Estonia is the most suitable jurisdiction
to launch a crypto-project
On November 27, 2017, on the basis of Directive No. 2015/849 of the European Parliament and of the Council, a new Law on the Prevention of Money Laundering and the Financing of Terrorism entered into force in the Republic of Estonia, which allows companies to legally provide customers with services of exchange, transfer and storage of crypto and virtual currencies based on the following licenses:
- License of the provider of services of exchange of virtual currency for fiat currency
- License of the virtual currency wallet service provider
However, as of March 10, 2020, virtual currency service providers are considered “financial institutions” in Estonia. Thus, both licenses were merged into a single cryptocurrency license called the Virtual Currency Service Provider License. Crypto-companies are required to comply with the same reporting rules and requirements as any other financial institution in Estonia.
In less than 3 years, Estonia has issued more than 2,000 cryptocurrency licenses (400 active as of now), thereby strengthening its position among the most preferred jurisdictions for launching a blockchain project. Globally, Estonia has been selected as a favorable ecosystem for building startups, offering a 0% income tax rate. In addition, it is necessary to take into account the following favorable characteristics of doing business in Estonia: minimal bureaucracy, digitisation of doing business, online company registration, and low administrative costs. Let us remind you that for a completely remote management of your company from anywhere in the world, you can use an electronic resident card.
Comparison of favorable jurisdictions
for starting a crypto-business
Over the past decade, with the rise in the number of virtual currencies, Europe has emerged as a starting point for cryptocurrency service providers and blockchain businesses. In 2018, several jurisdictions changed or created regulatory frameworks in order to apply the DLT (Distributed Ledger Technology).
Eman Pulis, CEO of the Malta AI & Blockchain Summit, said that while blockchain, cryptocurrency and artificial intelligence (AI) businesses still find it difficult to provide banking services in Malta, Estonia and Switzerland continue to gain momentum in attracting companies from these industries (Times of Malta, May 12, 2019).
In the comparative table, we examined the situation with the licensing of cryptocurrency activities of offshore jurisdictions, such as Switzerland, Gibraltar, Malta, as well as the regulation in Estonia.
|Requirements||License VFA Class 4 in Malta||FinTech License in Switzerland||DLT Provider License in Gibraltar||Single Cryptocurrency License in Estonia|
|Issue time||6 months||6 months||4 months||2 months|
|Incorporation state fee||375 EUR||600 CHF||200 GBP||190 EUR|
|Share capital deposit||730,000 EUR||300,000 CHF||28,000 GBP||12,000 EUR|
|License state fee||24,000 EUR||1,750 CHF||30,000 GBP||3,300 EUR|
|Supervisory annual fee||50,000 EUR||3,500 CHF||30,000 GBP||0 EUR|
|Total||754,375 EUR||282,425 EUR||81,432 EUR||15,390 EUR|
Malta vs Estonia
On July 4, 2018, Malta adopted three laws that created the first ever coherent regulatory framework for blockchain (although other jurisdictions prior to Malta already had rules related to cryptocurrencies).
The official government report can be read here. In short, it consists of three laws – the Malta Digital Innovation Law, the Law on Innovative Technologies and Services, and the most famous, the Virtual Financial Assets Law, which details the MDIA (Malta Digital Invocation Authority) regulation in relation to DLT, intermediaries, brokers, custodian services, OTC traders and others.
In theory, Maltese banks do not open accounts for cryptocurrency startups without an appropriate license issued by the Malta Financial Services Authority (MFSA). The process of obtaining licensing for a crypto-business officially takes at least 6 months.
The government is vigilant to protect Malta as an authoritative jurisdiction. This status was recently confirmed by Fitch, which assigned it an A rating with a stable outlook. Malta’s crypto-regulation, adopted under the 2018 Virtual Financial Assets Act, provides for four VFA service provider licenses (Virtual Financial Assets).
Four types of VFA license
- Class 1: reception and transmission of services (investment consulting or P2P DEX).
Obtaining a Class 1 license is accompanied by a registration fee of 6,000 EUR and an annual supervisory fee of almost the equivalent. You will need to deposit an initial capital of 50,000 EUR or 25,000 EUR and professional liability insurance. An authorised entity has the right to receive and transfer orders and/or engage in investment advice in relation to virtual financial assets and/or placement of VFA.
- Class 2: provision of VFA services (project portfolio management, P2P CEX).
Class 2 license provides for a registration fee of 10,000 EUR and an almost equivalent annual supervision fee. The initial capital requirement is be 12,000 EUR. The entity has the right to provide any services of virtual financial assets but cannot engage in portfolio management and trading at its own expense. At the same time, the entity is allowed to own or control the assets or finances of customers in connection with the provision of VFA services.
- Class 3: holding or controlling client funds (OTC trading platform).
For a Class 3 license, there is an application fee of 14,000 EUR and an annual supervision fee of 12,000 EUR for income of less than 250,000 EUR. In such a case, the initial capital must be contributed in the amount of 730,000 EUR. The license allows applicants to provide any VFA services, except for working on a crypto-exchange. At the same time, the entity is allowed to own or control the assets or finances of customers in connection with the provision of VFA services.
- Class 4: exchange of cryptocurrency and tokens (the only license allowing the provision of any VFA services).
The cost of a Class 4 license is 24,000 EUR and the annual fee is 50,000 EUR for income of up to 1 million, which increases on a sliding scale. The initial capital threshold of the company is 730,000 EUR. The official processing time for such licenses is unknown, but it is expected to take from 3 to 6 months. Registration with the White Paper is subject to an additional 8,000 EUR fee plus a 2,000 EUR compliance fee.
It is true that Maltese licenses are processed slowly. No DLT platform has yet received a VFA license, whilst other jurisdictions such as Estonia and Switzerland have already occupied this niche.
The software system auditing process should be performed by third party service providers who have successfully obtained MDIA approval as system auditors. The system audit fee is currently 3,000 EUR, plus an additional 2,000 EUR for initial processing charged by the regulator, for a total of 5,000 EUR.
The authorisation process for system auditors requires an initial processing fee of 7,500 EUR and a registration fee of 15,000 EUR, resulting in a total cost of 22,500 EUR for the entire process.
Results to date
Although cryptocurrencies are not legal tender, they are recognised by the government as “a medium of exchange, unit of account or store of value”. There are still no banks in Malta supporting cryptocurrency business. Also there is no specific legislation on the taxation of cryptocurrency companies in Malta, and currently VAT does not apply to transactions involving the exchange of fiat currency to cryptocurrency.
The Maltese authorities are doing everything possible to filter out potential virtual currency service providers who, in turn, must be impeccably versed in the innovative aspect of the blockchain sector, and maintain a reputation as a reputable financial center that has been trying not to attract fraudsters from shady banks for many years. Hence follows an impressive price list for the acquisition of local crypto-licenses and many additional payments. An annual supervisory fee follows each VFA license.
As of April 2020, no licenses have been issued by the Malta authorities. Binance did expand their headquarters to Malta in 2018, but their plans to open a bank account and launch a security token trading platform had not been accomplished.
One of the main reasons why Estonia has become the dominant force in the European crypto-industry is the relatively low fees for obtaining a license to start a business in the country. The relatively impressive numbers are mainly due to the initiative of the Estonian government to incorporate a crypto-culture into the country’s economy by application of a technologically neutral and supportive approach to innovation in the cryptoasset industry, while creating new opportunities for both emitents and investors.
The Estonian cryptoasset industry is largely based on the recently adopted Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT). The amendments to the Law entered into force on March 10, 2020, and as of July 1, 2020, new requirements and stricter regulation were required. Although cryptoassets do not have the same legal status as fiat currency in Estonia, they are allowed to be used as a means of payment and exchange.
Many believe that Estonia is at the forefront of blockchain and decentralised technology by implementing the projects like KSI and X-Road. In 2001, Estonia developed its own decentralised distributed system – X-Road, and has been using the KSI blockchain platform since 2008 in the registries of codes of healthcare, judicial system, law, security and Commercial Code, among which are e-Police, e-Law, e -Justice, as well as private sector e-services such as digital ID, e-Residency, e-Governance, e-Tax, i-Voting and e-Health.
A Board Member of the company can apply for a cryptocurrency license in Estonia. An application for a license can be submitted electronically with an e-Resident card, when visiting a notary in Tallinn, or by issuing a power of attorney to a representative of Company in Estonia OÜ so that we can submit the application for you.
The state fee for a single cryptocurrency license is 3,300 EUR. The fee must be paid to the Estonian Ministry of Finance (FIU). The issue of a license is decided by the Bureau of Data on Money Laundering (RAB) within 60 working days after the application is submitted. The ease of the process does not mean that the regulations is not taken seriously.
In connection with the Money Laundering and Terrorist Financing Prevention Act, some recent amendments have been made to establish stricter boundaries for companies applying for an Estonian crypto-license.
- The minimum share capital of a crypto-company is 12,000 EUR, and its full payment before applying for a crypto-license is mandatory. This amount can be further used to finance the commercial activities of the company.
- The state fee payable to the Estonian government is 3,300 EUR.
- A corporate IBAN account is required before applying. Estonian banks do not accept applications for opening a bank account from crypto-companies, however, companies have the right to open an account with the European Electronic Money Institution.
- The Management Board and the place of business must be located in Estonia.
- The company applying for the license must have a legal office in Estonia.
- The presence of an Estonian citizen Company Director is mandatory.
- After applying for a crypto-license, the KYC/AML officer will have to go through an interview with the RAB to confirm their skills and suitability for the position.
Although Malta initially established itself as a leader in crypto-jurisdictions, those in the know understand that the offshore has lost its dominance due to the creation of cryptocurrency structures from scratch and the tightening of regulation of crypto-activities. The “blockchain island” turned out to be a pioneer in marketing rather than creating an enabling environment for the crypto-business. Malta’s minimal share capital requirements, time and bureaucracy costs, running costs incurred by Maltese companies make Estonia a much better alternative and even encourage Maltese entrepreneurs to relocate their businesses to the Baltics.
Furthermore, only one cryptocurrency license is required in order to legalise any crypto-activity in Estonia. This strengthens its position among the most convenient and preferred jurisdictions for launching a blockchain project. The digital state on a global scale has been chosen as the most favorable cryptocurrency ecosystem for a variety of reasons. Eleven years ago, the Estonian government developed a profitable infrastructure and began to introduce not only the blockchain technologies, but also a full-fledged electronic state in all areas of the public and private sectors. After all, nothing attracts entrepreneurs more than convenience, and there is no doubt that Estonia is currently second to none on the global stage.
Company in Estonia OÜ specialists will be happy to assist in obtaining a cryptocurrency license. Based on the needs of customers from all over the world, Company in Estonia OÜ has developed an all-inclusive offer “Company & Crypto-License in Estonia”, which includes the registration of an Estonian company plus all the necessary services for obtaining a crypto-license. Assistance includes drafting the necessary documents, drafting procedural and KYC rules of a company, translation of documents into Estonian and support throughout the entire process of obtaining the license.
Company in Estonia OÜ offers a wide range of additional services, such as assistance in selection and rental of an office; assistance in making company share capital contribution; assistance in recruiting a local Company Director, signing a working contract; training of a Company Director for KYC/AML requirements; as well as KYC/AML Officer services.
An individual customer approach is vital for us. We take care of your business needs, combining both personalised order processing and professional consulting, reasonable rates, and company registration services for clients from all over the world. In addition, Company in Estonia OÜ provides continuous support to entrepreneurs in accordance with the latest updates in Estonian legislation.