Is Estonia, The 1st To Regulate Crypto, Now Killing It Off?

Imagine constructing a building only to tear it down because youre not happy with the foundation. Thats exactly what Matis Meker, head of the Estonian Financial Intelligence Unit, wants to do with the countrys crypto regulations, according to a local media report last week.

Located in Northern Europe, the small Baltic nation of Estonia consists of 1,500 islands, lush forests and numerous lakes. Once a part of the Soviet Union, Estonia has centuries of history as a battleground where Denmark, Germany, Poland, Russia and Sweden fought wars to control this access-point between East and West.

Estonia was also a trailblazer in the world of cryptocurrencies. It was one of the first countries to issue licenses to crypto businesses in 2017. These licenses were for two types of crypto businesses, ones that were looking to run an exchange and ones that were looking to undertake an initial coin offering. 

Additionally, the Estonian government offered digital residence which allowed entrepreneurs or their companies to legally base themselves in Estonia, even if the businesses operated elsewhere. This made it easier to obtain licenses in the country, which in turn attracted crypto businesses to the region. 

In March 2020 Estonia redefined crypto businesses as financial institutions, thereby merging the two categories of licenses into a single, virtual-currency service-provider license. This license required crypto businesses to comply with the same rules, regulations and reporting requirements of any Estonian financial institution. 

The number of crypto businesses has changed dramatically as a result. Between 2017 and 2020, Estonia issued over 2,000 cryptocurrency licenses. The crypto businesses that applied for Estonias license and digital residence had an international client base with customers across the U.S., and in Brazil, India, Indonesia, Russia, Venezuela and Vietnam, according to the Estonian Financial Intelligence Unit.

Around 40% of the Estonian banking sectors cross-border payments, which adds up to more than 20 billion euros, are handled by these crypto businesses, Meker said. Furthermore, according to a study last year, only 10% of crypto businesses licensed in Estonia had accounts with local banks while 40% used Lithuanian banks and 20% used U.K. institutions. 

The government began a crackdown on crypto businesses in June of last year during which more than 70%, or over 1,800 licenses, were revoked by December 2020. Around 400 licenses are currently active. But Meker wants to revoke all licenses. A draft bill is already in play that will tighten the requirements for licensed crypto businesses but Meker instead wants to turn the regulation to zero and start licensing all over again with tighter regulations and reporting requirements, according to the local media report. 

Meker, who was recently appointed chief of Estonias money-laundering data bureau, says people are unaware of the risks associated with cryptocurrencies. These risks are very, very high. We need to react cardinally and very quickly, he said. 

Meker claims that the 400 active licenses in the country exceed the total licenses granted across the rest of the European Union. And these businesses turn over very large sums, while Estonia gets nothing out of it, he added. Crypto businesses do not contribute to the countrys tax income or economy in terms of local jobs despite generating large profits, he said.

In his bid to impose stricter capital requirements, Meker wants to increase equity requirements for crypto businesses to 350,000 euros or approximately US$404,000 from 12,000 euros. This means that crypto businesses will be mandated to keep at least the required euros in cash or securities.

He also suggested that crypto businesses should be required to have more secure IT infrastructures. He wants to ban crypto companies from accepting investment in the form of property refinancing. He believes the businesses should accept only cash in order to increase investor protection. 

Reacting to the news, one Twitter user wrote: Estonia wants to be forgotten for eternity. While neighbors are accepting corporate presence of Binance, Tallinn keeps killing the economy after covid crisis. 

Jurisdictions around the world are now exploring crypto regulation, either to clamp down on it or embrace it. While Estonia was the first in regulating crypto, its recent crackdown on the industry is a cautionary tale for other countries announcing lenient regulations in a bid to become a crypto-hub.