What is really happening with the regulations of virtual currency services in Estonia

Good crypto enthusiasts,

You are probably all aware that the conditions for offering the virtual currency service in Estonia are changing drastically. The government has submitted a bill to amend the Money Laundering Prevention Act to the Riigikogu, and at the same time the ÜMIVS, ie the Co-financing Platforms, Other Investment Instruments and Virtual Currencies Act, has passed the second round of approval.

Both drafts in their current wording fatally affect virtual currency service providers, and the reason for rushing to the drafts is to conduct a MONEYVAL assessment of Estonia, which would have serious consequences for Estonia (Estonia’s risk of money laundering). it can affect everything from sovereign ratings and correspondent banking to a country’s reputation and foreign investment. However, as the evaluators of Moneyval and the FATF themselves have said, their assessment is less influenced by the standards adopted and more by whether and how they are implemented. This is where the main dangers of the government’s current activities lie: regulations are being adopted that cannot be implemented in some places and make entrepreneurship and innovation in the areas of virtual currencies, the blockchain, web3 and defi very difficult. At least in Estonia.

Since the national risk assessment last spring, the narrative has been maintained, as the biggest risks of money laundering are related to virtual currencies. It seeks to smooth out more than 200 billion bank washes between 1014 and 2017, bringing a new and more frightening ghost to the “stage” and taking advantage of the audience’s lack of understanding of virtual currencies as a phenomenon. With regard to bank money laundering, it must of course be added that no one has yet been convicted of any crime, although investigations are still ongoing.

Of course, it is a fact that many companies established in Estonia that were issued virtual currency licenses in 2017-2020 have raised hundreds of millions of capital and operate all over the world without following any rules. Most of them no longer even have a valid license, but their activities are not affected. Such companies present themselves as fully licensed Estonian companies at international trade fairs and offer money laundering services with fairly open cards, with a service fee of 3.5-7.5%, and declare that they are happy to serve high-risk customers. It is alleged that the total amount of payments mediated by such companies exceeded 30 billion last year. It is quite clear why these companies are causing reputational risk and a ticking bomb for the entire Estonian virtual currency market. But it is not possible to bring such companies to order by changing a law they do not comply with today.

However, the planned changes in the law will directly affect those companies that are trying to survive in a highly competitive market for virtual currency services, following the rules. That is why the Estonian Cryptographic Association, in cooperation with Lexlaw OÜ, submitted proposals to the Finance Committee of the Riigikogu, by which we try to remove the 7 most critical points from the law or redraft them.

1. According to the draft Ҥ 72 1 (1), the share capital of a virtual currency service provider must be:

1) at least 125,000 euros if the virtual currency service provider provides one or more services specified in clause 3 10), 10 1) or 10 3) of this Act ;

2) at least 350,000 euros if the virtual currency service provider provides the service specified in clause 3 10 2) of this Act .

Proposal: to delete § 72 1 (1) of the Money PTS from the draft. The rationale is simple – for an honest start-up, these amounts are too high and the threshold for setting up a VV start-up becomes unreasonably high. In the seed phase, it is not even possible for a start-up to collect such money from investors for the purpose of paying it back without any certainty that the permit will ever be issued at all. Which investor would put his money under an indefinite result indefinitely? So far, however, there is no feeling that capital requirements will be lifted, as the digital financial services package (the so-called MiCa and DoRa) prepared by the European Commission and approved in principle by national finance ministers, which has been negotiated in the European Parliament, also imposes high capital requirements on virtual currency service providers. If Estonia did not adopt the Anti-Money Laundering Act today, equity requirements would arrive throughout the European Union one year or another at the latest – this must be taken into account.

2. Surveillance fee

§ 1 clause 39 of the draft introduces a new chapter of the Money PTS with six sections, which provides for the supervision fee of a virtual currency service provider and the obligation to pay it.

Pursuant to subsection 75 3 (1) of the Bill, the capital part of the supervision fee is an amount equal to one per cent of the amount of share capital provided for in subsection 72 1 (1) of this Act.

Pursuant to § 75 3 (2) of the Bill, the volume part of the supervision fee is an amount equal to 0.035 per cent of the total amount of transactions executed by the virtual currency service provider and initiated or accepted in the course of providing the service specified in clause 3 10 2) of this Act.

Proposal: To maintain § 75 3 (1) and § 75 3 of the Bill Justification: The above provisions impose an obligation on VASP to pay a supervisory fee of 1% of the share capital and an additional 0.0035% of the total volume of transactions initiated or accepted, which harms the competitiveness of Estonian companies in the EU and world markets. Many platforms offer the exchange of virtual currencies for other virtual currencies within the platform free of charge, and in the event of such a change, companies would have to pay hidden VAT to the state on these transactions. This is not acceptable to the business environment. There is also a separate question of whether and how our supervisory authority, the RAB, would be able to administer (collect) it in reality. We have discussed this issue in isolation in the Committee on Finance and with officials from the Ministry of Finance, and we have convinced those involved that a ‘volume charge’ is not justified. We look forward to the start of the new week to see what the government will end up with.

3. “Travel rule”.

§ 25 of the Bill is amended by adding subsections 2 2 –2 7, according to which VASPs must apply the so-called travel rule as recommended by the FATF. This recommendation is practically unenforceable in the case of virtual currencies, and the information gathered through its apparent implementation has no information value. Instead of a “travel rule”, it would be reasonable to consider imposing an obligation to use blockchain analytics tools in law, as we have repeatedly recommended to the Ministry and also introduced the effectiveness of these tools at a meeting at the Ministry of Finance.

Proposal: § 25 (2 ) 2) of the draft deleted from the draft. The government disagrees and they stress that the FATF travel rule is the future. However, what is the weak point of the government’s arguments is that there is no established data exchange standard in Europe or in the world that complies with the travel rule. While in America the regulator’s attitude is to let the market set the best standard, in Europe the situation is confusing – some countries want to actively contribute, while others are not interested at all. From the point of view of the company, the situation is very confusing – whether and what data and how it is actually possible to transmit in the context of the operating principles of the block chain.

4. Audit and internal audit

Pursuant to the Bill, § 72 3 is amended , according to which the auditing of the annual accounts of a virtual currency service provider is mandatory and pursuant to subsection (2) a person specified in subsection 7 (2) of the Auditing Act may be appointed as an audit firm.

Proposal: To delete § 72 3 (1) from the draft.

Justification: When setting standards, they must be enforceable and purposeful. If all VASPs are required to pass an audit, Estonian sworn auditors must have the appropriate knowledge, readiness and skills to perform a competent audit. The explanatory memorandum to this draft does not provide information on whether the Board of Auditors has in fact confirmed that such competence and readiness exists to audit more than 400 VASPs each year. According to the report of the Ministry of Finance, as of 16.12.2020, there are 132 audit firms (hereinafter AEV) and 339 sworn auditors in Estonia, 121 of them do not provide audit services in AEV. Based on the above data, it can be concluded that approximately every auditor should inspect one VASP per year. Today, the government confirms that the auditors have announced their readiness. Nevertheless, we have discussed with the Ministry whether and which audit provides added value, including internal audit.

5. Right to suspend an activity license.

The draft is intended to supplement § 72 7 (1), according to which a virtual currency service provider cannot submit a notice of temporary waiver of economic activity provided for in subsection 34 (2) of the General Part of the Economic Activities Code Act.

Proposal: to delete § 72 7 from the draft.

Justification: This provision is extremely restrictive for market participants.

The right to suspend an activity license is the right of obligated persons, which is prescribed for everyone on the basis of the MsüS. The purpose of the temporary waiver is to protect both the consumer and the market participant.

6. Acquisition of a qualifying holding and prohibition on the transfer of a holding within two years.

The draft is supplemented by § 72 6 (3), which provides that the acquisition or increase of a qualifying holding as a result of a transaction is prohibited within two years as of the issue of the activity license.

Proposal: to amend the wording of § 72 6 (3) as follows:

“Acquisition or increase of a qualifying holding as a result of a transaction is prohibited within six months as of the issue of the activity license, unless the Financial Intelligence Unit grants a corresponding permit.”

Justification: According to the explanatory memorandum the acquisition of a qualifying holding is subject to the condition that the virtual currency service provider has been in business for at least two years. The purpose of this provision is to ensure that the license is applied for by the so-called persons who plan the activity. Apparently, this provision also has another purpose, which is to restrict the sale of so-called ready-made companies. This is a situation in which consultancy firms set up companies, obtain a license and transfer a legal entity. We have maintained in the discussions that the restriction on the sale of ready-made companies is already achieved by the government with other imposing restrictions, and the 2-year transfer restriction already generally affects the opportunities for fast-growing companies in this field to raise money and develop.

7. State fees.

Pursuant to the Bill, clause 3) is added to § 269 worded as follows:

“3) 10,000 euros for the provision of a virtual currency service.”;

The text of section 269 is deemed to be subsection (1) and the section is amended by adding subsection (2) worded as follows:

“(2) A state fee of 4,000 euros shall be paid for the review of an application for the amendment of an activity license in the field of virtual currency.”.

Proposal: No change in state fees.

Justification: The state fee for applying for an activity license for virtual currency service providers in the amount of 10,000 euros is unreasonably high. The authorization of providers of virtual currency services is similar in nature to the authorization of other financial activities, such as the procedure for the authorization of a payment institution, an electronic money institution or an investment firm. It is important to emphasize that the state fee for processing the aforementioned financial activity license is 1,000 euros.

This draft substantially increases the state fee three times compared to today, notwithstanding the fact that the state fee has already been increased on 01.03.2020, as a result of which the state fee was increased from 750 euros to 3300 euros.

We will continue to co-operate with the Riigikogu’s Finance Committee, the Ministry of Finance and the FIU to help develop new regulations that would clean up the market so that law-abiding companies have a good business environment and development opportunities, and innovation is still welcome in Estonia. The term for amendments in the Riigikogu is 9. on February at 5.15 pm and more generally February will bring clarity.

Raido Saar
Chairman of the Board of the Estonian Cryptographic Association