How will EU crypto regulations affect Estonian crypto businesses?

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Ellex partner in Estonia Marko Kairjak and associate Anneli Krunks spoke to Estonian World about the upcoming pan-European crypto regulation MiCA.

The upcoming pan-European crypto regulation refreshes Estonia’s dilemma of how to deal with the risks of crypto assets while remaining attractive to companies that encourage innovation in the crypto industry.

In the world of crypto, Estonia was one of the forerunners. Taking advantage of very loose regulation, at its peak there were, although many were dormant, around 2,000 registered crypto companies in Estonia. Around 1,300 cryptocurrency licenses were granted in 2020 alone.

Today, according to data from the Estonian Financial Intelligence Unit, there are approximately 160 virtual currency service providers who have a valid license, some of which have met the new requirements imposed by law in March 2022, and some have submitted documents, but the procedure is still ongoing.

The first game changer was the law change in 2019, as it made the regulations stricter. The reason for this change was that Estonia as a cryptocurrency hotspot turned out to be more like an offshore country in the context of the crypto world. Additionally, experts have pointed to the anonymity of cryptocurrency and the need to consider the risk of criminal money circulating.

The Estonian state did not take advantage of the situation [with so many dormant crypto companies] it meant no jobs, no taxes; often only fictitious ties to Estonia and the potential for reputational damage and systemic risk, said Marko Kairjak, partner at law firm Ellex Raidla.

Thus, the Estonian state has decided to end this crypto party and introduce stricter regulations. In June 2021, the Financial Intelligence Unit got the new head, Matis Meker, who prioritized institutions to control the risk associated with virtual currency service providers with tougher legislation.

This, on the other hand, has raised critical questions from crypto firms: Was Estonia trying to shrink the entire crypto industry? The Estonian Cryptocurrency Association asked for a place at the table to craft regulations that would be effective in preventing money laundering, but also law-abiding businesses would survive.

The current wording of the Estonian Money Laundering and Terrorist Financing Prevention Act entered into force in March 2022.

More protection for investors

At the same time, the European Union finalized its first attempt to integrate crypto-assets, issuers of crypto-assets and service providers into a regulatory framework for the first time. The objective is to protect investors and preserve financial stability, while enabling innovation and promoting the attractiveness of the crypto-asset sector.

It is hoped that this new framework, the Crypto-Asset Markets Regulation, abbreviated as MiCA, will bring more clarity, as some Member States already have national crypto-asset legislation, but so far it there has been no specific regulatory framework at EU level. .

The two financial law attorneys and the Estonian Cryptocurrency Association said the settlement was long overdue.

In Estonia we already have a virtual currency licensing policy for years, so from our point of view it is important that the regulation establishes additional requirements for cryptocurrency service providers and in this way investors in crypto-assets get more protection, Anneli Krunks, senior partner at Ellex Raidla, specializing in banking and financial law and fintech.

She added that, based on the new EU policy, service providers must apply for a license from a competent authority by presenting relevant data and documents and, as with other financial sector regulations , there are additional requirements for managers, owners and the organization. of the cryptocurrency service provider, including systems, processes and procedures.

But the regulation also provides rules on the offering of crypto assets and lays out many long-awaited definitions that will unify the rules regarding crypto assets.

To sum up, MiCA is not just a rulebook for cryptocurrency service providers, but for the entire crypto asset market, covering not only the service provider market, but the technology of the big digital book in its primary form, noted Krunks. She added that having received an operating license in one member state, the cryptocurrency service provider can extend its operating license to another EU member state and thus offer its services throughout the EU. Europe.

This allows cryptocurrency service providers to enjoy the same benefits of a level playing field as other financial market service providers such as banks, investment firms, and payment service providers. This is a long-awaited solution that will benefit the EU as well as Estonia, ending a period of uncertainty, added Marko Kairjak.

A balance between strict and intelligent

In Estonia, the issuance of business licenses and obligations related to the business activities of virtual currency service providers are mainly regulated by the Law on Prevention of Money Laundering and Terrorist Financing.

Raido Saar, a board member of the Estonian Cryptocurrency Association, an NGO, was one of the critics of stricter regulations, but he noted that the association and the Estonian unit of financial intelligence had the same objective of fair play in the market.

Now the requirements are so strict that the value of the license is very high. It is a political decision; the government decided so to prevent money laundering, he said.

But he also pointed out that low risk can kill innovation and added that it is very important to have smart regulations, so that there is a balance between risk and innovation. The question on the table now for Estonia is to decide to what extent we allow innovation here, because risk always goes hand in hand with innovation.

Saar noted that MiCA will definitely affect the crypto sector. I participated in the EU task force for a year and I think the pan-European framework is essential, because in many countries there was no regulation in this sector before, he said declared.

The next steps

MiCA is directly applicable to all EU member states and will make additional changes to existing Estonian crypto legislation.

Kristen Leppik, an adviser at the Estonian Ministry of Finance’s Financial Services Policy Department, said virtual currency service providers in Estonia are most likely to apply for the new license in 2024.

A number of additional requirements that are not stipulated by existing Estonian regulations will apply to them – protection of customer assets or requirements for providing information, for example, he said. Leppik added that it was difficult to assess whether all current virtual currency service providers could meet the requirements of the EU regulation, he felt that several of them would probably have to stop their activities.

At the same time, the Estonian Ministry of Finance has been working for years on its own bill that would regulate cryptocurrency and crowdfunding. It has been the subject of several discussions and approvals, but it has not yet been adopted as law.

We continue to assess in what form to proceed with this project, including which aspects of crypto ownership, its related services and crowdfunding services should and could be regulated by Estonian law. One such issue is crowdfunding based on consumer credit, which is not covered by the EU Crowdfunding Regulation, Leppik said.

Anneli Krunks of Ellex Raidla noted that the adoption of the EU regulation has reached its final stage. The regulation should soon reach the plenary session of the European Parliament, where it will probably be approved. The regulations then come into force after a period of 12 or 18 months, depending on the area, she explained.

EU law allows member states to start applying the Cryptocurrency Service Provider Regulation before the end of the 18-month transition period. Krunks thinks it is likely that several countries will also use such an option.

Marko Kairjak said it remains to be seen whether MiCA brings a competitive edge to the EU over other parts of the world in the use of crypto assets and underlying technologies.

Furthermore, the next few years will also show if Estonia will benefit from MiCA and if it could re-establish Estonia as the place to go for crypto-asset innovation or if other EU jurisdictions would emerge as places to go for digital innovation.

Read the full article here.

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