International Crypto Trends: The Estonian Experience. Interview with Toomas Seppel and Vladislav Linko from Hedman Law Firm

1. Why is Estonia a crypto-friendly jurisdiction and, more generally, why is it regarded as one of the world’s most digitally advanced nations?

Estonia was one of the first countries in Europe to deal with the concept of virtual (crypto) currency services in its regulation. The crypto community has matured, with approximately 160 entities licensed to provide virtual currency services. As a result, the regulatory bodies are very aware of the market and its specifics.

Services that do not fall directly under licensing are allowed to operate without interference. This includes issuance of utility tokens, development of blockchain software, participation in decentralized autonomous organizations (DAOs), and more.

Adjacent legislation supports the above concepts. For example, salaries and suppliers can be paid in crypto, and share capital contributions can be made in crypto. Estonia allows a foreigner to acquire an e-residency card—a document that allows the holder to establish and manage a company fully online. While e-residency is not sufficient to operate a licensed company, it allows a web3 product to be launched fully remotely.

2. Focusing on crypto-services, what are the latest developments in Estonian crypto-regulation?

The latest development is the introduction of changes to the licensing process and requirements for provision of virtual currency services. These have been in effect since February through June 2022, and they clarified the scope of regulated services and made changes that should strengthen faith in service providers. They include requirements for auditing, own/share capital, applicable AML rules, and more. 

3. Does an NFT platform also need to obtain a license to operate in the Estonian market? What are the existing rules applying to NFT platforms?

Generally, NFTs do not fall under the definition of assets that require oversight. This means that most NFTs are treated as standard digital goods or services. This allows wallets and marketplaces for NFTs to operate without a license. These platforms can operate like standard e-commerce platforms. 

4. With regard to tax law, what provisions apply to crypto-businesses operating in Estonia?

Estonia is well known for deferred income taxation under which capital gains are taxed only upon the distribution of profits (dividends). This rule applies to crypto-businesses as well. The Estonian tax board also issued comprehensive guidance for the taxation of crypto-related activities. With some exceptions, transactions in crypto are treated no differently than traditional financial transactions. Further developments might make it possible for consumers to deduct the losses from crypto transactions on their tax returns. 

5. EU institutions finally reached an agreement on MiCA. How will the forthcoming regulation impact the EU crypto market? Will NFTs be regulated under the MiCA regulation?

In addition to bringing further clarity to the market, the MiCA regulation will provide uniform requirements for operating as a provider of crypto-services and for issuance of new crypto-assets. This means that a company licensed in Estonia will be allowed to passport its services and/or offer its new tokens to Italian consumers without having to analyze the requirements of different countries individually. Still, the regulation does not cover everything. NFT and certain utility tokens will remain fully unregulated and subject to the separate regulations of each EU member state.