How the New Regulatory Amendments Draft Really Affects VASPs in Estonia

VASPs

On the 16th of December, the new draft that regulates virtual assets and co-financing was sent under coordination by the Estonian Ministry of Finance. On the 23rd of December, the Estonian government approved the draft legislation, and it needs to undergo a total of three readings before it can enter into force. The primary objective of the new law is to lower the risks of money laundering in the virtual assets sector, improve transparency and to strengthen the local authority’s competences in licensing and supervision processes.

Proposed Changes Per the New Anti-Money Laundering Law Draft

There are various changes that the law will bring along once it comes into force, and many of them are aligned with international standards. However, the most significant changes will happen to the licensing and supervision process, share capital requirements and the amount of transparency virtual asset service providers must have.

Issuer of VASP Licenses and Supervision

Per the current legislation, the Estonian Financial Intelligence Unit (FIU) issues virtual currency service licenses and performs supervision of the sector.

In the future, the Finantsinspektsioon, who already conducts supervision over banks, insurance companies, insurance intermediaries, investment firms, etc., will take these duties over from the FIU. This means that all applications, claims and compliance requirements will be processed by Finantsinspektsioon, and they will be the new central point for the virtual assets sector in Estonia.

Virtual Currency Services and Share Capital Requirements

The most significant changes will happen to the share capital requirements that intermediaries and VASPs must have. The amount depends on the type of service a company offers. Therefore, it is especially important for you to completely understand under which category your business falls before planning your next step.

Services Specified in the Draft

Virtual currency services that specified in the draft’s §4 section 2 and their explanations from the draft are:

1) Virtual currency wallet service – A service that creates or maintains encrypted keys for customers that can be used for the objective to store, maintain, and transfer virtual currencies.

2) Virtual currency exchange service – A service in which a person exchanges virtual currency for FIAT money or FIAT money for a virtual currency or one virtual currency for another virtual currency.

3) Virtual currency trading platform hosting service – A service where a virtual currency service provider manages a platform where third parties interested in buying or selling a virtual currency can communicate in a way that results in a contract, exchanging one virtual currency for another or for FIAT money.

4) Virtual currency transfer service – A service that enables a transaction to be made at least partially electronically through a virtual currency service provider on the behalf of the originator for the purpose of transferring virtual currency to the recipient’s virtual currency wallet or account, regardless of whether the originator and the recipient are the same person or whether the originator and the recipient of the transaction use the same service provider.

Also, per the §4 section 7, the issue of a virtual currency, the organization of the offer or sale, or the provision of financial services related to the offer or sale are also deemed to be a virtual currency service.

New Share Capital Requirements

Now, if you have identified which service your company offers, you can understand which are the new share capital requirements:

According to the 73 section 1 of the draft, the share capital of a provider of intermediation of investment instruments shall be at least €25 000. (This goes for companies, who list tokens on their homepage or offer NFTs)

Per the 73 section 2 of the draft, the share capital of a VASP shall be:

1) at least €125 000 if the VASP provides one or more services specified in 4 section 2 points 1, 2 or 4. (Businesses that offer a virtual currency wallet service, virtual currency intermediary service or a virtual currency transfer service)

2) at least €350 000 if the VASP provides the service specified §4 section 2 point 3. (Businesses that offer a virtual currency trading platform hosting service)

Also, when setting up as a service provider as a new company, all share capital requirements may only be contributed in cash.

Higher Transparency by VASPs

The draft also specifies that accounts and wallets opened at and hosted by Estonian VASPs may not be anonymous, and all accounts and wallets must be linked to a customer. Therefore, a proper KYC process must be established and the ability to identify customers and their transactions must be in place. This increases the transparency of the sector and mitigates the risks of potential financial crime taking place through Estonian service providers.

Contrary to the information that has circulated, the transparency requirements do not apply to customers of Estonian virtual asset service providers or to private individuals that own virtual currency through a private wallet that is not provided by a VASP. Therefore, hardware wallets (cold wallets) that are beyond the control of a service provider do not fall under this category.

The law does not require customers to share their private keys or wallets or ban them from owning or trading virtual assets.

Consult Experts on How the New Estonian AML Law Affects Your Business

Recently, there has been a lot of misinformation posted on different media outlets and social media regarding these changes and how they affect businesses that are already operating or are just starting out.

RCA can offer you an in-depth consultation on the specific rules in the proposed legislation that your business must start following and how you can already take your first steps towards becoming completely compliant with the new Estonian AML law before it enters into force.

If this sounds something that you are interested in, please feel free to reach out to us and book your consultation with real experts!

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