New Crypto Regulation Changes in Estonia?
A couple of weeks ago the Estonian parliament published a new draft law for crypto companies in Estonia.
Overall, it’s a major disappointment for all industry participants. Except, perhaps, for the Estonian FIU (the liability of supervising the licensed companies would move from the Estonian FIU to the Estonian FSA). They would have less work to do.
And if you’ve ever worked as an official, then that’s the dream.
The proposed changes have caused a lot of questions and worry from license holders and (potential) license applicants. While I can’t guarantee anything, it’s likely that the law won’t be enforced quite like the first draft is proposed. Why?
Let’s examine some of the reasons for my optimism:
- The draft law was created by the old government. Many people in the Ministry of Finance have changed. My colleagues from another firm have had several meetings now with the people from the Ministry of Finance, and there’s a light at the end of the tunnel.
- Finance of Estonia, the association of FinTech market participants, ordered a lengthy analysis on the proposed changes together with more reasonable proposals from a top law firm.
- The proposed draft law was somewhere between unreasonable and moronic. Especially the proposed time-frames for existing license holders.
Hence, I would encourage all the applicants to keep the head calm. There will be changes, but it’s very likely they won’t be as bad as the first draft suggests. Moreover, if you’re interested in the license today, it’s probably the best time to get started. You’ll have enough time to obtain the license and get your business going before the new regulation takes effect.
Here are some of the most important proposed changes – it’s not an all-inclusive list, but it has the juiciest ones listed.
Under the new requirements, service providers must have/provide, among other things, the following:
- the share capital of at least EUR 25,000, or a quarter of the previous year’s fixed costs;
- a registered location and head office located in Estonia;
- the management board must consist of at least two persons;
- the management board must have an impeccable business reputation, knowledge, skills, experience, education and professional suitability for the management of the service provider. This knowledge, skills and experience must include aspects such as understanding the technology on which the service is based, preventing and avoiding risks, protection of customers’ interests, the preservation of financial stability and avoidance of illegal activity;
- a business plan;
- balance sheet and statement of income, expenses, profits, losses and cash flows and, if available, the accounts for the last three financial years (if applicable);
- internal rules corresponding to the requirements in the act;
- internal accounting rules;
- information concerning the information technology systems and other technological means and systems necessary for the provision of the planned services, including a description of the security measures used to ensure continuity of service and the level of technical organisation of activities;
- security policy, or rules and information on ensuring security, including measures to ensure cyber-security;
- internal control rules and rules of procedure which ensure the fulfilment of obligations in connection with the prevention of money laundering and terrorist financing (this requirement already applies), now including financing of the activities of the applicant;
- a description of the applicant’s organisational structure;
- a list of shareholders, with identification details (already applies today);
- information on the qualifying holding;
- information on the managers of the applicant, including identification information, details of residence, a description of their education, a complete list of jobs and positions held, and, in the case of members of the management board, a description of their area of responsibility, as well as supporting documents which the applicant considers relevant (already applies today);
- information concerning companies in which the participation of the applicant or a member of its management body exceeds 20 per cent;
- information concerning the audit firm and internal auditor of the applicant;
- documents certifying the number of own funds, together with a sworn auditor’s report;
- a list of payment accounts held in the name of the service provider (already applies today).
- Application fee to decrease but annual supervision fee will apply
The application state fee will decrease from the current 3300€ to 1000€.
The time-frame increases to up to 6 months (assuming all documentation is provided as required).
The most questionable aspect of all the proposed changes is the time-frame. The first draft requires the current license holders to update their documentation by the 1st of October, 2021. This, of course, is completely ridiculous, considering, that the act was proposed to come into force on July 1, 2021.
In essence, if the EFSA processes applications within six months, then you’d need to submit the new documentation latest on April 1st, 2021. But the new regulation would take effect on July 1st, 2021. I.e, the EFSA has no law to process the submitted documents before the 1st of July. So it’s impossible they would process the licenses by the 1st of October. Go figure.
What Will Happen?
I know what you’re thinking.
You’re thinking that everything you just read is too much. Too uncertain.
What the authorities have proposed is a copy-paste regulation from the Investment Firms Act. But Investment Firms are totally different beasts and provide different services. And this has been the main point which the law firms and market participants have highlighted.
Bitcoin isn’t a security. If you buy bitcoin, it doesn’t mean you’re buying securities or equity. It’s the same as currency exchange. It makes no sense that exchanging fiat to crypto or vice versa is regulated in the same way as investment firms.
Another big thing is the time-frame. In whichever form the new law will be adopted, there should be at least a 2-year transfer period for current license holders, considering, that many of them just went through the licensing process in 2020. This is one of the areas where we will have improvements.
There are other more and less important objections around this new proposed law.
The downside is that there will be changes. And it will create a certain level of uncertainty going forward.
The upside is that lawyers, associations and market participants are actively working to make the new changes reasonable. And it seems we have more ears in the ministry now than we had before.
We’ll see a number of changes to the act before it’s passed.
There is a light at the end of the tunnel.