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Crypto bears the brunt of Estonia’s war against dirty money

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In a country with a heavy legacy of dirty money scandals, Estonia is determined to prevent crypto from offering illicit financiers a new laundromat.

Estonia’s latest effort to flush out white-collar criminals is due Tuesday, when Tallinn’s amendments to its Money Laundering and Terrorist Financing Prevention Act come into force — with the international community watching closely. And more initiatives are coming down the pipeline.

Estonia’s banking sector has already humiliated the government on multiple occasions by funneling billions in suspicious funds for clients based in Russia. There’s no way that’ll happen again through crypto, as far as the country’s treasury and financial intelligence unit are concerned.

“We do welcome the innovation, but for us, it’s very clear that we will not and cannot tolerate any financial crime, and preventing money laundering is certainly a political priority,” Estonia’s finance minister, Keit Pentus-Rosimannus, told POLITICO.

The new rules shore up a licensing process that most in Estonia’s crypto market agree was far too loose. The first licensing regime that emerged in 2017 made it easy for hundreds of companies to get an Estonian license and operate from anywhere in the world. Some firms even made a business out of selling shell companies.

“Supervision was simply not possible,” the minister said. “But the risk was ours because they operated with an Estonian license. That was one thing that was changed with the law.”

Tallinn’s decision to tighten its supervisory leash now comes as little surprise to the industry, which is launching efforts more broadly to stop bad actors and trying to dispel concerns that Russia and Belarus are using crypto to dodge Western sanctions on grounds.

The government is under pressure to perform as the Council of Europe’s Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL) is halfway through a two-year audit on the country’s dirty money safeguards. The routine audit, which concludes this December, is also looking at how digital assets are regulated. A group of auditors is arriving in Tallinn on April 25 for a two-week visit.

Estonia could face heavy consequences if it falls short of MONEYVAL’s expectations. Offending nations can ultimately end up on the world’s dirty money gray list, which includes Malta. The resulting stigma has a track record of scaring foreign investors away from an offending country.

As a result, Tallinn isn’t messing around. The new rules are designed to make the market in Estonia as uncomfortable as possible for illicit financiers to work in or abuse.

One technique is to make it expensive to enter the marketplace. Companies providing digital wallets and online exchange will soon have to cough up at least €100,000 in capital requirements to hold an Estonian license. Firms that hold and move cryptocurrencies for people will need to put down a minimum of €250,000.

The amendments also come with steep registration fees, strict due diligence duties and heavier regulatory scrutiny. A chunk of companies’ business infrastructure will have to be located in the Baltic country, too.

MONEYVAL’s audit and Estonia’s checkered past do play a factor in the government crackdown, Pentus-Rosimannus and treasury aides admit. But more generally, the measures are designed to enhance transparency in the crypto market and protect honest players, according to the minister.

Just a flesh wound

As Estonian cryptos see it, however, Tallinn is using a butcher’s knife to treat a flesh wound, undermining the country’s reputation as a fintech-friendly business environment.

The heavy-handed approach is also raising eyebrows because EU legislators are halfway through developing a bill, dubbed MiCA, that contains less stringent standards — and Estonia will ultimately have to adopt those in any case. The European Commission had proposed that MiCA’s capital requirements, for example, range from €50,000 to €150,000, depending on a crypto company’s services (the largest operators would need to cough up more).

The nature of Estonia’s crackdown is a clear reflection of the pressure that comes from ongoing international scrutiny and the dirty money scandals it’s had to endure, according to industry representatives.

The law “was only done in a panic, which comes from the MONEYVAL evaluation on Estonia as they’re looking to put guilt on others than banks,” said Raido Saar, the chairman of the board of the Estonian Cryptocurrency Association.

“During the last two years, our legal environment has been changed two times, and there’s a third already [underway] in government, that revokes all those licenses,” he lamented, referring to a separate piece of legislation expected at a later date. “We need to restart our licenses for financial inspection.”

The treasury, for its part, says nothing has been decided on that particular bill. Known as the Crowdfunding, other Investment Instruments and Virtual Currencies Act, it’s still in an early stage of drafting.

The idea of a complete future overhaul, however, carries favor with Matis Mäeker, the head of Estonia’s FIU — a financial conduct regulator that all EU countries must have.

In Mäeker’s eyes, if Estonia fails to act, it’ll likely trigger another Danske Bank scandal, in which 6,000 “nonresident” clients funnelled some €200 billion through the Danish lender’s Estonian branch between 2007 and 2015, most of which was deemed suspicious.

It’s this kind of rhetoric that’s left companies fearful of what else might be coming down the legislative track. Lawyers at Sorainen, which offers specialized legal advice on fintech, also question whether Estonian authorities will use new discretionary powers to revoke licenses with little justification.

No time to waste

For her part, Pentus-Rosimannus is refusing to sit idle until MiCA arrives.

“We have risks now, and it was clear that we must address them now. We simply cannot wait,” she said. “It was not an option for us to wait until all those discussions [in Brussels] to come to an end. We had to react straight away.”

The industry does believe that new rules will go far in weeding out any money launderers in the country’s crypto market. It would only have been a matter of time before authorities would have discovered a shell company, on the other side of the world, providing suspicious activity with an Estonian license, it says.

That said, the government could have handled its communication strategy better, according to Sten Tamkivi, an Estonian tech entrepreneur and investor, who worked as an executive at Skype for more than eight years. He hopes that the government’s good intentions won’t hurt the country’s reputation as a haven for startups.

“There was a lot of noise around Christmas and New Year, internationally, with completely over-the-board false claims that Estonia bans Bitcoin, or doesn’t allow self-custody,” he said. “I just hope the short term and messy middle doesn’t distract us too much.”

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