More requirements ahead – What’s the future for virtual currency services in Estonia?

The cryptocurrency industry knows Estonia as a go-to place to get licensed in order to provide virtual currency services. While referred to as the virtual currency services license, the requirements for acquiring such a license have been relatively easy to fulfill. Hence this license has more been akin to a higher-level type of registration than a proper license.

The popularity of Estonia as a destination for virtual currency services has been both a blessing and a curse. A blessing in the sense that it cultivates financial innovation and brings talent here. A curse because together with talented entrepreneurs’ also financial crime perpetrators has chosen Estonia as a suitable base for various scams, frauds and other financial crimes.

To combat financial crime, the current virtual currency service licenses are being reworked and a new draft law amendment has been created. The requirements are to become more strict and more similar to that of other financial services licenses. In our view, the current draft legislation aims to regulate virtual currency services in a similar standard to that of payment institutions. The aim of this article is to provide the current and future market participants an overview of what is to come and how to be prepared.

1.       The management of the company must reside in Estonia

The interpretation of the Financial Intelligence Unit (FIU – the authority issuing the licenses) is that the management board of the company is considered to reside in Estonia if all its key functions are fulfilled in Estonia. This interpretation has already been affirmed by case law. The factual management and control functions must reside in Estonia – hence everyday management decisions must be adopted in Estonia.[1]

In practice, this means that management cannot for example consist of two management board members, out of which only one resides in Estonia. Going forward, the draft legislation further substantiates the local presence requirement, stating that “registered location, management’s real seat and place of activity” must be in Estonia. Hence, the majority of management board members must reside in Estonia and they must fulfill all the most important business functions. The current interpretation suggests that the functions of CEO, CFO, and MLRO/Compliance Officer should be maintained in Estonia. All management board members should also have access to the company’s bank accounts and be able to make transactions.

Local presence further expands to employees of the company – while not regulated in the law, the FIU expects license holders or applicants to have (or at least have a plan to recruit) employees in Estonia.

2.       Higher share capital requirements

The draft legislation plans to increase share capital requirement from EUR 12 000 to EUR 350 000. Overall, the company is expected to have more own funds available at all times. A licenced company must have its own funds in the amount of EUR 350 000 or 25% of the fixed overhead costs per annum. The company must opt for the alternative amounting to a higher level of own funds. If a licenced company does not have real data to calculate its own funds requirement, the company can base the calculations on financial projections until real data is available.  

3.       The management board and the qualifying holders will be subject to fit & proper requirements

Management board members are obligated to have higher education and at least two years of relevant experience. The FIU shall reject applications or revoke licenses where it is not evident that the management board members are professionally suitable to manage a virtual currency service business.

In addition to educational requirements, management board members must also have an impeccable reputation. Such reputation can be tarnished if:

a)       the person is responsible for the insolvency of a company subject to a financial supervisory authority;

b)     the person is responsible for the revocation of a license issued by a financial supervisory authority;

c)       the person has been criminally penalized;

d)     the person has been subject to a court-issued prohibition to engage in business activity;

e)     the person has submitted false information to the FIU or has failed to submit the required information;

f)       the person is subject to international sanctions; and/or

g)       the person is not able to organise the company’s activities in a way that ensures proper treatment of both investors and customers.

Impeccable reputation requirements shall also apply to the company’s qualifying holders – direct or indirect shareholders of the company, owning at least 10% of the company. Qualifying holders must also have enough financial means to ensure that the company shall be properly funded at all times and they must be able to structure the company in a way that enables effective and sound supervision by the FIU.

4.       Virtual currency service companies shall be subject to auditing obligations

Companies shall be obligated to retain internal auditors. While not evident from the draft legislation, in practice this means that companies should implement “three lines of defence”, where internal audit is the third line. The aim of the internal auditor is to review that the company conducts its business in a compliant manner. Internal auditor/s shall be obligated to inform the FIU if they believe that the interests of customers are being harmed, or if the company is incompliant with legal requirements.

Companies must also contract an external auditor to audit their annual financial statements.

There are also various other details in the draft law amendment – additional regulatory fees, travel rule, permission requirement imposed by the FIU to enter into foreign markets through the Estonian licensed company, etc. However, as the proposed amendment is still in a draft stage, there can be various changes before the amendment will pass the Estonian Parliament, Riigikogu.

In conclusion, the draft law amendments will create a considerably higher standard of conduct for virtual currency service providers. While it will be cumbersome for the market participants, it will also mean that the market participants must be more sophisticated and well-funded to meet the regulatory expectations. This should provide a more stable and secure market for all.

NJORD Law Firm will keep you updated as the draft legislation moves forward!

[1] Tln RngkK lahend nr 3-20-2026.

Autor: Jaanus Sildam

Virgi Nael
Attorney at Law, Head of Banking and Finance
Mobile: +372  524 1668

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