As it is expected that it would take at least 2-3 years before the European Commission regulation regarding virtual currency service providers would enter into force, the Estonian legislator has decided to be a frontrunner and proceed with its own amendments in order to reform the sector.
In January 2021, the Ministry of Finance in Estonia presented a new proposal to regulate virtual currency service providers. The new proposal comes less than a year after the last significant amendments. Those amendments required the virtual currency service providers operating under the license of the Financial Intelligence Unit to have their registered office, location of the management board, and place of business in Estonia.
According to the new proposal, further amendments must provide the necessary transparency to the sector and protect investors’ interests. Currently, virtual currencies are not subject to any securities regulation in the European Union, nor investor protection rules, which causes distrust among service providers and investors.
What would new rules change?
The most noteworthy change pursuant to the new proposal is that the virtual currency service providers would be subject to the supervision of the Financial Supervision Authority. This means higher minimum share capital, regular reporting, and auditing obligation as well as limited legal forms for operating. Moreover, all current license holders are required to apply for a new license.
The operating license would be issued only to the company incorporated in Estonia (i.e. private limited company (in Estonian osaühing) or public limited company (in Estonian aktsiaselts)), which provides services in Estonia and which paid-in share capital is at least EUR 25,000. It is not permitted to provide virtual currency services in Estonia through a foreign legal entity. In case the Estonian service provider would aim to supply services in other countries, approval from the Financial Supervision Authority to act as a provider of cross-border services or to establish a branch in another country is required.
In order to apply for the license, the company must submit documentation to prove its ability to provide services as required (e.g. 3-year business plan, an overview of the IT systems, security policy, etc.) and pay the processing fee of EUR 1,000. The license issued by the Financial Supervision Authority is termless and is not transferrable to another legal person.
Furthermore, in addition to the current virtual currency wallet service and virtual currency exchange service, the term “virtual currency services” would also include the operating of a trading platform for virtual currencies. The latter could be defined as managing a platform where multiple third-party buying and selling interests for virtual currency can interact in a manner that results in a contract, either by exchanging one virtual currency for another or a virtual currency for a fiat currency. Unlike the European Commission proposal, the Estonian proposal does not include the provision of advice on crypto-assets as part of the virtual currency services, leaving the latter out of the scope of the new legislation.
Guided by the European Commission regulation proposal, the Estonian proposal also establishes the obligation to notify of or register the crypto-asset white paper to the Financial Supervision Authority before the offering. Similar exceptions apply as in the European Commission proposal, e.g. the offer is solely addressed to the qualified investors, etc.
What remains the same?
The proposed amendments would not affect the obligation of the virtual currency service providers to apply the anti-money laundering regulations and conduct KYC while providing services.
Also, the requirement to have the registered office, location of the management board, and place of business in Estonia remain the same.
Should the new proposal be adopted, the legislation should enter into force from 1st July 2021 and the current licenses issued by the Financial Intelligence Unit would become invalid 01.01.2022. The current wording of the proposal does not establish any simplified application process for the virtual currency service providers who already have a valid license. This in mind and also the fact that the Financial Supervision Authority would make the decision to issue an operating license or to refuse it within 6-months after all the necessary documentation and data have been received, the service providers should be in compliance with the new rules (i.e. submitting the new license application to the Financial Supervision Authority) in a timely manner.
Considering that the new proposal is not yet approved by the parliament, it is not too late for the interested parties to submit their adjustments and contribute to the legislation which would reflect the interests of the sector to the largest extent.
Taking into account the aforementioned and also the current virus crisis, the 1st July 2021, however, seems rather too ambitious for the new amendments to enter into force. Nevertheless, the virtual currency service providers already operating under the license issued by the Financial Intelligence Unit or who are planning to apply for the license should keep an eye on the upcoming developments. It is very likely that Estonia would take a step towards a more transparent crypto sector and offer more protection to the investors by implementing a new regulation.
It is clear that the sector needs to be regulated more clearly and that the regulations should be similar at least across the European Union. Regardless of the fact that the current EU regulation is under discussion, the sector and investors need more certainty rather sooner than later. Of course, there is a risk that should the regulation on the European Union level be significantly different than currently proposed, the benefit of the quite bureaucratic burden which comes with the proposed Estonian amendments would not serve its purpose.
Nevertheless, until there is no uniform regulation in the European Union, the Estonian new legislation would allow the service providers to operate in a more transparent framework already from 2022. Being able to provide the investors with legal certainty which comes with the supervision of the Financial Supervision Authority would certainly contribute to the more trustworthy crypto sector in Estonia.
As under the proposed legislation, the license holder would be entitled to provide its services also in a cross-border manner, the proposed amendments would solve the current problem of limited territorial scope and limited supervision by Estonian authorities. This, once again, provides more legal certainty for the investors.
Even though the compliance costs would increase for the service providers, there is a reason to believe that the ones who value their investors and are keen to operate in a transparent framework would also be interested in obtaining a license under the new regulation. The interest in new licenses would perhaps not be as striking as it was in 2017 when Estonia was one of the first countries who started to issue licenses for companies engaged in providing virtual currency services, nevertheless, Estonia would once again be a frontrunner in the emerging sector and would contribute to its development.
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Attorney-at-Law | www.rask.ee