Several years ago, and particularly during Taavi Rõivas' (Reform) time as prime minister, Estonia was well on the way to becoming somewhat of a cryptocurrency hotspot, ERR's online news in Estonian reports, with over 1,300 having been issued cryptocurrency licenses, while avenues were explored for Estonia to exploit its "Baltic tiger" e-state niche further

However, last month, the ministry issued draft legislation which would make regulations stricter, including the Financial Supervisory Authority (Finantsinspektsioon) being responsible for monitoring the sector, rather than the Financial Intelligence Unit (FIU), organizationally a part of the Police and Border Guard Board (PPA), as has been the case up until now.

Change in government has not changed legislative approach

A fee would be payable to the Finantsinspektsioon, while current license holders would have to reapply for their license. Only a minority – 381 – of companies dealing in cryptocurrency hold a license at present, and it is not clear how many of them will be able to continue under the new regime, should it enter into law.

Adviser at the finance ministry Erki Peegel says the intention is not to close down operators, though at the same time Estonia could sustain around 50 to 100 cryptocurrency companies – fewer than ten percent of the number to have been issued license over all (as of 2019, a little over 1,200 firms were involved in crypto).

While the finance ministry has seen a change of leadership with the entry into office of the Reform/Center coalition last month and Keit Pentus-Rosimannus (Reform) being appointed minister, the draft legislation, drawn up during Pentus-Rosimannus' predecessor Martin Helme's ministership, may still be approved by the new administration.

Deadline for ministries' feedback on proposed law was today, Friday February 5

The ministry sent the draft for coordination rounds in mid-January, around the time of Jüri Ratas' (Center) resignation as prime minister and with it the collapse of the last coalition, with a deadline of today, Friday February 5 – though the lack of reported proposals from other ministries so far may be explained by the change in government.

The issue might be seen as back in focus again given the surge in Bitcoin price since October last year – the currency broke the US$40,000-mark for the first time last month.

Estonia was the first country to legalize cryptocurrency firms' operation, with the FIU required to review applications and issue licenses if satisfied – a process which took about a month.

The stipulations in acquiring a licese were reportedly not very strict, mostly involving Know Your Customer (KYC) and anti-money laundering (AML) measures in place (a Supreme Court ruling required AML regulations to be applied – ed.), including those aimed at combating potential terrorist financing, and acquiring a license was not expensive.

Crypto popularity grew rapidly 2014-2016

The drafters of the original law, issued when Taavi Rõivas (Reform) was prime minister, had not expected more than a handful of applications.

However, the cryptocurrency phenomenon fairly blossomed worldwide as cryptocurrency prices rose – for instance Bitcoin prices surged from a few hundred dollars late 2013 through to early 2017 when the US$1,000 mark was first breached, to nearly US$19,000 in late 2017, while many of the other myriad cryptocurrencies out there saw similar growth in value.

The popularity seemed to fit with Estonia's image as a tech success story, alongside the e-Residency program launched in December 2014, with the then-head of the latter, Kaspar Korjus, even proposing a national Estonian cryptocurrency, to be called Estcoin.

This was never realized, though it attracted international media attention. Then-head of the European Central Bank (ECB) Mario Draghi said that a national cryptocurrency was not viable inside the Eurozone – which Estonia had joined at the beginning of 2011.

Arguments over whether cryptocurrency is money in the traditional sense, or not

Nonetheless, an Estonian cryptocurrency license was still viewed as a mark of trust and a type of national approval, which was appealing to many foreign citizens who then set up shop either in Estonia or, via the e-Residency system, outside.

In the meantime, the status of cryptocurrency has seen some ups and downs in Estonia and beyond; the Tax and Customs Board (MTA) said at selling cryptocurrency should be subject to VAT, since it is not money in the traditional sense, while the European Court of Justice (ECJ) ruled in late 2015 that in fact it should be treated in the same way as regular currency, and not subject to VAT.

The numbers speak for themselves. In 2017, a total of four firms obtained cryptocurrency licenses. By the end of the following year this had risen to 617, and by the end of 2019, the figure stood at the rather memorable figure of 1,234.

Rewards were there to be had

The rewards were there for those that knew what they were doing, be it trading, mining, providing consultancy etc. Entrepreneur Argos Kracht, a financial adviser, provided a service mediating the issuing of Estonian cryptocurrency licenses for €6,000 a throw, for example (over half of that figure is the state fee payable on the license).

Kracht's firm, KRM Advisor, saw its turnover triple to €2.4 million in 2018 as a result, with nearly €1 million in profit and a growth in staff to over 20.

Growth was substantially higher for cryptocurrency gambling firms based in Tallinn – one of which had a reported turnover of €16.5 million at one point and went on to sponsor top-flight English football teams (link in Estonian).

However, in KRM's case this did prove to be somewhat of a bubble, with competition and the decline in Bitcoin prices contributing to a contraction in the company's size, to six staff, and falling profits and turnover.

Kracht also says applying for licenses even ahead of the tabled legislation is not as easy as it once was, adding he has changed business focus.

Regulation stepped up after Jüri Ratas enters office

Changes in the law arrived in 2017 after Jüri Ratas (Center) became prime minister late on in the previous year. Amendments to the Money Laundering and Terrorist Financing Prevention Act which entered in force in autumn that year legally defined virtual currencies and introduced further obligations for cryptocurrency sellers and wallet providers.

The legislation is not seen as the final word in the matter, but rather an aim of getting a better handle on what was happening nationwide in the market and to get some further control over the sector.

It also led to a fall in the number of licenses applied for, with four being granted between the law entering into force and the end of the year.

Further regulation came at the end of 2019/beginning of 2020, which required a licensee's head office being physically located in Estonia itself regardless of where their customers might be (gambling firms using crypto cannot legally have customers based in Estonia, where online gaming is restricted to a few providers - ed.) and further controls. Companies were also required to start properly identifying their customers, with a period of grace until July 2020 to put these measures into place.

Major money laundering scandals unfold

This law change came at a time when money laundering had been front and center not only in the Estonian media but globally, following revelations that at least €230 billion in potentially illicit funds had been channeled via the now-defunct Tallinn branch of Danske Bank in the period 2007-2015, i.e. just when cryptocurrency was taking off, along with several billion thought to have passed through Swedbank and SEB in Tallinn.

Cryptocurrency license had undoubtedly been used for criminal activity, ERR reports.

Further risks arose from license applicants who had no connection whatsoever with Estonia otherwise, and fears of potential terrorist financing at a time when several high profile terror attacks took place in Europe, along with the money laundering risk noted above.

Crypto honeymoon period ends

All of these are naturally things which Estonia does not want to be associated with Erki Peegel says.

The law effectively ended the cryptocurrency honeymoon period once and for all, with 346 applications through 2020, i.e. not much more than half the number of the previous year.

More than that, over 1,800 licenses were revoked (some firms had multiple licenses – ed.).

A few operators did challenge their license revocation, however, with 31 legal actions issued against the FIU last year for same, and also for complaints about deficiencies in the license application process itself, though, ERR reports, none of these have led to a reinstatement of a license.

Not the high-street game changer once heralded

Overall, Bitcoin and other cryptocurrencies, at least in Estonia, do not seem to have delivered to the average joe in the street to the extent many thought they would do. Paying for a restaurant bill, for instance, or buying store goods, using crypto is not possible in Estonia nowadays, pandemic notwithstanding.

Currency dealer Tavid, whose kiosks can be found in many shopping malls, did not opt to trade in cryptocurrencies, and has reverted to gold in its recommendation on what to buy. Tavid did enquire about Bitcoin in 2013, when the price rose from about €10 to nearly €1,000, but got the response from the Finantsinspektsioon that it was not regulated and was not a means of payment, in the authority's view.

Currency dealer Tavid, whose kiosks can be found in many shopping malls, did not opt to trade in cryptocurrencies, and has reverted to gold in its recommendation on what to buy. Tavid did inquire about Bitcoin in 2013, when the price rose from about €10 to nearly €1,000, but got the response from the Finantsinspektsioon that it was not regulated and was not a means of payment, in the authority's view.

"Bitcoin could be seen variously as a work of art, a commodity, a pyramid scheme, a security or other things, but it's not seen as money at the moment," Kilvar Kessler, Finantisinspektsioon chief, said in 2014, largely reflecting what various global financial regulators thought of cryptocurrency at the time.

Should the latest proposed legislation get the go-ahead at cabinet level, the next stage would be voting at the Riigikogu. Given two of the parties now in opposition (EKRE and Isamaa) were in office at the time the legislation was drafted, there may be relative unanimity on the matter - though at the same time it wouldn't be the first time parties and their MPs have voted against changes they would have previously supported.

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