Why Crypto Loves Estonia – Is This is Love Affair to Last?

While recently reviewing a brand called BitcoBrokers, we shared one of the requirements of the service provider, namely that the operator of their service must be an Estonian legal entity. For those of you who have experience dealing with crypto trading, this may not have rung any bells. But we decided to expand the topic a little bit, so that newbie brokers get to understand the background.

Read this article to find out.

Estonia :heart: Crypto

Estonia is a small country in the Baltic region with at least a quarter of its population being ethnic Russians. At the same time, it is an active member of the European Union and NATO (also using the Euro as a national currency). Back in 2017 Estonia tried to once again serve as a bridge between various interests to the benefit of its own land and population. Several law makers gathered and decided to further leverage on the strong e-government already built, and introduced a series of new laws and regulations, which aimed to support projects in the crypto field.

The newly introduced licensing targeted two groups of companies – those looking to initiate an ICO campaign (initial coin offering) and those looking to operate a crypto exchange. This was completely unheard-of back in the day, when no one knew how to treat such projects from a legislative perspective, especially within the heavily regulated EU. Estonia was already ahead in various fields such as the digital government, which helped them introduce a “digital residence” in addition to the crypto licenses. In simple terms, the digital residence permitted entrepreneurs, citizens of any nation to obtain the necessary licensing even if they were already located elsewhere over the globe.

The result was quite impressive. Thousands of companies, who wanted to kick-off a revolutionary way to fund raise their businesses through the blazing hot blockchain technology, flocked to Estonia and launched ICOs in a matter of months.

Current State of Affairs

Fast forward two years ahead, in 2019 the EU passed a very complex legislation, related to the KYC (know your customer) policies, which the regulators on a national level supposed to implement in order to oversee the operations of the crypto businesses. The ultimate goal was to stop money laundering within the relatively non-yet-regulated industry. Estonia met all this new legislation relatively readily and it was in the beginning of 2020 when they introduced amendments to the crypto business’ licenses.

Here is the most interesting part of this story. According to many legal professionals, the newly introduced EU legislation was already covered in the existing crypto policies on a local level in Estonia. They were already ahead of everybody and once they decided to change their policies further, everyone was a bit shocked. So why did they do it?

To understand that better, we will take a moment to briefly outline the changes Estonia deployed earlier this year. In 2017 it was enough for a company to appoint an individual responsible for the KYC, like a DPO or a Compliance officer. One of the heads of the new company had to be either a EU resident (not necessarily even a citizen), and the official address had to be in Estonia. The license itself would cost about $400 to obtain.

After the changes, the company’s director had to be an Estonian resident and a local office was required. The license fee jumped up to $3,700, which all together does not seem like a big deal. However, the compliance procedures, which include monthly reporting and various additional paperwork, cost an average of about a few thousand dollars a month. Which is about what you would pay one-time for obtaining the license elsewhere (say, the United Kingdom Financial Conduct Authority crypto license).

Estonia and MySpace

The number of companies to leave Estonia is growing on a daily basis. There are still reasons why some companies continue to seek licensing in Estonia, such as the familiar path towards obtaining it, the digital services, which are very simplified in the small Baltic country, and many others. But the economics just does not work anymore. If you are running a startup, annual fees of $20,000 simply do not make sense.

So why did Estonia do that? From various publications in media, it sounds like the lawmakers tried to monetize on their advantageous position. They thought that for many of the crypto businesses it will be better to stay with the devil that they know; however they somehow missed the fact that a small country cannot compete with the big boys in the long run. If we look at Estonia from a business perspective, their model to be the first was rather unique, courageous, and quite practical at the time. Almost like MySpace in the early 2000s, Estonia surely monetized their position. And just like with MySpace, many competitors quickly gained speed, improved the model and… well, the rest is history.

Did you find our article useful? Check out Our Services and see how we can help!