Author: Syedur Rahman
23 June 2020
2 min read
Syedur Rahman of Rahman Ravelli outlines the Estonian authorities’ tougher new approach to cryptoassets.
Estonia has cancelled 500 cryptocurrency firms’ licences as it looks to tackle money laundering in the wake of the Danske Bank scandal.
Cancellation of the licences – roughly a third of the total in Estonia – is an attempt to prevent a repeat of the Danske Bank situation, which saw an estimated €200 billion in suspicious transactions flow through the Danish bank’s small Estonian branch.
Estonian regulators are concerned that Bitcoin exchanges and other crypto companies could use their platforms to facilitate illegal transfers. The Estonian Financial Intelligence Unit (FIU) has indicated that the action is a pre-emptive strike aimed at reducing the risks.
Estonia was one of the first European countries to take an open approach to cryptoassets, licensing more than 1,400 entities in a three-year period. But stricter new regulations introduced in March 2020 have made it more difficult to obtain a licence. Licences used to cost €300 and take 30 days to obtain, now the price is €3,300 and they are issued after three months following completion of tougher verification procedures.
Cryptocurrency outfits registered in Estonia now have to incorporate in the country or open an Estonian branch of a foreign firm. The FIU has warned that half of the remaining crypto companies with licences may lose them as they have no operations in Estonia and are managed from beyond its borders.
Although not legal tender, Estonia’s government regards cryptocurrencies as “value represented in digital form”. They can be used as payment instruments. The government classes cryptocurrencies as digital assets for tax purposes but does not subject them to VAT.
In 2017, Estonia’s Anti Money Laundering and Terrorism Finance Prevention Act (AML/CFT) introduced robust new regulations for crypto businesses operating in the country, including strict reporting and know your customer rules. Under current legislation, cryptocurrency exchanges must obtain two licences from the FIU: the Virtual Currency Exchange Service Licence and the Virtual Currency Wallet Service Licence.
This recent announcement that hundreds of licences have been revoked has to be seen as Estonia further tightening the regulations and ensuring compliance with the latest AML/CFT legislation.
Arguably Estonia’s approach is similar to that taken by the Financial Conduct Authority (FCA), now it is the UK’s sole AML authority for the crypto business. After a decade of compliance under a laissez-faire approach to AML legislation, UK-based crypto firms now face a significantly more stringent set of rules. In January 2020, new regulatory powers were introduced by the FCA that allowed it to supervise how cryptoasset firms conduct their business with consumers. The FCA highlighted the risks involved in cryptoassets and, in particular, how the marketplace is a target for fraud. It also set out a list of requirements for cryptocurrency-related businesses, some of which related to the identification and assessment of risks in regards to AML and CFT, development of policies and controls to eliminate such risks and conducting customer due diligence.
Like Estonia, cryptocurrencies in the UK are not legal tender but cryptocurrency exchanges are legal, provided they adhere to the registration requirements set by the FCA. Unlike in Estonia, however, cryptocurrencies are taxable in the UK, with gains or losses on cryptocurrencies subject to UK capital gains tax. And the FCA has not, as yet, been proactive in revoking licences.
This article was also featured on Lexology.com.
Syedur Rahman is known for his in-depth experience of serious fraud, white-collar crime and serious crime cases, as well as his expertise in worldwide asset tracing and recovery, civil recovery, cryptocurrency and high-stakes commercial disputes.