Cryptocurrency Regulations in Estonia Prior to 2023

Before 2023, Estonia was recognized as a forerunner in regulating services related to cryptocurrencies. The country’s approach to cryptocurrency regulation was open, innovative, and in many aspects, more advanced compared to other EU member states.

Regulatory Framework and Legal Status: Cryptocurrency exchanges were legal in Estonia and required to register with the Financial Intelligence Unit, supervised by the Financial Supervisory Authority. Despite not being accepted as legal tender, the Estonian government regarded cryptocurrencies as “value represented in digital form.” This classification was crucial for tax purposes, although cryptocurrencies were not subject to Value-Added Tax (VAT)​​.

Amendments to AML/CFT Legislation: In 2017, Estonia introduced the Anti Money Laundering and Terrorism Finance Act, bringing robust new regulations for crypto businesses operating within its jurisdiction. These regulations included strict reporting and Know Your Customer (KYC) and Anti-Money Laundering (AML) rules. The 2017 amendments were part of Estonia’s efforts to mitigate the risks of money laundering and terrorist financing more effectively​​​​.

Tightening of Licensing Requirements: Estonia’s government passed regulations in 2019 to tighten licensing requirements for cryptocurrency service providers. These regulations asserted that virtual currency service providers would be treated similarly to financial institutions under the Money Laundering and Terrorist Financing Prevention Act. In late 2020, the Estonian government revoked over 1,000 operating licenses after amendments to the law rendered many cryptocurrency service providers non-compliant with the updated regulations. Before these changes, cryptocurrency exchanges had to obtain two licenses: the Virtual Currency Exchange Service License and the Virtual Currency Wallet Service License. However, after tightening AML controls, these two licenses were merged into a single Estonian Cryptocurrency Exchange License​​.

New Requirements for Market Participants: Estonia introduced new requirements for Virtual Asset Service Providers (VASPs). These included having a sound internal compliance and risk management framework, adequate share capital, a business plan, and a substantial local presence in Estonia, among others. These amendments aimed to align the cryptocurrency industry’s regulatory standards with those of e-money institutions and other licensed financial service providers in Europe​​.

Enforcement and Compliance: Both existing and new VASPs were required to conform to these new regulations. This included reviewing and possibly improving internal controls, risk assessments, and management board composition. Auditing became mandatory, and internal auditing was required to ensure the effectiveness of a company’s internal controls and regulations. The new AML Act also had specific provisions regarding transaction monitoring and sharing of transaction data​​.

In summary, Estonia’s approach to cryptocurrency regulation prior to 2023 showcased a progressive and stringent regulatory environment. The country adopted a comprehensive framework, incorporating AML/CFT compliance, strict licensing requirements, and operational standards for cryptocurrency exchanges and service providers. This regulatory stance positioned Estonia as a leader in the EU in terms of creating a secure and regulated cryptocurrency market.