti-money laundering regulations and safeguarding global financial systems.

The crackdown on cryptocurrencies in Estonia was calculated to maintain the country’s position as a major tech centre. The nation’s regulatory measures were implemented in response to worries about money laundering and the requirement to support a trustworthy and creative crypto economy. Estonia aims to improve the calibre and integrity of the crypto business within its borders through increasing capital reserve requirements and license revocation for non-compliant entities. As the MiCA framework of the European Commission approaches, Estonia is committed to upholding legal requirements while maintaining its standing as a dependable centre of innovation and technology. By firmly banning Bitcoin, Estonia has shown its unshakeable commitment to sustaining the most significant norms of honesty and innovation in the world of technology.