Estonia’s policy of welcoming cryptocurrency and blockchain firms into its nascent digital society could be nearing an end, as regulators, lawmakers, and the Bank of Estonia have been increasingly critical of the country’s e-resident program. Many officials are now calling for increased scrutiny and rule-changes that could see many of those once-welcomed digital firms stripped of their e-resident status, Reuters reported on Friday.
When Estonia created its e-residency program as part of a broader effort to create a true digital society, many tech experts and digital enthusiasts cheered the innovative idea. At one point, the tiny Baltic nation was even considering its own digital currency, the estcoin, for use within its e-residency community. As recently as last June, officials were still considering the option of creating a regulatory framework for initial coin offerings.
While e-residency had its critics, last year’s Danske Bank money-laundering scandal has intensified skepticism and emboldened critics to push for tighter controls. That scandal saw Danske Bank’s Estonian branch under fire for 200 billion euros laundered from Russia and other former Soviet states. Financial Supervision Authority (Finantsinspektsioon) head Kilvar Kessler indicated that the Danske scandal was the last straw:
“The lesson of Danske is, I hope, enough for us. You onboarded customers which were offshore companies.”
Kessler suggested that the country now needs to focus on e-residents to find out who they are and why they need Estonian banking accounts. The current system allows foreigners to obtain digital identity cards which can then potentially enable them to open Estonian bank accounts. More worrisome is that the e-residency program has been open even to citizens of U.S.-sanctioned nations like North Korea – though at least one bank has stated that account applicants are vetted to ensure that sanctioned individuals and companies are blocked from financial services.
There are more than 50,000 current e-residents, and 6,000 e-resident companies registered in Estonia. For the 600 cryptocurrency firms registered as businesses in Estonia, the coming months could see considerable change, if officials follow through on recent proposals. As the central bank and regulators continue to scrutinize and criticize Estonia’s openness, the country’s lawmakers are weighing options that would empower police to examine the firms and potentially pull their licenses.
The proposed rules would also mandate that crypto firms establish an actual business presence in the country. Many of the existing e-resident crypto companies are foreign-owned enterprises with no physical presence in Estonia. As a result, Bank of Estonia deputy governor Madis Muller told Reuters, “I understand that most would not be able to comply - and would not qualify to keep their license.”
Muller also suggested that the current rules are hardly a win-win for his country when it comes to reputation:
“There is a money laundering risk with cryptocurrency operators. We have made it too easy for these crypto operators now. They get a reputational benefit from their link to Estonia. We get the reputational risk.”