Crypto License in Estonia

Crypto-authorization process in the Estonia Virtual Currency Registry

The crypto authorization process to secure the license in Estonia is straightforward. Refined by the years, entering the Estonia virtual currency is now a very clear procedure. The complete set-up from scratch to finally receive an authorization as a virtual currency business in Estonia takes from 3 to 6 months.

First, a limited liability company shall be formed in Estonia. It is now a requirement for the crypto license in Estonia to have a local place of business, therefore it is expected from virtual asset services providers to have a local company, a local office and local personnel.

Once the company is formed, the application must be prepared by carefully putting in place every requirement listed in the official act.

This means having, among other things, the following things prepared:

• A corporate account opened with the fully deposited share capital of the company (100,000 EUR or 250,000 EUR for crypto remittance businesses);
• Renting a local office space within the Republic of Estonia;
• Hiring a local AML officer for transaction monitoring and communication with the Financial Intelligence Unit;
• AML-KYC procedures, compliant with the Money Laundering and Terrorism Financing Prevention Act;
• A detailed business plan including financial projections, the company assets, the service to be provided and to whom, risk management principles and strategy applied, etc.

It is critical to the success of the crypto authorization process to perfectly understand the expectations of the Estonian authorities and to have them lined up beforehand.

The registration of Estonia Company in Register of crypto currency companies

Once everything is set for the registration of the Estonian company in the register of crypto currency companies, things are fairly simple.

A request for authorization shall be formulated to the Register of Economic Activities, A back and forth communication with the Financial Intelligence Unit begins, in order for the Estonian “financial policeman” to fully understand the intended activities to be performed from Estonia.

This registration process takes several months and usually includes interviews and questioning from the regulatory authorities that are looking deep into the crypto business.

Governmental Statements on Crypto in Estonia

The severity of the Estonian regulators cannot be overstated. The requirements are heavy and the expectations are huge. The Estonian lawmaker is not looking to give away licenses, applicants shall demonstrate a very serious profile and will to work in and from Estonia.

This is best demonstrated by official statements from FIU director Matis Mäeker, showing his stance and therefore the stance of the FIU. In May 2023, he declared “We [...] see an increasing trend of Estonian companies being used for money laundering and related criminal activities in other countries.” when asked about the riskiness of crypto assets.

After revoking about 100 crypto licenses in the Spring of 2023, Mäeker said: “In the applications, we found very many suspicious circumstances on various topics. This calls into question the credibility of the companies that wanted to do business here – their actual desire to provide services in Estonia or, vice versa, shows the desire of certain persons to use the Estonian economic and financial system for illegal activities.”

These two recent quotes are an illustration of the state of mind of the Estonian crypto regulator. They expect applicants to show an immaculate modus operandi and to provide a real effort into settling in Estonia and participating in the local economic life.

Requirements for companies engaged in crypto activities in Estonia

Companies engaged in crypto activities in Estonia are expected to meet certain requirements at all times. These requirements are explicitly described in the Money Laundering and Terrorism Financing Prevention Act of 2017, regularly updated since then, the last time in February 2023.

A crypto company in Estonia is for example expected to hold its share capital in full at all times. This share capital is stated to be at a minimum of 100,000 EUR for most crypto activities.

In the case of a registration as a “virtual currency transfer service”, the minimum share capital requirement rises to 250,000 EUR.

AML/KYC policies that shall be applied by Estonian VASPs are among the strictest of all crypto licensing frameworks. For example, basic due diligence applies for every customer, no matter where they are from and how little they may spend in the VASP services.

This means that the totality of the activity on the services provided by the crypto business shall be monitored.

Finally, Estonian crypto licensed companies are expected to really invest themselves in the territory of the Republic of Estonia. This means that the small Baltic state shall be the place of business of the company.

In other words, a local office space is required, with domestic employees including a compliance officer, responsible for AML-KYC implementation and operation.

The law states that the FIU can refuse licensing a crypto business if “it does not intend to operate in Estonia or its business has no connection to Estonia or – apart from a place of business and members of the management board who are in Estonia – its business has no significant connection to Estonia”.

The process of setting up a company for a cryptocurrency business in Estonia

Setting up an Estonian limited liability company (OÜ, osaühing) has been made easy thanks to the digitization of processes in Estonia. A lot of crypto entrepreneurs and others have been able to open their Estonian company from the comfort of their homes.

Done remotely, the incorporation process in Estonia still requires the notarization or Apostille of the identity documents of the board members. Once this administrative requirement is fulfilled, the process is streamlined and quick. The applicant shall decide on a company name and provide contact details.

In the case of setting up a company for a cryptocurrency business in Estonia, it shall be noted that the minimum share capital required for applying for a license has to be entirely paid up beforehand. This minimum share capital is of 100,000 EUR in most cases, but raises to 250,000 EUR for the virtual currency transfer service activity, a crypto license that covers remittance of virtual assets on behalf of the clients.

Taxation for cryptocurrency companies in Estonia

Estonia has one of the most advantageous corporate tax rates among non-tax havens and so called offshore jurisdictions. Revenue generated by Estonian companies are not taxed (0% corporate income tax), as long as they are not distributed (that means paid either as a salary or a dividend payment).

Dividends are taxed at a rate of approximately 20%. Beforehand, the participants of an Estonian crypto licensed company should make sure that their country of fiscal residency has a double tax treaty with Estonia. A tax lawyer shall better advise them on how to properly transfer generated wealth to their personal accounts.

Obligations for crypto companies in Estonia

A licensed crypto company in Estonia should have implemented strong AML-KYC policies and must enforce them at all times. These policies are significantly more strict than what crypto businesses are used to work with in various jurisdictions.

Monitoring and reporting suspicious transactions is the bread and butter of the compliance officer (or AML officer) of an Estonian crypto company. Clear communication shall be established and maintained with the FIU, who has a zero tolerance policy with money laundering risks.

Accounting is naturally an obligation in Estonia that also applies to crypto companies. Filing annual accounts and reports is also mandatory.

Any virtual currency service provider in Estonia shall have its accounts audited every year. Plus, as an additional measure of transparency, the accounts cannot be audited more than five years in a row by the same auditor.

These drastic obligations contribute in making Estonia one of the most trusted crypto licenses in the world. Failure to follow these obligations can lead to serious sanctions.

Sanctions for violating Estonia crypto-business obligations

The 2023 updated Money Laundering and Terrorism Financing Prevention Act has a detailed subsection listing all the sanctions and fines that apply to various wrongdoings.

We can list, among others, the following cases and the sanction that applies, to give an example of the height of the punishment that awaits crypto companies in Estonia that wouldn’t respect the obligations set by law:

• Not implementing AML measures: up to 400,000 EUR;
• Not applying KYC due diligence: up to 400,000 EUR and possible detention of the AML officer;
• Not reporting suspicion of money laundering or terrorist financing: up to 400,000 EUR.

Though some of the sanctions apply to the legal entity at fault (usually with a fine set up to 400,000 EUR), most cases where the responsibility of the breach of duty can be imputed to an individual can lead to this individual being personally liable, resulting in fines and detention by the police services of Estonia.

Repeated breaches or serious contravention of the law can result in the license being revoked. The FIU is reputed for easily deciding to revoke licenses.

It has been made clear by the FIU director since 2021, Matis Mäeker, that there will be no tolerance for breaches of the law and the AML-KYC policies in force. It is certain that a crypto business breaking the law in Estonia will be exemplarily sanctioned.