Estonia

#22

Crypto Exchanges & Regulation – Top exchanges in Estonia by Coincub criteria

Country facts

Estonia crypto score

Trade and store crypto

Can I trade Bitcoin and cryptocurrency in Estonia?

Estonia is an ambitious hi-tech country that has long been at the forefront of fintech developments, including the adoption of crypto and blockchain technology. Often gaining a leap over many larger crypto economies around the world that have tended to follow crypto developments, Estonia has taken a proactive line. The country has a track record of creating regulations and policies attuned to crypto requirements and its e-residency programme has been at the forefront of the strategy to digitalize the economy’s infrastructure.

However, whilst Estonia has been a blockchain and Bitcoin advocate for many years the country, like many others (following 2022’s high-profile scams and price volatility with cryptocurrencies) is firming up legislation regarding the industry. New regulations in 2022 mark a change of strategy for a country that allegedly was home to 50% of the world’s registered virtual-asset service providers (VASPs) in 2021. At the very least, new rules mean Estonian crypto companies will need to meet new transparency requirements (so no more anonymous accounts) and they’ll also have to show some asset capital on the books – at least €250,000.

Crypto has been taken to heart here, and residents can own, buy and sell cryptocurrencies and blockchain-based assets through leading exchanges and Bitcoin ATMs. Peer-to-peer crypto activity is also high. This tiny, tech-friendly nation is still, nevertheless, a part of the EU and has a strong crypto economy, said to host 55%* of the world’s registered virtual asset providers VASPs thanks to its progressive regulatory strategy and e-residency scheme for overseas entrepreneurs.

Crypto exchanges are licensed previously coming under two classifications: the Virtual Currency Exchange Service License and the Virtual Currency Wallet Service License – both of these licensing requirements are now merged into a single Estonian Cryptocurrency Exchange License.  New legislation late last year also requires that crypto service agencies, wallet providers, and exchanges, keep appropriate capital reserves – along with 5th Directive AML requirements – all to ensure that such services are governed and check customer identities.

*source Coindesk

Bitcoin taxation in Estonia

Crypto is classified in different ways across the world, from being a foreign currency, to being a store of value or even, in the case of El Salvador, as legal tender. In line with quite a few countries, cryptocurrencies are classed as assets and liable to the Income Tax Act in Estonia. (You didn’t think it would be tax-free did you?) Standard income tax reporting is required and tax is charged on the earnings from investments in crypto which is treated as being the same as receiving income in cash. As a result, only those exchanges and transfers that generate cash gains need to be declared for income tax appraisal.

Mining Bitcoin in Estonia

In the Estonian Republic, cryptocurrency mining is perfectly legal, and taxation is simply an extension of the income classification. Basically, any gains from the mining are seen as income and are taxed as regular income. Alternatively, the activity can be registered as a business activity and the revenue gained as business income. Thus if the mining for gains activity is done on a regular basis any individual needs to register as a sole proprietor in the country’s register of businesses. Mining is exempt from VAT and not included as taxable turnover, but because of this, miners cannot get refunds for VAT paid on expenses, such as electrical costs, related to mining activities.

As we have said elsewhere, mining across so many countries is now becoming a green issue and Estonia’s consumption of electricity mining makes up a percentage point of all consumption at peak periods. The pros and cons are debated, but total mining activity is not huge and carries on despite the price rises in electricity.

Bitcoin community in Estonia

Estonia has a huge blockchain economy with numerous blockchain-related services and companies, both homegrown and overseas, the latter of which is encouraged by the country’s e-residency scheme. Software, IT and fin-tech leads the way, by far and the world’s largest blockchain company, Guardtime, is located there with a portfolio of products centred around the design and implementation of distributed virtualized computers enabling the automation of processes across organisational boundaries.

Initial Coin Offerings in Estonia

As with blockchain technology generally, Initial Coin Offerings ICOs play an increasing role in Estonia. The country is popular among companies considering fundraising through launches of token-based digital currencies or Initial Coin Offerings (ICO), thanks to Estonia’s  ICO regulations. With its reputation as one of the world’s most advanced digital nations, in no small part due to its e-Residency scheme and openness to digital infrastructure and blockchain technologies, Estonia is regarded as a prime location for carrying out ICOs.

Much depends on the type of tokens being issued, however, and where digital tokens fall within the definition of securities and constitute a public offer the issuer has to register a prospectus with the Estonian Financial Supervisory Authority FSA prior to the public offer of such tokens. Where the proposed company intends to provide a virtual wallet and/or a fiat-to-virtual currency exchange, the provisions of the Money Laundering and Terrorist Financing Prevention Act also apply.

Bitcoin transparency in Estonia

Estonia’s compliance regulations with respect to Anti Money Launder AML are strict and being a European Union member state, it follows the EU’s wide-ranging guidelines surrounding money laundering and terrorist financing which have also been updated by the latest 5th AML directive. All crypto businesses operating in Estonia must comply with these laws including virtual asset service providers (VASPs) and financial institutions in and out of the crypto economy. Following a ‘Risk-Based’ approach, all companies and agencies must carry out high levels of due diligence and conduct Know-Your-Customer (KYC) checks with Suspicious Activity Reports (SARs) being submitted to the Estonian Financial Intelligence Unit. Oh yes, this also includes a strong focus on record maintenance and payment transactions that must be available for up to five years. Much of this, however, is also required by many other countries, even those outside of the EU.

That said, last year some 1,000 licences were revoked for non-compliance with AML laws and abuses of the e-residency programme. Following its share of fraud and money laundering scams, the new legislation and regulation should prove to be positive for the country where tougher supervision strengthens the crypto economy.