Estonian government approved draft legislation that tightens regulation of virtual asset service providers

Estonia has moved to calm investor fears about tougher rules on cryptocurrency, a sector which has been a target of regulatory scrutiny for the Baltic nation since at least 2019.

According to Bloomberg, the country is considering new rules that would enforce due diligence, audits and higher levels of capital for crypto firms ahead of a review of its money laundering policies this quarter.

From the level of capital perspective, the new bill proposes steeper capital requirements for VASPs (virtual asset service providers). Depending on the services provided, VASPS will now be required to have a share capital of 125,000 euro (around $141,000) or 350,000 euro (around $395,000). For comparison, the current level is 12,000 euro or around $13,500.

The proposed rules still need parliamentary approval. 

The Estonian Finance Ministry issued a statement and a FAQ after speculation the new rules would shut down crypto wallets and ban trading in Bitcoin. Estonia “recently introduced draft legislation that would tighten regulation of virtual asset service providers,” the finance ministry said in a statement. “However, Estonia has no plans to make owning cryptocurrencies illegal, as some misconceptions on social media claim.”

The Baltic nation was one of the first countries to grant cryptocurrency licenses in 2017, attracting a surge in companies interesting in doing business in the sector. It has since revoked about 2,000 of these and only around 400 licensed companies remain. Estonia took a tougher stance on crypto after allegations that billions of dollars of illicit cash flowed through the local unit of Denmark’s largest lender Danske Bank A/S, in what was then Europe’s biggest ever dirty-money scandal.

______________

On December 23, Estonian government approved draft legislation that tightens regulation of virtual asset service providers, or VASPs. The bill – which now has to pass through Parliament and is planned to enter into full force in the first half of 2022 – brings regulation of VASPs more in line with e-money institutions and payment service providers but does not directly affect customers or individuals who use private wallets from owning crypto. However, Estonian VASPs are not allowed to provide anonymous services and must identify their clients.

The regulation builds further on the general prohibition for Estonian VASPs to open anonymous virtual accounts, a rule that came to force in summer 2020 after license applications boomed and risks for financial crime sharply spiked. The rules are not applied to customers, but to VASPs who conduct activities for or on behalf of a natural or legal person as a permanent business.

This means that the legislation does not contain any measures to ban customers from owning and trading virtual assets and does not in any way require customers to share their private keys to wallets. The regulation does not affect individuals who own virtual currency through a private wallet not provided by a VASP.

However, accounts opened with Estonian VASPs cannot be anonymous and Estonian VASPs should treat anonymous services as higher risk – and apply real time transaction monitoring solutions, to spot and, if necessary, notify suspicious activities to the FIU. Reducing anonymity does not mean that personal data collected by the service provider will become public.

More details here: How will new Estonian draft legislation affect virtual assets and crypto?