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Estonia’s recent tightening of anti-money laundering measures to flush illicit crypto financiers out of its market is leading neighbors Latvia and Lithuania to strengthen their regulatory demands on crypto companies.
Tallinn’s earlier loose laws had led to a buildup of opaque shell companies within its fast-growing crypto sector. Riga and Vilnius are now concerned that any shady actors fleeing the Estonian clampdown could simply ship their business across the border to profit from their weaker regulatory regimes.
Russia’s invasion of Ukraine has only heightened those fears after European Central Bank President Christine Lagarde last month warned policymakers that oligarchs could use cryptocurrencies to dodge Western sanctions.
EU officials, analysts and legislators have downplayed the risks. Research from Chainalysis, a blockchain data platform, found that wealthy Russians have moved just over $62 million worth of cryptocurrency to other online addresses since the start of the war. EU countries, in comparison, have imported an estimated €9 billion worth of Russian fossil fuels since the war began.
The industry has warned that national crackdowns will make it harder for companies to navigate Europe. Not to mention there’s an EU bill designed to regulate the bloc’s crypto market that could come into force in a few years’ time, which will replace the Baltic laws.
But Latvian and Lithuanian policymakers aren’t willing to wait given the Baltic’s checkered past of dirty money scandals — especially in Estonia, which is undergoing an international routine audit on its dirty money safeguards.
The number of crypto companies in Lithuania has skyrocketed since 2019, when only 20 were registered in the country. Now there are 252, said Lithuania’s finance minister, Gintarė Skaistė, who has proposed introducing capital requirements of €125,000 and new transparency measures for all cryptos that have and will register their business in Lithuania. Crypto companies will also have to hire a manager who’s based in the country. If all goes to plan, the rules should go into force from November.
“With the increasing numbers of these entities [crypto companies], I think there is an increasing risk of fraud, money laundering” and “maybe some evasion of sanctions regime,” Skaistė told POLITICO from a couch in a hotel lobby after this month’s Ecofin gathering in Luxembourg.
And there’s also little appetite for more reputational risk, particularly as the region is involved in a bidding war for the EU’s future anti-money laundering authority, known as AMLA. The crackdown is not directly related to AMLA. But countries don’t want a scandal to undermine their bid for an EU watchdog that would come with a yearly war chest of €55 million and at least 250 well-paid officials.
“We are putting a lot of emphasis and energy on [anti-money laundering] issues” as well as creating a friendly environment for fintech, Skaistė continued. “One of the ideas is to host AMLA in Vilnius.”
Latvia, which is also bidding for AMLA, has seen fewer crypto firms arrive in the country but is pursuing a stricter licensing procedure for such firms to weed out any bad actors escaping Estonia.
“Baltics is a small region and they might migrate somewhere,” Līga Kļaviņa, the deputy state secretary of Latvia’s finance ministry, said. National elections this year will make it difficult to introduce the new rules before the end of the year, however. Kļaviņa hopes to have them in place within the “first part of next year.”
The Baltics’ national crackdowns will be short-lived. The whole bloc will have to introduce new investor safeguards as part of an EU bill for the market of crypto assets, dubbed MiCA, which legislators in Brussels are trying to tie up before July.
Prior to Russia’s invasion of Ukraine, lawmakers had planned for the rules to come into force in three years — a timeline too lengthy for the Baltics. Lithuania and Latvia are nonetheless modeling their new rules as close as they can on MiCA. Estonia, meanwhile, will have to pull back much of its strict regime to get in line with the EU initiative.
All this has left the industry in a lurch. An executive from an established crypto company in Estonia told POLITICO that the firm is considering registering its business in Lithuania as an insurance policy, for example, for fear of what still may come from Tallinn’s crackdown.
“We are growing concerned with the fragmentation of AML rules across Europe, which not only run counter to the actions at EU level aiming at creating European rules, but [are] also endangering European businesses and jobs,” said Blockchain for Europe’s secretary-general, Robert Kopitsch.
Legislators are hoping they can speed up the implementation so that MiCA, with its safeguards and supervisory structure, can be in place by the end of 2023. Those negotiations are still ongoing and there’s no guarantee they’ll conclude by mid-summer, as legislative disagreements between Parliament and Council linger over the supervision of crypto assets. There’s little point in waiting while praying that no new scandals will emerge, as far as the Baltics are concerned.
“Some of these entities … they are just empty shells,” Skaistė said. “And to just keep them like that … I don’t see the reason why it should be like that.”
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