Recently, there were discussions regarding Estonia’s new law on cryptocurrency, the revocation of 500 crypto licenses in Estonia, and companies are exiting from Estonian regulatory jurisdiction.
This month will be dedicated to the topic of how not to lose the cryptocurrency license in Estonia. It will consist of 4 articles. The purpose of these articles is to give recommendations for those who are considering incorporating a crypto business in Estonia and for those who are currently operating in Estonia which could help with not losing their licensing.
There will be several articles on this topic. Let’s start with first one.
Do your research before engaging with a legal partner in Estonia
Yes, it might sound odd, but I think one of the reasons why companies are losing their crypto licenses are some consulting companies. I won’t mention specific firms, but I am aware that some consulting companies are conducting very aggressive marketing, and are spamming their adverts for a single reason — to sell a “ready company” with licenses and, in some cases, with a bank account.
Why are they to blame? First, they spam and try to sell their services to everyone who is working in the cryptocurrency business, which I feel isn’t appropriate. Estonian licenses are for very specific services and may not be applicable to everyone who is working in the crypto industry. I have personally met people who bought a “ready company” from one of those consulting companies. When figuring out their business model, I came to the conclusion that they did not really need them.
Second, a bank account, which was opened for a company before the sale, will most likely be suspended or blocked from operating normally when a buyer will start changing the shareholders and directors. In Estonia, banks are very conservative and usually they do not work with crypto business and non-Estonian residents, especially when the company cannot prove the direct connection to Estonian jurisdiction. Having an Estonian company is not enough.
Be ready to start the business within 6 month after the issuance of the license
The widespread reason for revocation of the cryptocurrency licenses by the FIU is that some companies were simply not able to start operations within a specific period of time. Under Estonian law, a company has 6 months to start the business once the license has become valid. The important detail here is when it becomes VALID.
During the application, the applicant indicates the specific date for the license validity to start. For example, when you are applying for a cryptocurrency license, but you forecast to not start operations within 6 months, there is a possibility to delay the starting date. If you think it will take 1 year to start operating, just indicate the date in the future when you would like your licenses to start being valid.
This seems simple, however it has become the reason why some companies have lost their licenses. The FIU is responsive and can give an extension only in a case where you can prove that the delay with the launch of the business was outside of your control. If you cannot prove this, the FIU is usually strict with the deadline and exercises the right to revoke the cryptocurrency license.
It is just a small detail in the application to mark the start date for the validity of the license. Therefore, pay attention and discuss it in detail with your legal partner.
AML/KYC compliance is the core focus if you want to keep your licenses
I’ve seen many companies that were granted licenses with the help of consulting companies did not have a real understanding of how important AML compliance is. They were thinking once they have a license, they can ask something from the customer and do their business. However, it is not the case.
The cryptocurrency exchange in Estonia is required to undertake strong KYC/AML measures of its customers from the onset with customer onboarding and finishing with the transaction monitoring. To comply with AML/KYC requirements requires a lot of human resources, money and legal expertise. Sometimes the requirements are a bit confusing in the Estonian AML framework which create additional risks for the cryptocurrency.
A cryptocurrency exchange registered in Estonia is required to have an AML officer who is the resident of the country and with specific experience in AML. To find such a person is a real challenge in a small country like Estonia with lots of registered cryptocurrency businesses.
This requirement for a local AML officer impacted the business of some of the consulting firms in Estonia, as it has become a market practice for them to provide the services of an AML Officer. Imagine if one consulting firm is the registered AML Officer for 20 more companies. How good of a quality can their services be?!
This is the risk to deploy a firm as described to be an AML Officer for a cryptocurrency exchange as the FIU might have some questions for an individual who is an AML Officer for more than 2 companies. Usually, the AML Officer has a lot of requirements and is usually under time constraints. An individual can be the AML officer for more than 1 company, however this is not a good standard to follow.
My recommendation is take AML/KYC compliance seriously. One should try to find an AML Officer dedicated to one company only. Additionally, one should do the research about what can be outsourced, e.g. KYC or AML cryptocurrency screening services.
Currently, the FIU is a unit of the Estonian Police and Board Guard. However, there is ongoing discussion to make the FIU a separate agency and to grant them more power and resources. Consequently, they will have more expertise for supervision of companies to comply with the relevant AML regulations.
My advice is to “do your own research” when selecting your legal partner in Estonia. Try to avoid consulting companies which are spamming you or employ aggressive marketing. Usually, they do not have time to really dive into your business model to understand what you really need. Their aim is solely to sell you the licenses and other services.
There are also some consulting companies operating or located outside of Estonia, e.g. in Russia, Israel etc. Such companies cannot know the local practice very well. Engaging with them, you risk to receive not accurate information. Moreover, in cases, they will engage an Estonian law firm to help, your fees will be much higher, since the consulting companies will add extra on top of the fees from an Estonian law firm.