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Crypto Exchanges& Regulation in Estonia

Top exchanges in Estonia by Coincub criteria
Article review author
Jonathan Lea
Estonia head image

Crypto Country Rating: 8.5/10

9/10
Institutional acceptance
Crypto progressive
8/10
Exchanges & Wallets availability
Leading exchanges available
8/10
Government regulation
Crypto progressive strategies
7/10
Defi acceptance
Huge blockchain community of business
7/10
Financial services
New licensing requirements may curtail activity.
7.5/10
Transparency
New licensing requirements and EU AML laws apply
5.5/10
Spending crypto
No great spending activity
7/10
Banks activity in crypto
Estonia's largest bank LHV, offers crypto buying facilitation

Introduction 

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.

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

 Tax 

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 Savador, as legal tender. In line with quite a few countries, crypto currencies 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 

In the Estonian Republic, cryptocurrency mining is perfectly legal, and the 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. 

Blockchain community

Estonia has a huge blockchain economy with numerous blockchain related services and companies, both home grown and overseas, the latter of which are 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

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 nation’s, 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.

Transparency

Estonia’s compliance regulations in respect to Anti Money Launder AML is 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 payments 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.

Helpful?
FAQ

New to crypto? Here’s our guide!

FAQ Image #1 01 Why Bitcoin? It seems like the buzz around Bitcoin just keeps growing. Bitcoin is a constantly evolving technology with a passionate community. What is it about the digital asset that makes it such a controversial topic and attractive investment?
FAQ Image #2 02 How to Get Started with Bitcoin It can be difficult to get past the technical jargon surrounding bitcoin (BTC) and other cryptocurrencies in order to figure out how you can buy and store them. Beginners can purchase Bitcoin, for example, on many exchanges using fiat currency like U.S. Dollar, Euro or British Pound.
FAQ Image #3 03 Blockchains 101 Blockchains are a type of database where data is stored in blocks that are chained together. As new data comes in, it is entered into a block, which is then chained to the previous block. The Bitcoin blockchain serves as a ledger that records every Bitcoin transaction in history.
FAQ Image #4 04 Bitcoin in the Real World Ok - you’ve found an exchange, bought your Bitcoin, and stored it safely. What’s next? By now you can buy just about anything with Bitcoin if you try hard enough, from Amazon gift cards to an old master painting. You can also convert your BTC to fiat with ATMs, an exchange, and more.

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