“Should we also set up an Estonian entity?” – I have been asked this question so many times last year that by early summer I started avoiding situations where people generally may ask this. :)
First, I am no legal professional obviously. Second, I am way too busy with my own things to assist everybody pro bono structuring their #business. Last but not least if I really want to give them a proper answer apart from driving a bit of extra business towards Valters (he is the founding partner of the law firm we work with in all three Baltic countries), it becomes a fairly complex matter.
Why is it complex? Well, because it really depends on why you think an Estonian entity will suffice –and here my second issue comes in –how you will structure your operations. Simply, establishing an entity and jumping through the hoops in order to obtain one or more licences are already hard enough but yet it’s only the first step. Operating in accordance with those licences is a thing that punters neither understand nor care – and that’s the tough bit.
Let’s jump back to 2017. With my partners, we were asking each other slightly similar questions. Compliance we always agreed on, but the country to register our business at – well…that’s hard. There have been a handful of places with some type of regulation in place and we knew we had to pick the one that’s the most suitable for our needs… and the Estonian Parliament created legislation to support fintech ventures and welcomed foreigners...including virtual currencies ventures. I’ll get back to this in a minute, but let’s see a few other examples available back then:
The Unites States has legislation around cryptos – won’t get deeply into that – but in the end, you will find yourself in securitization. If you are OK with that and happy to work with US clients under FATCA, then you can operate out of the US.
China – not supported. Period.
So, Estonia. We picked that place for 4 main reasons: founders are EU citizens and we were very very very committed to obtaining a licence within the European Union. Besides, we have spent heaps of money on legal professionals all over Europe and found some very good, reliable partners that can help us move forward and thrive through the years coming. Also, obligations set under their legislation
– an amended Anti-Money Laundering Act basically – were something that we very much wanted to live by. Don’t get me wrong, obviously legislators don’t give a damn what you think of a legislation – follow it or you get in trouble – but this was something we were very happy with fundamentally. Finally, procedures, applications, processes with Estonian Authorities. This is not something we knew in
advance but it turned out that working with them is something they should teach in universities abroad: how to run an Authority, Estonian style.
From a business prospective, there’s no perfect law, I think. In our case, we are talking about virtual and/or digital assets, where the legislation is frankly around KYC/KYB and AML – basically we have to do pretty much the same things a bank would do with their clients – identify everyone thoroughly and prevent money laundering and terrorism financing…
On the top of that, we are very much committed to disclosing all relevant information to our clients – regardless it is beneficial or detrimental to a certain product of ours. This is not a direct requirement within our licences but we want to make sure potential clients are given all necessary information in advance… and this will basically go down to a risk and product disclosure. We want to make sure that
anyone, who enters into an agreement with us is fully aware of all the possible scenarios resulted by the positive decision on purchase. We even rub it in our users’ face before a purchase is being made. Our UX guys kept raising eyebrows but it is what it is. We inform, double inform and triple inform everyone.
One additional thought on licensing: from management prospective, we do a lot of things on a risk basis, meaning that we put lot of effort in identifying potential risks and their implications and then we do our best to ditch or transfer them or at least have a controlled mitigation strategy against them. The million-dollar question back in 2017 was, whether we prefer licensed versus unlicensed #crypto activities. Keep in mind, that back then and even today only a handful of countries had some type of
legislation in place, even less players wanted to run business compliant with any type of regulation. When valuing this risk – apart from our personal beliefs – we came to a dilemma. Whether we get into a licensed activity and approach the entire subject though this view and aim for new type of clients or we go with the “no school like the old school” way where are no licences in place and we close our eyes to who does what, where and when. This risk assessment led to an almost definitive result: it is only a matter of time until authorities, banks, other financial institutions and the media start slaughtering non-licensed activities… so we picked the approach we always agreed with --> Get into the ring amongst the first ones, full KYC/KYB and AML monitoring, risk disclosure and educate everyone involved.
We chose not trying to meet – in some cases even vicious – requirements of the users fancying unregulated activities but aiming for mainstream acceptance. Get this thing out of an underground subculture and make it accessible for everyone who is willing to accept certain guidelines.
We got a lot of good feedbacks but even more negative comments. We didn’t have to ask for either of them. :) We were being asked: “Guys, do you understand that crypto is all about being unidentified? I ain’t gonna use this, why do you ask all these questions? If you do this, you’ll lose 90% of potential clients.”
The good thing was that we never started acquiring ‘bad’ clients. This fact itself within 1-2 months started encouraging mainstream prospects to use our services….
I’ve been very fortunate through my career to gain experience in multiple sectors, both locally and internationally with enormous regulatory complexities. Through the last few years lawmakers became very sensible though. We are constantly meeting with various authorities concerning regulation and share our views about what should be changed and where it is all heading from both user demand and
innovation prospective. Most of them are listening and some of them have already acted, like Estonia. What we do is already mainstream. Asset digitalization, regardless it is crypto or not, it is here to stay and will grow even greater than ever imagined.