Blockchain Technology and Cryptocurrency in Estonia | 2022
Blockchain technology and cryptocurrencies have been growing industries for over 20 years now, ever since Satoshi Nakamoto created Bitcoin and blockchain technology was implemented. While the idea of blockchain has been around far longer than cryptocurrencies and the link between them is noticeably big, one can argue that their purposes of use can be vastly different. In simple terms, blockchain can be used, among other things, to create secure decentralized information systems, while virtual currencies are mostly used to store wealth, make investments, and perform transactions. The Estonian government and Estonian entrepreneurs were pioneers in adopting both innovations earlier than most countries. Therefore, let’s do a small recap about the use and developments of blockchain technology and cryptocurrency in Estonia.
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Blockchain Technology in Estonia
While the general opinion is that blockchain technology had its first real-word application in 2009 with the launch of Bitcoin, Estonia started using KSI blockchain (Keyless Signature Infrastructure) in its digital strategy in 2008.
The story goes back to the year 2000 when Estonia started its journey towards becoming one of the technologically most advanced countries in the world. It was then when the government made a pledge to put computers in every school and declared that access to the Internet should be a human right. This significantly boosted the use of internet and computers in general and has led to the norm that all interactions between the state and the general public can be done over the internet.
In 2001, Estonian IT visionaries developed X-Road, which is the decentralized, distributed information system that allows most local public and private sector information systems to be linked up and function together. It was in 2008 when blockchain was first implemented to protect data, devices and to provide e-services.
Estonian e-services are full range public services which allow secure transactions. With the e-services, all outgoing data is digitally signed and encrypted while all incoming data is automatically authenticated and logged. This means that the system and data is safe and reliable for all parties. Most popular e-services that Estonia offers are e-Health, e-Tax and the e-Business register.
These services are also made available for people from outside of Estonia with the help of e-Residency that enables people from all over the world to establish and manage a business in Estonia remotely in order to participate in the Estonian and European economy.
Since the implementation of blockchain in the governmental IT system, efficiency, security, and transparency of transmitted data has significantly improved and has led to countries like Finland, Kyrgyzstan, the Faroe Islands, Iceland, and Japan to adopt it with the help of experts from Estonia.
Estonian Businesses Using Blockchain
Since Estonia was an early adopter of blockchain technology, there are also many businesses that use blockchain in their products and/or services, and many private businesses can link up to the government’s e-services system to authenticate their customers. A prime example of this is that one can access their bank account with the same card and passwords that they use to communicate with the government and digitally sign documents.
Excluding companies that deal with cryptocurrencies, the most well-known Estonian company that develops solutions based on blockchain technology is Guardtime. Guardtime’s KSI blockchain is used by the US and Thai governments, and businesses like Ericsson, Verizon, and Lockheed Martin. Furthermore, Guardtime is in partnership with Microsoft, Moller-Maersk, EY, Willis Towers Watson, and others to develop a platform for marine insurance.
Another successful blockchain technology based Estonian company is Icefire, which was acquired by Checkout.com, the leading cloud-based payments solutions provider in 2021. Icefire had extensive in designing and building transformative technologies for banks and fintech companies, healthcare institutions and workflow management solutions for businesses from both the public and private sectors.
Funderbeam used to implement blockchain technology to record trading transactions when they launched their crowdfunding platform in 2016. While being one of the first in the world to trade real-world assets in shares using blockchain, they encountered limitations related to early adoption, regulatory compliance and practicality, thus straying away from using it in 2019.
Cryptocurrency in Estonia
Cryptocurrencies have been around in Estonia ever since the launch of Bitcoin and locals have been mining and trading it before it became widely known. Cryptocurrencies have always been legal in Estonia and will continue to be legal thanks to the local and EU regulators that have the objective to support innovation while mitigating the risks that the alternative economy might bring to the financial system or to Estonia as a whole.
In 2014, locals established the Estonian Crypto Association which has the purpose to unite companies related to virtual currencies or blockchain technology and that holds regular events regarding both topics ever since for people and businesses interested.
Cryptocurrency Regulation in Estonia
As mentioned earlier, Estonia was a pioneer in adopting cryptocurrencies and it did it by being the first country in the European Union that provided a legal framework for virtual asset service providers (VASPs) and enabling them to obtain operating licenses. The first AML law that included VASPs, set strict know-your-client (KYC), customer due diligence (CDD) and anti-money laundering (AML) measures that these businesses were set to follow.
However, the lack of transparency and trust within the sector became apparent when businesses associated with Estonian VASP licenses were reported for disappearing with investor’s money. This meant that the government had to drastically improve the legislation and lead to new amendments in 2019 and 2020 after which over 1,000 financial service licenses were revoked as businesses became actively non-compliant with the legislation.
Today, businesses offering services with cryptocurrency in Estonia are well regulated following the amendments to the AML/CFT legislation in March 2022. While holding, trading cryptocurrencies as a private individual in Estonia continues to be completely legal and can be done without a license, providing services like virtual wallets services, exchange, transfer, and initial coin offerings (ICO) requires licensing from the Estonian Financial Intelligence Unit (FIU).
Before a business can obtain a VASP license in Estonia, they must be completely compliant with the applicable AML legislation upon submitting their application to the FIU and this is something that RCA can help you with!
Taxation of Cryptocurrency in Estonia
There are no taxes related to cryptocurrencies in Estonia, and the way that they are taxed is no different from how other assets and profits. The only real difference lies in whether you are dealing with cryptocurrencies as a business or a private individual.
According to the Estonian Tax and Customs Board taxes only apply to profits and profit with cryptocurrencies is generated when:
- there is a change in prices, which can occur due to selling or trading virtual currencies for FIAT money or other virtual currencies;
- mining virtual currencies;
- renting out cloud storage capacity;
- paying for goods or services in virtual currencies;
- receiving as a form of payment for goods or services (and salaries).
Likewise, profit is not generated when:
- virtual currency is donated;
- buying virtual currency with FIAT money;
- transferring virtual currency between own digital wallets.
Read the full article about cryptocurrency taxation in Estonia.
Estonian Businesses Using Cryptocurrencies
As of June 16, 2022, there were 269 businesses that were licensed by the FIU and allowed to provide virtual asset services to third parties, compared to 381 in the beginning of 2022 and before the new amendments came into force.
The most well-known business that deals with cryptocurrency in Estonia and allows locals to hold and trade virtual assets is Change. Change was founded in 2016 and today enables its users to invest in over 50 different cryptocurrencies along with stocks, gold, and derivatives.
LHV, which is one of the biggest banks in Estonia also allows investors to trade virtual assets within their platform and was one of the first traditional banks in Estonia to shift its focus towards enabling its customers to invest in crypto assets.
Regulatory Compliance Associates – Experts in Their Field
Whether you are seeking legal guidance to understand if Estonia is the right jurisdiction for your upcoming business or are already active and need expert help, please feel free to contact us!
RCA offers a variety of compliance services and training that operating and aspiring businesses which need authorization from the Estonian government can benefit from.
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