28/08/2018
Estonia: Cryptocurrency Heaven and Blockchain-Enthusiasts Heaven
The knowledge economy is one of the pillars of the modern world. #Estonia is a vivid example of that. The state having a population of just over one million people, has managed in a short time to become a Mecca for service providers in #FinTech field. What was the reason for charging into the lead of the virtual world? The answer to an enigma lies in the decision of the Estonian authorities to properly regulate the cryptocurrency industry, thus providing #blockchain companies with opportunities to conduct business in legal field.
Digital Carte Blanche

Estonian companies operating in the cryptocurrency area can apply for special state authorization of two types of business activities:

• Providers of a service of exchanging a virtual currency against a fiat currency.
Owners of such license can provide services of an exchange of fiat currencies for cryptocurrencies, cryptocurrencies for fiat currencies and cryptocurrencies for cryptocurrencies. It allows to receive funds from third parties and transfer them.

• Providers of a virtual currency wallet service.
The holder of this license is entitled to provide custodial services of credentials used to access users' cryptocurrency codes. For example, a licensor is allowed to generate keys for recipients of hot and cold cryptocurrency wallets services or to store such generated keys used for various cryptocurrency operations.

#License Requirements

The Financial Intelligence Unit (#FIU) is the state authority responsible for issuing authorizations.

A company established in Estonia, or a subsidiary (branch) of a foreign company registered in Estonia can apply for the authorizations. The preferred option, both in terms of facilitation of registration and in the context of accelerating the formalities, is to incorporate an Estonian legal entity rather than a branch. The incorporation would usually take up to 5 working days and can be done remotely thanks to high level of public sector digitization in Estonia.

The minimum authorized capital for a private limited company will amount to EUR 2500. This not being mandatory, however, in order to demonstrate reliability of the company when the application is revised by the FIU and increase chances of obtaining a license, it is still recommended to deposit the authorized capital amount.

Among the other requirements for the structure of the Estonian company the following may be outlined:
• at least one shareholder;
• at least one director;
• appointment of at least one official (compliance officer) responsible for implementing measures to counteract money laundering and ensure compliance with international financial sanctions;
• registration address (not the actual location) in the territory of Estonia.

Residency and citizenship of shareholders and directors do not matter. Moreover, the same person can simultaneously act as both a shareholder and a director.

Procedural Aspect: Minimum Formalism

The applicant can apply for both authorizations at once or separately, but in the first case he still has to go through each of the procedures separately (and pay two fees). The applications and accompanying documentation are to be submitted to the FIU. In particular, the following documents (drafted in Estonian) must be submitted:
• application form;
• description of internal security measures (including assessment of internal risks, records storage);
• rules for AML / KYC procedures (in particular, criteria for high-risk and low-risk transactions, their monitoring procedure, description of various risks and control procedures to manage them);
• Instructions and guidelines for determining whether individuals belong to certain groups (for example, politically exposed persons or residents of jurisdictions with insufficient regulation in the area of combating money laundering, etc.);
• power of attorney for representation before the FIU.

The term for consideration of a license application usually takes about 30 days from the filing date. License may be denied when an incomplete set of documents is filed or misleading information is provided, and if the FIU finds the application and related documents inadequate. It is necessary to take into account that the FIU can request additional documents and information.

The state fee for obtaining one authorization is EUR 345. Once the company receives the authorizations it is considered as a financial institution. The company, however, is not obliged to perform any special reporting to tax authorities or FIU. Although, as a case may be, these and other authorities may occasionally issue specific rulings or percepts addressed to the company.

"Know Your Client" #KYC

The FIU imposes rather strict requirements for the procedures to identify license applicants, which is especially important in the light of the EU Fifth AML Directive setting higher standards for providers of services related to virtual currencies.

For the purposes of #AML / KYC procedures, the package of documents submitted to the FIU must include notarized and apostilled certificates of criminal records (no more than 3 months old) and copies of the passports of all persons related to the company (shareholders, directors, ultimate beneficial owner, compliance officer, etc.), executed in Russian or English language.

Also, the FIU, upon its discretion, may request to provide CVs of shareholders, directors, ultimate beneficial owner and compliance officer, a description of the company's planned activities, other documents and information.

If the applicant's shareholder is a legal entity (Estonian or foreign), it is necessary to provide both confirmation of the trustworthiness of the shareholder company itself and of all natural persons persons related to it (that is, documents and certificates on the absence of previous convictions of all directors and shareholders, other persons, if so required by the FIU). For companies incorporated in certain jurisdictions (for example, offshore) this will make it almost impossible to obtain the evidence of trustworthiness.

#Bank Account

Considering that Estonian banks had been especially vigilant in making due diligence as to potential and current clients, the opening of a bank account has become quite a durable procedure. In addition to providing a complete package of KYC documentation for directors, shareholders, beneficial owner of the company and confirming the sources of funds, it is usually necessary to pass a personal interview with the bank, to be thoroughly prepared for.

If an Estonian company does not have an actual connection with Estonia (activity, employees) or its beneficial owners are foreigners, opening an account with a local bank may prove to be problematic, which is also complicated by the fact that banks tend to scrutinize cryptocurrency businesses as having high-risk nature. In practice, however, there is quite a number of options for opening accounts in foreign banks. So far Estonian banks have not been very loyal to cryptocurrency companies, although the situation may change as they get more familiar with the industry.

To Be Continued?

Estonia seems to be determined to keep up the crypto-impetus and not slip into complacency in the innovations field. Not so long ago, the imagination of crypto-enthusiasts was excited by the news that the Estonian government intends to introduce a national crypto currency – #Еstcoin. Although the country's authorities disclaimed the original idea afterwards, it was discussed that Estcoin might be used for the purposes of the Estonian E-residency program, a tool providing a simplified identification for receiving administrative services in Estonia.

Given the comprehensive state support for the crypto-industry, we believe that framework of initiatives aimed at the development of fintech sector in Estonia will expand. But in order to take advantage to the fullest extent possible, mend your sails now, while it is fine weather!

Assisted by the "Quantum Attorneys", you will receive the following services:

• Registration of an Estonian company;
• Accompanying the process of obtaining licenses;
• Preparation of rules, instructions and procedures required for submission to FIU;
• Preparation of all other necessary documentation for obtaining licenses, etc.
Quantum Attorneys
Law firm