Why Estonia Revoked 1296 Crypto Licenses

Why Estonia Revoked 1296 Crypto Licenses

Crypto License (VASP)
20 January 2021

Estonian crypto licenses have been very popular in the crypto industry. Mostly because there aren’t that many jurisdictions which have crypto regulations and specific licenses.

The European Union is a market of 500m people. And it’s seen as a reliable regulatory environment. Therefore, it’s understandable why there’s so much demand.

But to explain why Estonia revoked all these licenses, I would need to first go back to 2016.

History of Estonian crypto licenses

In 2016, the Estonian parliament decided that cryptocurrencies can be classified as alternative payment methods. And thus, should be regulated in the same way.

As a result, in 2017, the existing regulation was amended and crypto licenses were introduced to the legislation. At first, there were two licenses:

  • For service providers providing services of exchanging crypto to fiat and vice versa;
  • For service providers providing e-wallet (crypto wallet) services (the so-called crypto custodian activities).

But the regulation was light. There weren’t many requirements. No capital requirement, no local office requirements. The only things you needed was non-criminal history documents and AML procedural rules. And of course, to set up the Estonian company.

The licenses were introduced in late November 2017. In 2017, a total of 4 licenses was issued. Nothing out of the ordinary.

But the Estonian regulators underestimated the growth and trend of the crypto space. By a large margin.

In 2018, more than 600 exchange licenses and more than 500 e-wallet licenses were issued.

In 2019, more than 600 of both licenses were issued.

And this rung the alarm bell for the authorities. There were no resources to supervise these companies. And even if there was, how could they do it? The companies were operating across the world, and they had no requirements to have a local office in Estonia.

Changes were needed. And the parliament came up with a draft plan for making it more difficult to obtain and upkeep the Estonian crypto license.

At first, when we heard about the planned changes to the crypto regulations, we were pretty furious. Because we were biased. Licensing was (and still is) our business.

But at the same time, I started to get emails from my network from different parts of the world. For example, a Spanish lawyer sent me a couple of crypto projects in Spain which were operating under the Estonian license. And both of them looked like Ponzi schemes.

And they were making statements on their website that they’re heavily supervised by an EU authority. And this acted as proof of credibility for their investors. And this was a problem. For investors, and for Estonia as a jurisdiction.

Revoking of the licenses

Once the new regulations were cooked up (but not yet in force), the FIU also needed to clean up space from the bad actors.

The first batch of licenses was revoked at the end of 2019. The FIU sent out a questionnaire which had to be filled out by crypto companies that had had a license for more than 6 months. The questions included the client demographics, whether the company had a bank account, have they started a business yet, etc.

There’s a clause in the law which states that you have to start operations in 6 months after obtaining the license, or the FIU may (or may not) revoke the license.

And the companies that said they hadn’t started their business, lost their license.

While there were occasions where this wasn’t justified (because you can obtain a license and still develop your technology before launching which can take time), it was needed. Because there were many ICO companies which obtained the licenses but never needed the licenses.

The second batch of licenses was revoked when the new regulations took effect. By July 1st, 2020, all license holders had to comply with the new regulations (12 000€ share capital, local management board member, AML officer, office,  and a bank account in the EU).

And as expected, many companies did not comply.

As a result, a total of 1296 licenses was revoked. And just a few hundred companies with licenses are left (including the new ones that have obtained the license after regulatory changes, including many Comistar clients).

Why It’s A Good Thing

It is true that it’s now a lot more difficult to get the license.

But it’s also true that it’s still relatively easy compared to any other jurisdiction in the EU. The capital requirements and personnel requirements are far lighter compared to other licenses in the financial services industry.

And now, only companies with real business can upkeep the license. And thus, the reputation of Estonia as a jurisdiction stands on a good foundation.

And banking providers are more interested in working with Estonian crypto exchanges, as they know that these exchanges are properly monitored.

Overall, through pain and challenges, it’s been a great move for crypto market participants.

Not only in Estonia, but everywhere.