Estonia's government circulates FAQs amid concern over new crypto rules

Estonia is circulating a series of frequently asked questions (FAQs) to dispel fears that its newly approved crypto legislation equates to a ban. 

The heightened requirements are an effort to comply with recommendations from the Financial Action Task Force (FATF), which released guidance for nations recommending heightened anti-money laundering standards for VASPs. 

The legislative proposal seeks to regulate crypto entities, or virtual asset service providers (VASPs), like traditional financial institutions and payment platforms. It adds onto Estonia's 2020 prohibition of the opening of anonymous virtual accounts by expanding the definition of VASP and holding VASPs to a higher standard of anti-money laundering provisions.

Essentially, VASPs will be responsible for collecting and transmitting know-your-customer information and are prohibited from opening anonymous accounts, a way of targeting noncustodial wallets. They also have to obtain a VASP license for a fee of 10,000 euros — an uptick from the previous 3,300 — as well as meeting capital requirements and paying a supervision fee of 1% of share capital and 0.035% of all virtual asset transactions. This is to dissuade dormant entities from registering, according to the FAQ. 

Some worried that the requirements equated to a ban of owning crypto or a noncustodial wallet. The industry raised similar concerns during the draft stage of FATF's guidance, arguing that depending on a given nation's implementation, nations could use the recommendations to justify banning decentralized finance or noncustodial entities. If that were the case, the DeFi space could be walled off, with no compliant way to exchange funds between centralized and decentralized entities. 

Estonia's FAQ made it clear that it is not intending a ban. AML rules do not apply to customers or private wallets set up without the help of a service provider. Citizens are free to hold crypto whichever way they like and transact with any entity. The anti-anonymity rules only apply to VASPs, which fall under the purview of Estonia's Anti-Money Laundering Act.

"This means that the legislation does not contain any measures to ban customers from owning and trading virtual assets and does not in any way require customers to share their private keys to wallets," the government's document explained. "Individuals can still freely use non-custodial wallets."

Those wallets just can't be set up through a VASP since businesses are required to verify the identities behind the accounts. In practice, Estonia banned businesses from offering the ability to create non-custodial accounts. It's also unclear how Estonian VASPs will transact with non-custodial wallets since they cannot effectively transmit the identification information of the user in a transaction with an anonymous wallet. The FAQ included the provision that transactions between VASPs and un-hosted wallets are permitted "given real-time risk analysis is performed on each transaction." 

The Estonian government approved the proposed rules on Dec. 23. It now has to pass through Parliament before its planned implementation in the first half of 2022.