Countries are approaching the issue of regulating digital assets differently. Switzerland and Singapore are competing for the status of the world’s largest cryptohub. China has banned the mining and trading of virtual coins. Estonia was the first country in the European Union to introduce legislative regulation of cryptocurrency business (in 2017). In 2024, the country has a reputation as a digital nation thanks to its support for fintech and blockchain technology. Cryptocurrency in Estonia is equal to regular money: it can be used to pay for goods, exchange, investments. In all these cases, tax obligations arise, for non-compliance with which administrative and criminal liability is provided.
Peculiarities of cryptocurrency regulation in Estonia
Until 2015, digital assets were outlawed in the country. The Central Bank of Estonia did not recommend citizens to buy, sell, store bitcoin and directly compared it to a financial pyramid. In 2014, the Online Residency Act (e-residency) came out, which allowed foreigners to open companies and contact government agencies remotely from any country.
Another year later, the Bitnation blockchain service started providing notary services to e-residents. This attracted a large number of fintech and crypto organizations that managed projects from abroad. In late 2015, the Court of Justice of the European Union (EU) determined that bitcoin was a currency and not a commodity. By then, blockchain projects had become the largest segment of Estonian IT.
The first state act regulating cryptocurrency in Estonia appeared in 2017. The Money Laundering and Terrorist Financing Prevention Act 2017 (MLTFPA 2017) defined: coins are virtual currencies that parties to a transaction recognize as a means of payment.
The legal framework for the operation of companies providing services in the cryptosphere was also established. The legislator provided for 2 types of licenses:
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- For exchangers and cryptocurrency exchanges.
- For virtual wallet service providers.
Transaction control and user identification were entrusted to the Estonian Financial Intelligence Unit (EFIU), while the issuance of licenses was entrusted to the anti-money laundering bureau (Rahapesu andmebüroo – RAB).
Thanks to the adopted regulations, Estonia has gained popularity as a jurisdiction where cryptocurrency activities are legal and regulated. From 2017 to 2019, about 1,500 companies received RAB licenses. In 2019, the country was leading the ranking of the most attractive states for crypto-business, compiled by the Belarusian public organization Flying University. At the same time, Denmark’s largest bank, Danske Bank, was accused of laundering $220 billion through a small unit in Estonia. The incident was followed by the revocation of 500 permits from registered companies and stricter regulation of crypto projects.
In mid-2020, amendments to the anti-money laundering law came into force, which equated exchange and trading platforms with traditional financial structures and replaced the previously existing permits with a single digital service provider license.
Private users have also come under the regulation. Now investors who transfer cryptocurrency in the equivalent of more than 15 thousand EUR per month may be required to confirm the legal origin of assets. Private users will also be obliged to undergo an extended examination (to provide data on counterparties, which will be interviewed in the format of a video link).
Transactions with cryptocurrency (sale, exchange, payments) are subject to income tax (14-20%). Companies pay it only when distributing profits. In other cases, a 0% rate is applied for businesses, but social charges of 33% may be levied. Hiding a tax liability is punishable by a fine of up to 32 thousand EUR or imprisonment from 1 to 7 years.
Regulation of tokens and ICOs
Since 2018, Estonia has clearly established rules for initial coin offerings. The enforcement procedure for organizing and conducting ICOs is set out in the recommendations of the Estonian Financial Supervisory Authority (EFSA). In them, the regulator divided tokens into types depending on the functions and legal consequences of their acquisition:
- Financial instruments – they grant depositors certain rights in relation to the issuer or have a price linked to the company’s future profits. Issuance of tokens is regulated by the Securities Market Act (Securities Market Act, Law of Obligations Act): provides for publication of the prospectus and registration of ICO.
- Gift (donation) – assets do not allow to participate in the capital, receive interest and other payments. In this case, the issuer has no obligations to investors, but the regulator will pay special attention to the awareness and voluntariness of investments.
- Investment token – used to attract funding in the ICO format for development and profit. The activities of the issuer are regulated by the Investment Funds Act (Investeerimisfondide seadus).
- Prepayment token – gives the right to receive a product. The rules of the Law of Obligations Act (Üürivaidluse lahendamise seadus) apply to such assets, which requires the issuer to inform investors about the characteristics of the product, its full value, taxes, and the terms and conditions of the termination of the contract.
- Payment token – used to transfer finances and valuables. Developers need to obtain authorization under the new anti-money laundering legislation (Money Laundering and Terrorist Financing Prevention Act 2020).
Regardless of the type of token, in order to organize an ICO, a business must be registered, at least one Estonian resident must be included in the board of directors, and a license for cryptocurrency activities must be obtained.
If a company does not comply with the regulations or conducts crowdsale (collective funding) without a license, it can be considered fraudulent under the Penitentiary Code.
Cryptocurrency activities
In 2020, the country’s digital business regulations changed. Now, operators of exchange, storage and developers of cryptocurrency in Estonia obtain a koin provider license. Entrepreneurs and employees of companies must pass a thorough check: provide documents confirming professional skills and experience in the field of finance. The application for licensing is accepted online through the Register of Enterprises or with the help of a notary.
Cserék
The legislator not only changed the procedure for issuing licenses to cryptocurrency companies, but also regulated the organization of the trading platform, on which the provider of virtual coins will conduct activities, and users will be able to enter into contracts for the purchase and sale of assets. Exchangers of the new type no longer just offer a quick conversion of some digital units into others and fiat. Now the platforms place a large number of offers to buy and sell assets. Investors, on the other hand, get the opportunity to convert their coins at a profit.
Cryptocurrency exchange services in Estonia can be provided by a private or public company licensed by the Financial Intelligence Unit (FIU), a financial regulator. The company’s board members must regularly review the rules of the trading platform, assess their effectiveness and eliminate shortcomings.
The regulator’s current requirements for exchanges are as follows:
- The platform rules must be published and available to users to ensure that virtual currencies are bought and sold based on objective criteria.
- The operator of an exchange service is obliged to publish on the website explanatory documents on working with cryptocurrencies (methodology for determining the value of the asset, information on the exact exchange rate, the rule on the execution of an order at the current price).
- Companies must provide a quarterly report on completed transactions, client assets, profits, losses, as well as a balance sheet.
- Outsourcing (engagement of external contractors) of AML/KYC measures is allowed, if such cooperation does not hinder the work of the platform and does not reduce the quality of customer service. The person entrusted with the function must have relevant professional skills.
| Estonian Stock Exchange | Date of registration (year) | Average daily trading volume in November 2021 ($) | Number of visits per week in November 2021 (persons) |
|---|---|---|---|
| Coinsbit | 2018 | 893.45 million | 4.17 million |
| Kuna | 2016 | 1.96 million | 89.01 th. |
| CoinEx | 2015 | 147.21 million | 1.17 mln |
Estonian license
In order to obtain a license for cryptocurrency activities, you need to register a company, organize an office and open an account in a local bank (payment system). All persons associated with the project – board members, shareholders, ultimate beneficiaries, contact person (AML officer), must provide certificates of no criminal record and documents proving experience in the industry. To increase the chances of getting a cryptocurrency license in Estonia, it is worth getting an e-residency for a board member. This will allow you to manage the company remotely and interact with government authorities in an online format.
Stages of applying for a license:
- Determine the type of activity for which a license is required.
- Collect data on the company’s founders, beneficiaries and managers.
- Develop internal rules for monitoring transactions, combating money laundering and terrorist financing.
- Complete registration forms and submit documents to the Financial Intelligence Unit (FIU).
- Provide additional information during the application process.
Applications are reviewed within 60 days. The regulator can extend this period up to 6 months if they have additional questions for the applicant. A license to operate cryptocurrency in Estonia is issued untimely.
Opportunities
In 2024, Estonia issues a single digital service provider license to cryptocurrency companies. The document allows doing business in 3 directions:
- Exchanging some crypto coins for others.
- Converting digital currencies to fiat currencies and back.
- Storing virtual assets and conducting transactions with coins.
A single crypto license covers all types of transactions with digital currencies that are recognized by society and can be converted into fiat money.
Requirements for obtaining
To work with cryptocurrencies in Estonia, you can choose any organizational form – from a limited liability company to a joint-stock company. There must be at least one resident of the country on the board. The company also needs a contact person responsible for communicating with the regulator and fulfilling the requirements of anti-money laundering legislation. The AML officer should have relevant education, experience in the field. Once licensed, the officer is interviewed by FIU to confirm skills and suitability for the position. Other requirements for authorization:
- Pay the authorized capital in the amount of 12 thousand EUR. The founders deposit money in the amount of the nominal value of the share from their personal accounts to the company’s bank account. After registration in the Estonian Commercial Register, the authorized capital can be used for business activities.
- Open an account in a bank or payment system in the territory of the European Economic Area.
- Organize an actual office within the country. Provide a rental agreement for the premises with photographs.
- Prepare a package of documents related to AML (internal control rules aimed at reducing the risks of money laundering and terrorist financing).
In 2024, documents are only accepted in digital format: they must be scanned and uploaded to the FIU portal.
If a company’s founder, board member (or AML officer) and regulator change after the authorization has been granted, a new inspection will be conducted. In such a case, the license can be revoked because it was issued for a project with other people. Also, the license is revoked if:
- The office does not meet the regulator’s requirements.
- The AML officer is not capable of performing his/her duties.
- The project management is not complying with the FIU regulations.
- The company has not started work within 6 months from the date of license issuance.
By the way, the last point was cited as the official reason for revoking 500 active permits in 2019.
Benefit
The strictness of Estonian laws regarding digital assets is offset by the benefits of compliance. The new anti-money laundering regulations effectively equated cryptocurrency projects with traditional financial structures, allowing businesses and citizens to use virtual coins through licensed providers. This allowed blockchain companies to enter fully into the legal field. Customers and partners of crypto startups received a level of protection corresponding to that of banks. Thus, Estonia was the first country in the world to create a segment of the economy by making transactions with digital currencies safe and accessible.
Summary
Estonia’s cryptocurrency legislation is the strictest existing regulatory framework in the world. But the strict licensing requirements for digital businesses provide them with a stable operating environment in the legal field. This allows ordinary companies and citizens to use crypto-coins on a par with traditional payment system services and banks.
Frequently Asked Questions
🤔 Does Estonia have a national cryptocurrency?
The idea of creating a national crypto coin (estcoin) was proposed in 2017 by the head of the e-residency program Kaspar Korjus. The initiative was studied for a long time in the government, but measures for its realization were never taken.
💼 Can non-residents of a country own a crypto business?
Yes, but at least one board member must have Estonian citizenship or residence permit.
📅 For how long is the e-residency card issued?
💶 How much does it cost to register a company in Estonia?
The state duty for registration of a legal entity is 500 EUR.
💰 Do ordinary users have to pay tax for cryptocurrency transactions?
Yes, if the transaction is profitable. The income tax rate for individuals is 20%.
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Author: Saifedean Ammous, an expert in cryptocurrency economics.
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