Cryptocurrency License in Estonia – Comments from Regulator on Changes

Previously we have published couple articles about coming changes in the law, that affect cryptocurrency license in Estonia and cryptocurrency companies.   Private Financial Services’ specialists have prepared translation from Estonian language of a guideline that was recently presented by Financial Intelligence Unit.

The most important clauses

• The virtual currency exchange service against a fiat currency provider shall provide documentary evidence of the existence of a right of use (lease or rental) of the premises at the place of business, as well as the current bank accounts used to provide the service.
• As required documents, the company must be able to present, upon application, an electronic copy of any identity document for all nationalities and proof of absence of criminal record in the country of origin of the foreign national in the case of a member of the governing body, prosecutor, beneficial owner or owner, as well as the documents of the member of the company’s governing body and the prosecutor attesting to the educational level of those persons, containing a complete list of their jobs and positions and, in the case of a member of the management body, their area of responsibility. If the documents issued abroad do not prove the absence of penalty to the requisite extent, they shall be accompanied by a certificate on oath taken by the person whose absence of penalty is to be proved (in free form).
• If the applicant deems it essential to provide documentation to prove the credibility of the member of the governing body or the prosecutor and that the applicant has a good business reputation, they shall also be included in the application.
• The application shall be accompanied by the internal rules of procedure prepared pursuant to § 14 and 15 of the Money Laundering Act and, in the case of persons with special obligations listed in § 20 of the International Sanctions Act, the rules of procedure and their verification.
• Where an undertaking wishes to use the authorisation also for the activities of its subsidiary, it shall also provide, in the application for authorisation, all the information relating to the subsidiary in accordance with the prescribed fields.
• Changes in the circumstances of an object of inspection and the activities of entities holding valid authorisation.

Changes in the regulations governing applications for licenses that are mandatory for all authorised service providers unless otherwise stated in the instruction.

Pursuant to the new legislation, which will enter into force on 10.03.2020, companies with a valid authorisation must submit the following information and documents, which are necessary for compliance with the objects of inspection of the license, are prerequisites for obtaining a cryptocurrency license in Estonia (Documents and data must be submitted as an application for amendment, provided that this requirement can be met by 01.07.2020 at the latest):

• When applying for a licence, if only documents certifying proof of absence of criminal record and identification have been presented for only one country, that the related person has and the person has multiple nationalities, such certificate and document(s) must be presented for all countries of nationality. Companies related with only persons with only Estonian citizenship are not required to submit such documents.
• If the applicant for a cryptocurrency license in Estonia or the holder of a license also wishes to prove the good reputation of its related persons, it may (optional) provide documentation to prove their good reputation.
• If the documents issued abroad do not prove the absence of penalty to the requisite extent, they shall be accompanied by a certificate on oath taken by the person whose absence of penalty is to be proved. Certificates issued under oath in a foreign country must also be submitted as an electronic copy. Accounting for this document is at the discretion of the FIU, this certificate has no predetermined force and the FIU may disregard it (§ 70 (31) of the Money Laundering Act).
• New requirements have been introduced for virtual currency providers, which also require existing license holders to update their internal control rules, rules of procedure and risk appetite document.

The following are the contents of the mandatory changes to these documents:

• Special requirement for determination of risk appetite (§ 10 (4))
• The drafting of internal control rules and rules of procedure is mandatory, the instructions of the ESAs (European Supervisory Authorities) must be taken into account, and the Minister may, by decree, lay down further requirements (§ 14 (4), (7), (8))
• Money laundering contact person must be designated (§17 (2))
• Prohibition on correspondence with shell banks (§ 18 (2))
• Prohibition on the provision of anonymous services (§ 25 (1) and (2))
• Opportunity to open a restricted account (§ 27 (1))
• Special Requirements for the use of certain due diligence measures, etc. (§ 28)
• Requirement to use client video recognition if the person is not identified face-to-face (§ 31 (1))
• Right to receive e-resident data from state database (§ 31 (5))
• Additional requirements for risk assessment, including consideration of ESA guidelines (§§ 32 (2), 35 (1), 37 (5), 38 (4))
• Stricter restrictions on high-risk third countries (§ 39 (3))
• Expands to correspondent relationship with credit institution of third country (§ 40)
• The requirement to record more data applies (§ 46 (3))
• Broader rights of exchange of information (§ 51 (2), (3), (5))

With effect from the amendments entering into force on 10.03.2020, the circumstances of the object of inspection, which are for compliance by both applicants for and holders of existing authorisations unless otherwise specified in the instructions.

• The addition of clause 11 to § 72 (1) of the Money Laundering Act introduces a new definition of the Money Laundering Act – “good business reputation” and its control. § 72 (2) of the Money Laundering Act provides that the existence of good business reputation is presumed where circumstances calling into doubt are absent. Proof of good business reputation need only be provided if the person wishes to provide additional proof of this, and free-form documents must be digitally or hand-signed or signed as a set and must be uploaded to the register of economic activities. The FIU will evaluate the information and documents to be provided in a set with publicly disclosed material about the individual, such as previous negative media coverage or court rulings.
• As of 10.03.2020, the seat and place of business of all virtual currency service providers, including valid licensed service providers, must be in Estonia, and this must be stated both in the company’s articles of association and in the register of business and economic activities. The virtual currency service provider shall provide a contract of the right of use (lease or rental) of the premises at the seat and place of business. This contract must also be included (request an amendment) if the company already has a valid virtual currency service license. For the purposes of the Money Laundering Act, a seat is the principal place of business of a or the place where a service is provided, where the acts or services required to ensure the fulfillment of the requirements of the Money Laundering Act are performed. In practice, this means that the persons responsible for complying with the requirements of the Money Laundering Act work at the registered seat, there is immediate access to the mandatory data arising from the Money Laundering Act, which must be collected and retained by the obliged entities and submitted to the supervisory authority, and immediate access to the rules of procedure, risk assessment, internal control code and other supporting documentation to ensure that the obliged entities and its employees comply with the requirements of the Money Laundering Act.
• In order to provide virtual currency service to an applicant company must have a payment account with a credit institution, an electronic money institution or a payment institution established in Estonia or a contracting state of the European Economic Area and who is providing services in Estonia or establishing a branch in Estonia. The held payment accounts must be submitted with the application for authorisation in the register of economic activities, accompanied by a bank statement proving the existence of the payment account. The list of payment accounts should also be added if the company already has a valid virtual currency service license, ie when changing the license.
• Virtual currency providers have a share capital requirement of 12 000 EUR, which must be paid in monetary contribution and recorded in the commercial register. In the case of a foreign company, the contribution must be reflected in the commercial register or other place where the fulfillment of this requirement is officially confirmed. The entry for the contribution of share capital must also be entered in the register of economic activities. The entry must also be included if the company already has a valid operating license for the virtual currency service, ie an application to change the license must also be submitted.

Cryptocurrency License in Estonia – General issues

Cryptocurrency license in Estonia applications submitted and resolved before 10.03.2020 will be governed by the law in force at the time the application is submitted, that is, by the requirements of the Money Laundering Act applicable at the time of processing. If the deadline for eliminating the deficiencies in the license and / or the due date for the proceeding is later than 10.03.2020, the law applicable at the time the application is made shall apply to procedural provisions (such as duration pf proceedings and state fees). As regards the substantive provisions (circumstances of the object of inspection), the new wording of the Money Laundering Act (RT I, 31.12.2019, 20) applies as of 10.03.2020.

Applications for authorisation submitted from 10.03.2020 (included) shall be settled by the Financial Intelligence Unit within 60 days of the date of submission of the application by granting or refusing the authorisation. By a decision of the Financial Intelligence Unit, the time limit of granting the authorisation may be extended to up to 120 days (§ 71 of the Money Laundering Act). Thus, the time limit for processing applications is initially extended from 30 working days to sixty days, and the FIU can further extend the deadline for processing applications to 120 days.

Undertakings authorised pursuant to this act are required to bring their activities and documents into compliance with these requirements by 1 July 2020 at the latest. If the undertaking fails to comply with the law and fails to submit documents within the prescribed period, the Financial Intelligence Unit shall revoke the undertaking’s cryptocurrency license in Estonia.