AK: Bill tightening crypto-currency regulation likely to pass at Riigikogu

Ministry of Finance (Superministry).
Ministry of Finance (Superministry). Source: Siim Lõvi/ERR

A draft bill is before the Riigikogu which would siginificantly tighten regulation on traders in crypto-currencies, Non-fungible tokens (NFTs) and other virtual assets if it passed at the Riigikogu. ETV news show 'Aktuaalne kaamera' (AK) reported Tuesday night that the bill would likely pass all three required readings at the Riigikogu, albeit subject to potential amendments, within the course of this month.

The legislation would in particular hone in on those crypto-currency operators or businesses which had no obvious connection with Estonia.

Center MP Andrei Korobeinik said that Estonia was still the major jurisdiction worldwide for crypto-currency business, adding there was no reason for this to change, but rather, the sector could do with some further regulation.

Korobeinik told AK that: "We have to look for a compromise that reduces the risk of money laundering and the risk for customers. On the other hand, this would still leaves the sector to Estonia. Estonia is now undoubtedly the world's leading jurisdiction for cryptocurrencies and I would really like to protect this situation, because Estonia rather benefits from this."

A recent Bloomberg article reported that Estonia's crypto-currency market is still susceptible to criminal activity, which in turn can affect Estonia's international reputation.

Korobeinik added that: "I definitely don't want that reputation."

Korobeinik is also chair of the Riigikogu's Finance Committee, and added that: "The adoption of regulations means that you have a better overview of what is happening."

Finance minister Keit Pentus-Rosimannus (Reform) told AK that: "It is really not anyone's goal to [prevent] honest, sensible innovative companies. We are currently discussing exactly where to draw this line," said

The draft bill would, if it passes at the Riiikogu, raise capitalization requirement for crypto-currency firms to €125,000, or €350,000, depending on the area of activity, while criteria for board members at such firms would be codified.

Currently the capitalization requirement is €12,000.

Supervision fees are also involved – the finance ministry would like a 0.03 percent cut of every crypto-currency transaction, though Korobeinik said he would prefer a compromise solution, for example, to charge a fee based on annual turnover.

Pentus-Rosimannus added that: "Supervisory fees have been one of the issues that the sector itself has raised."

The number of active crypto-currency licenses in Estonia has been on the decline significantly in recent years, from 4,000 at its peak, to less than a tenth of that figure at present.

This does not equate to the same fall in the number of companies operating, Pentus-Rosimannus added – a significant proportion of license issued were for operators who had nothing to do with Estonia, she said.

Anton Korobeinik said that there was no need to scare away the entire sector, however; it would simply relocate elsewhere if that were the case, he said.

The Financial Intelligence Unit (FIU) has been trying to streamline the issuing of crypto-currency license in recent years, but has also met with litigation as a result. Of 37 cases brought, 20 are still pending, the unit says.

At the start of this year, the first-tier Tallinn administrative court granted the right to eight companies to work in crypto-currency, which requires that they be issued licenses, AK reported.

Finance ministry: Cabinet approved draft bill just before Christmas

The finance ministry reports on its own website that the government approved the legislation on December 23 2021.

The bill, if it passes, would more effectively regulate virtual asset service providers (VASPs), the ministry says, a move which would mitigate the risk of financial crime.

The revised draft law builds further on the general prohibition to open anonymous virtual accounts, a rule that came to force in summer 2020 after a boom in license applications and favorable legal environment brought the virtual assets under the scrutiny of FIU and law enforcement authorities alike, the ministry says.

The regulation would not be applied to virtual asset customers, but to VASPs who conduct activities for or on behalf of natural or legal person as a permanent business.

This means that the legislation does not contain any measures to ban customers from owning and trading virtual assets, and does not in any way require customers to share their private keys to wallets with the authorities.

The regulation does not affect individuals who own virtual currency through a private wallet not provided by a VASP.

However, accounts opened with Estonian VASPs cannot be anonymous and Estonian VASPs cannot offer anonymous accounts or wallets.

Draft bill in brief:

  • VASPs who facilitate transactions of virtual assets are required to identify their customers.
  • The new regulation also states that only companies who operate in Estonia or are connected to Estonia can apply for a license to operate as a VASP.
  • As noted, VASPs will be required to have a minimum of €125,000 or €350,000 euros of share capital, depending on the type of service offered, increased from the current floor of €12,000.
  • Under the new rules, the FIU could decline a license where the entity does not have any business operations in Estonia, nor has any apparent connection to Estonia.
  • Identifying information must be retained in a way that would enable it to be linked to the transaction, similarly to bank transfers, with real-time risk analysis required on the part of VASPs, if this is not viable.
  • The measures are analogous to rules that apply to transactions facilitated by banks and payment service providers, since virtual assets are also used first and foremost for value transfers.
  • This measure will further reduce the risk of registering or keeping dormant VASPs for resale.
  • The amendment transposes Financial Action Task Force (FATF) recommendations to allow service providers to conduct transactions with parties from other jurisdictions where such requirements do not yet apply.
  • The proposed draft would incorporate the updated international standards on VASPs by FATF, including types of virtual asset services that are defined by FATF but had not been clearly defined under the current law.

Current rules allow the resale of companies that have obtained a license to third parties who are not connected to or do not operate in Estonia, the ministry says.

Supervising such entities is not feasible, and the risk of abuse endangers Estonian VASPs who operate transparently and in good faith.

The average annual turnover of VASPs licensed by Estonia is currently €80 million.

The draft law has now been submitted to Riigikogu and would need to pass three readings before it entered into law.

Money laundering bureau chief Matis Mäeker told investigative weekly Eesti Ekspress last October that a cull of cryptocurrency operating licenses in Estonia was needed.

By far the largest money laundering scandal to have engulfed Estonia does not primarily concern crypto-currency, and led to the closure of the Tallinn branch of a traditional bricks-and-mortar Danish bank, Danske, in late 2019, after it came to light that as much as in excess of €200 billion in potentially illicit funds, mostly of Russian origin, had passed via the bank's portals between 2007 and 2015.

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Editor: Andrew Whyte

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