CMS Expert Guide to Crypto Regulation in Estonia

Assuming cryptoassets do not constitute securities or e-money, only the following services related to virtual currencies are regulated.

Under Estonian law “virtual currency” means a value represented in digital form, which is digitally transferable, preservable or tradable and which natural persons or legal persons accept as a payment instrument, but that is not the legal tender of any country or funds for the purposes of Article 4(25) of Directive (EU) 2015/2366 of the European Parliament and of the Council on payment services in the internal market or a payment transaction for the purposes of points (k) and (l) of Article 3 of the same Directive. The following services are subject to specific regulation and require a license in Estonia from the Financial Intelligence Unit:

• “Virtual currency wallet service” means a service in the framework of which keys are generated for customers or customers’ encrypted keys are kept, which can be used for the purpose of keeping, storing and transferring virtual currencies.
• “Virtual currency exchange service” means a service with the help of which a person exchanges a virtual currency against a fiat currency or a fiat currency against a virtual currency or a virtual currency against another virtual currency.
• “Virtual currency transfer service” means a service that allows a transaction to be conducted electronically at least in part through the virtual currency service provider in the name of the initiating party with the aim of moving the virtual currency to the recipient’s virtual currency wallet or virtual currency account, regardless of whether the initiator and the recipient are one and the same party or whether the initiator and recipient are using the same service provider.
• In addition, the organisation, in the name or on behalf of an issuer of virtual currency, of a public or targeted offering or sale related to the issue of such currency, or the provision of any related financial services, is regarded as a virtual currency service.

Virtual currency services are not considered financial services (although they are equated to financial services in terms of AML/CTF requirements).

Virtual currency services are not subject to financial supervision, however, it is likely that they will become subject to financial supervision within the next 1-2 years - possibly before the EU Regulation on Markets in Cryptoassets (MiCA) enters into force.

In the summer of 2022, the Ministry of Finance introduced an updated draft of a new national law which would regulate both crowdfunding services (incl. those which are not regulated under the respective EU regulation) and virtual currency services. If the draft law would be adopted, virtual currency services would be considered financial services and would become subject to supervision by the Estonian Financial Supervision and Resolution Authority (EFSRA). However, given that MiCA has now been agreed upon, it is uncertain if this national law will be adopted as proposed (i.e. if it will cover virtual currency services).

It is possible to establish a company in a day (with an Estonian ID, e-residency or electronic ID of few other EEA states). Otherwise, registration may take a week or so after all necessary documents have been compiled.

Regulated virtual currency service providers are required to have a payment account opened in a credit institution, e-money institution or payment institution that has been established in Estonia or in an EEA state that provides cross-border services in Estonia or has established a branch in Estonia – opening such an account can take several weeks.

The Financial Intelligence Unit has up to 120 days to process the license application after receiving all the necessary information and documents (in due form). In practice the application may take 6 months.

The state fee for applying for the licence to provide the virtual currency services listed above, is EUR 10,000.

Additional costs include: the commission of a financial auditor and internal auditor, state duties, notary fees, and translation costs. If professional legal services are also commissioned to prepare AML/CTF and other internal procedures, these costs may amount to EUR 8,000-15,000.

In case cryptoassets constitute securities, e-money or other regulated financial services, the state duty for applying for a license from the EFSRA is EUR 1,000.

Additional costs include: the commission of the financial auditor and internal auditor, state duties, notary fees and translation costs. professional legal services are also commissioned to prepare the application and internal procedures, such additional costs may amount to EUR 25,000-50,000 depending on the level on external assistance needed.

The service provider must, most notably:

• have a payment account opened in a credit institution, e-money institution or payment institution that has been established in Estonia or in an EEA state that provides cross-border services in Estonia or has established a branch in Estonia;
• appoint a financial auditor (for auditing annual accounts);
• appoint an internal auditor;
• prepare and submit a 3-year business plan;
• prepare and implement AML/CTF procedures and procedures for applying international sanctions;
• prepare detailed IT description;
• management board members must have higher education and at least 2 two years of relevant experience, other fit & proper requirements applicable to board members and owners;
• the registered seat, the seat of the management board and place of business must be in Estonia;
• share capital of EUR 100,000-250,000 (depending on the services provided) must be paid in in cash upon establishment; and
• additional own funds requirements (depending on the services provided and the volumes).