The Estonian Regulator Assures there are no Plans to Ban Cryptocurrency

On Sunday, the Estonian Ministry of Finance squashed reports that it would prohibit cryptocurrency ownership and trading. According to their new draft legislation for virtual asset service providers (VASPs), customers will not be banned from possessing or trading virtual assets. 

Estonia’s Government on Crypto

The statement followed reports that the planned legislation would effectively outlaw decentralized finance (DeFi) and non-custodial wallets. A non-custodial wallet grants users complete control of their cryptocurrency and secret keys.

The unsupported claims state that the government’s planned anti-money laundering laws would prohibit individuals from owning and trading cryptocurrencies. The tweet referred to new legislation proposed in a bill passed by Estonia’s Parliament on Dec. 23.

The Estonian Ministry of Finance stated in a release that the legislation aims to tighten anti-money laundering (AML) standards for VASPs. This will minimize the creation of anonymous accounts significantly.

However, the Ministry of Finance’s suggested criteria for VASPs could be applied to decentralized wallet developers, who would need to meet significant funding hurdles. If the bill passes, Estonian VASPs will be required to identify their clients when offering accounts or wallets.

Clarifications on the proposed Bill

On Monday, the Estonian Ministry of Finance released an updated informational page addressing frequently asked questions about the planned legislation. According to the Ministry, the new bill is Estonia’s response to FATF recommendations on VASPs’ regulation.

According to the release, the Estonian Financial Intelligence Unit (FIU), which began licensing VASPs in 2017, was too lax in establishing initial criteria for crypto service providers.

In 2020, the FIU revoked the licenses of more than 1,000 cryptocurrency businesses because they had no connections to Estonia. However, an Estonian-licensed VASP must operate in Estonia or have a “demonstrable connection” to the country under the new legislation.

The new bill also calls for steeper VASP capital requirements. VASPs will now be required to have a minimum share capital of 125,000 euros (around $141,000) or 350,000 euros (around $395,000), depending on the services provided.

The Ministry confirmed that the bill’s definition of a VASP subjects to the FATF definition, which includes crypto exchanges, issuers, and some platforms assisting initial coin offerings.

The FATF has added decentralized applications, including non-custodial wallets, to its new definition of a VASP. The FATF guidance makes it clear that DeFi apps aren’t VASPs. However, the definition of a VASP extends to “creators, owners, and operators or other persons who have control or significant influence” in DeFi agreements.

The Ministry emphasized that the bill does not prohibit any services and that companies wishing to provide such services in Estonia must follow AML regulations. The bill now has to pass Parliament for approval and go into effect in the first half of 2022.