How Estonia regulates ICO and cryptocurrencies

Requirements for mining of cryptocurrency

The Financial Regulator of Estonia (FRE) does not include the mining of cryptocurrency as a sphere of activity into the field of supervision. It is recommended to study the principles of taxation.

Permissions for exchanging a virtual currency or working with a virtual wallet

The AML policy rules can be applied to purchase and sale of virtual currency in Estonia. The Anti-Money Laundering and Combating the Financing of Terrorism Act provides for obtaining of authorization to provide services for the conversion of virtual currency into fiat and for virtual wallet services from the Bureau of Information on Money Laundering (Rahapesu andmeburoo, RAB).

Regulation of holding an ICO

To begin with, it is necessary to analyze the rights to be provided by a token in order to understand whether it should be classified as a security or not in accordance with the Securities Market Act.

Token, being a right of ownership, obligation or contract, is considered as a security in such cases:

• can be transferred with the consent of at least one party;
• allows to vote or make decisions about the issuer's activities;
• brings a certain profit (the right to a share from the issuer's income, regular profit or any other potential income) to the investor, regardless of whether there is a maturity date and whether the attracted funds will be returned.

1. Gift and donation

Neither gift nor donation entitles you to use a service or product from a business project. Money is considered a gift or donation in the event that above funds do not provide the donor or the grantor with the right to participate in the issuer's capital, dividends, interest or any other payments from the business project.

It is necessary to indicate that the intention to waive the right to gift or donation is conscious and conscientious in the documents on transfer of funds as a gift or donation to persons transferring funds.

2. Preparation of the Prospectus and the Securities Market Act

Transfer of tokens that are securities is regulated by the law on the securities market.

Cases in which the offer of securities is not considered public:

• securities are offered only to qualified investors;
• offering extends to less than 150 persons of the State Party, other than qualified investors;
• securities are transferred to investors for a fee, total amount of which is 100 000 EUR per investor, for each separate offer;
• offering of securities has a nominal or book value of at least EUR 100,000 per security;
• remuneration with a total amount of less than EUR 2,500,000 for all participating States should be received for the proposal, taking into account that the offer term is one year.

In other cases, the offering is considered to be public and requires drawing up of a prospectus and registration with the FRE.

The Prospectus Regulations provide for a number of exceptions for prospectuses of start-up companies (companies that exist less than 3 years).

3. Law on Credit Institutions

It is mandatory to have a license for activity as a credit institution for some companies engaged in token sale. It is required if a company provides loan services on its own behalf or at its own expense, and if this activity is financed from ICO by attracting repayable funds from public.

4. Law on Investment Funds

In the case of attracting investors' capital in the form of ICO with the aim of further investing in the company in accordance with the established investment policy in favor of the investor and in the general interest, the activities of companies are regulated by the law on investment funds.

5. The Law on Advertising

The advertising campaign plan for ICO must be compiled in accordance with the requirements of the law on advertising. The advertising product should not mislead the consumer about the activities of the company and the characteristics of the product or service.

6.  Law of Obligations Act

If tokens represent the access to a product or service, their purchase is actually a prepayment for the product or service. Since conclusion of such contracts is conducted through a computer network, they are subject to the provisions of the law of obligations act.

The law of obligations act requires the company conducting ICO to inform the investor about main characteristics of the object of a contract, total price of the object of a contract, as well as taxes, term of a contract or conditions for termination of a contract. Other rights and obligations arising on the basis of a contract and its technical stages should be notofied. Such information should be highlighted and clearly indicated.

Above law requires from the issuer of a token to return all received funds or assets on the basis of the contract to the investor for the refusal of the contract.

7. The Law on the Suppression of Money Laundering and the Financing of Terrorism

Token, which is intended only for use as a means of payment or as a means for transfer of finances and values, is considered to be a payment token. There are no requirements to the issuer of above token.

Trade in tokens and their investments

Permit  or license is necessary to act as an investment company if token is a security and if the following services are offered on an ongoing basis:

• receiving or transfer of orders related to tokens;
• execution of orders related to tokens, on behalf of or at the expense of the client;
• transactions with tokens at own expenses;
• management of the securities (tokens) portfolio;
• investment advice on token issues;
• providing a guarantee for a token or guarantee regarding the offering, issue or sale of tokens;
• organization of ICO (organization of the offering or issue of tokens);
• management of the multilateral trading system that brings together the simultaneous or non-simultaneous interests of individuals in relation to the receipt and transfer of securities under inflexible conditions resulting in the drawing up of a contract;
• management of an organized trading system.

Consequences of non-compliance with legislative acts

A company with activities related to ICO may be deemed fraudulent if it does not comply with the requirements of the above laws or provides untruthful information during ICO. The Penal Code defines fraudulent operating organizations as those that do not have a license to carry out economic activities. In addition, such activities may involve offenses in the field of finance.