Estonia to crack down on cryptocurrency firms

After riding the initial wave of the digital-currency revolution half a decade ago, Estonia is cracking down on the ballooning industry in a cautionary tale for would-be crypto hubs.

With a key review of its anti-money laundering enforcement policies by the Council of Europe slated for early next year, the government of the Baltic nation is weighing firmer oversight of what’s become a popular European centre for digital coin trading and the accompanying infrastructure.

“We will toughen our supervision, we will toughen our approach which concerns the market entry,” said Matis Maeker, the director of Estonia’s Financial Intelligence Unit (FIU), in an interview. “We were the first country to regulate them, this was a gateway for them to have a licence because no one licensed them.”

The FIU is an independent body affiliated to the Finance Ministry and has the right to grant and revoke cryptocurrency licences as part of its main remit fighting money laundering.

For the euro area and NATO member of 1.3 million people it’s an urgent issue. The country is trying to move beyond a sprawling money-laundering scandal in 2018 that saw Danske Bank’s Estonian unit handle 200 billion euros (US$232 billion) of suspicious transactions.

Since then, authorities have revoked about 2,000 licences for crypto exchanges and wallets, and now the Estonian government is considering new legislation to tighten oversight across the board. That includes requirements for audited annual reports, higher capital levels, as well as due diligence thresholds on transaction volumes.

Governments around the world are grappling with how to regulate digital assets. While China has imposed a ban on crypto transactions, Bitcoins are designated legal tender in El Salvador.

In Estonia, attitudes soured further in April when the country’s security services investigated a company called Shitcoins.club. The firm, whose ATMs convert clients’ physical banknotes into anonymous digital coins, was designated a security risk and its licence, held by a company called Virtual Planet, was revoked by the FIU. At the time, Shitcoins.club denied wrongdoing and argued that the transactions were not anonymous.

While the crypto companies may be registered in Estonia, their client base is international. The sector’s top customers are in the US, Venezuela, Russia, Vietnam, Indonesia, Brazil and India, the FIU said earlier this year.

The firms handle transactions equivalent to more than 40% of the Estonian banking sector’s cross-border payments, or more than 20 billion euros, Mr Maeker said in a separate interview with the Eesti Ekspress newspaper.

In a 2020 study, only 10% of crypto-service providers licensed in Estonia had accounts with local banks. About 40% banked with Lithuanian institutions and 20% used UK lenders.

According to FIU chief Mr Maeker, had Estonian officials been able to predict the risks associated with crypto companies in 2017, they wouldn’t have allowed such explosive growth.

“Definitely the decision would have been different,” he told Bloomberg. “We are learning, but I also want to make the remark, the entire world is learning.”