On June 15, 2022, a law amending the Estonian Act on the Prevention of Money Laundering and Terrorist Financing entered into force in Estonia. It introduced significant changes for the country's virtual currency sector. It is particularly important to note the requirement to obtain a business license for a much larger group of entities than previously. Before the changes, as is currently the case in Poland, entities such as currency exchanges, cryptocurrency exchanges, and virtual wallet providers were required to implement AML procedures and obtain entry in the cryptocurrency register. Therefore, entities that did not provide fiat-to-crypto or crypto-to-crypto exchange services were outside the scope of Estonian regulators' scrutiny, unless they issued or provided services related to investment tokens. Therefore, numerous businesses issuing utility or payment tokens conducted regulated activities.
The new Act therefore regulates the activities of entities that provide a virtual currency transfer service, which is a service "enabling the execution of a transaction at least partly electronically through a virtual currency service provider on behalf of the principal in order to transfer the virtual currency to the wallet or account of the beneficiary, regardless of whether the principal and the beneficiary are the same person or whether the principal and the beneficiary use the services of the same provider" as well as the activities of entities providing a service consisting in organizing "on behalf of or for the benefit of the issuer, a public or private offer or sale, or the provision of a related financial service in connection with the issuance of virtual currency" [author's translation].
Regarding the first of these categories, it should be noted that we are dealing here with a service similar to those provided by payment institutions in the fiat currency market, facilitating payments between two parties to a transaction. Regarding the second group, the provision "in the name or on behalf of the issuer" raises some doubts, as it could suggest that if an entity issues a virtual currency in its own name and without intermediaries, it would not be subject to licensing requirements. However, certain signals from the Estonian regulator may suggest that, unfortunately, the issuer itself will also be directly obligated to fulfill the new obligations.
The changes will have significant implications for industry players. In particular, license applicants will be required to submit extensive information/documents, the most important of which include:
1) the amount of assets and share capital and documents confirming this amount and its contribution;
2) the applicant’s opening balance sheet and a statement of revenues, expenses, profits and cash flows and the assumptions on which they are based, and in the case of an operating company – the balance sheet and profit and loss account as of the end of the month preceding the month of submitting the application for a permit and, if available, financial statements for the last three financial years, unless they have been filed and made available in state-maintained databases;
3) a business plan meeting the requirements specified in Article 701 of the Act;
4) documentation of the determination of risk content and risk assessment prepared in accordance with Section 13 of the Act;
5) information on IT systems and other technological devices and systems necessary to provide the envisaged services, including a description of the security measures used to ensure the continuity of service and the protection of customer assets, a description of business continuity measures, and the level of technical organization of the business.
Small businesses may find the requirements related to share capital and the license application fee, which can amount to up to €10,000, particularly burdensome. It's worth noting that entities that were previously obligated institutions under AML regulations must also adapt to the changes.
Considering the above, at least until EU regulations are introduced, Poland remains a country that regulates the virtual currency industry to a much lesser extent than Estonia. It's worth emphasizing that this applies both to the scope of activity (in Poland, only exchanges, currency exchanges, and cryptocurrency wallet providers remain regulated) and the scope of obligations to be fulfilled (in Poland, only entry into the relevant register, where the entity provides company details and the scope of its operations, is still mandatory).
However, sweeping legislative changes don't necessarily mean a massive outflow of cryptocurrency businesses from Estonia. Given that similar regulations to Estonia's will be in effect across the EU in the coming years, entrepreneurs will be able to enjoy the absence of regulation in another jurisdiction for a relatively short period. Furthermore, Estonia still appears to be an attractive destination for tax reasons.
This alert is for informational purposes only and does not constitute legal advice.
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