ICO regulation. Estonia

Over the past decade, Estonia has become one of the most successful European countries in the business field, mainly due to its complex digital solutions and progressive e-government model. Personal interaction between state organizations and the applicant is minimized due to the maximum possible use of information technology.

Despite the fact that the Estonian regulator shares the approach to the application of securities legislation to security tokens, holding an ICO in the country is allowed subject to a number of conditions.

In Estonia, you can create a company online in 15 minutes, and pay taxes in 3 minutes. Income tax on saved and reinvested profits is 0%, 95% of tax returns are filed online. Estonia ranks first in the International Tax Competitiveness Index Rankings , second in the Index of Economic Freedom Index of Economic Freedom in Europe . Estonia has signed investment protection agreements with 31 countries, including the United States, Germany, France, Finland, Sweden, Norway and Switzerland, as well as double tax treaties with 53 countries. All foreign investors can set up a company and conduct business in Estonia under the same conditions as local investors.
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At the level of the European Union (Estonia - EU member) ICO is not prohibited. On November 13, 2017, the European Securities and Markets Organization (European Securities and Markets Authority, ESMA) established a non-exhaustive list of requirements, noting also that the national laws of EU member states are also applicable to ICO regulation. ESMA has determined that compliance with the following regimes and obligations is required:

• Alternative Investment Fund Managers Directive, Directive of Alternative Investment Fund Managers, which establishes the rules for authorization, operation and transparency of alternative investment fund managers that manage and / or sell Alternative Investment Funds (AIF) in the EU;

• The Fourth Anti-Money Laundering Directive, which prohibits money laundering and terrorist financing, on December 15, 2017, the European Parliament and the European Council adopted a new version of the Fourth Anti-Money Laundering Directive, which is potentially applicable to ICO due to the fact that ICO transactions may carry a certain degree of money laundering risk;

• The Markets in Financial Instruments Directive (Markets in Financial Instruments Directive), aimed at creating a single market for investment services, investment activities and providing a high degree of harmonized protection for investors in the markets for financial instruments;
  

• Directive on the prospectus to be published during the public offering of securities or their admission to trading (Prospectus Directive as the regulatory regimes), aimed at providing investors with adequate information when raising capital in the EU.

• The Markets in Financial Instruments Directive (Markets in Financial Instruments Directive), aimed at creating a single market for investment services, investment activities and providing a high degree of harmonized protection for investors in the markets for financial instruments;

• Directive on the prospectus to be published during the public offering of securities or their admission to trading (Prospectus Directive as the regulatory regimes), aimed at providing investors with adequate information when raising capital in the EU.

In addition, ESMA warns that ICO carries high risks for investors:

• This is an unresolved area, therefore vulnerable to fraud and illegal activities.

• High risk of loss of invested capital

• Lack of exit mechanisms and extreme price volatility

• Inadequate information provided to investors

• Defects in technology. The distributed network or blockchain technology is still not deeply tested.

Despite the ambiguity of regulation at the EU level, in Estonia, in general, the ICO is allowed, but taking into account the explanations of the Estonian Financial Regulator (Estonian Financial Supervisory Authority, EFSA), who believes that the analysis of tokens should take into account the actual circumstances, and the content prevail over form (ICO also includes the concept of the primary placement of tokens, since cryptocurrencies and tokens are interpreted by EFSA as synonyms).

EFSA shares the views of regulators in the United States, Canada, and Singapore. Tokens that grant investors rights to the issuer, or tokens whose value is tied to the future profits or activities of the company, are more likely to be recognized as financial instruments. Thus, the issue of such tokens can be recognized by the issuance of financial instruments and should be governed by the legislation on securities (Securities Market Act, Law of Obligations Act). In this case, it will be necessary to go through all the necessary procedures for notification and registration.

In addition, in some cases, the activities of the organizing companies of the ICO, as well as those implementing tokens in the secondary market, can be recognized as the provision of investment services. The implementation of such activities requires the availability of appropriate licenses and permits.

If the company is engaged in the provision of loans at the expense of funds raised under the ICO, the norms of legislation on credit institutions may be applied to its activities.

According to the decision of the Supreme Court of Estonia, the implementation of bitcoins as an entrepreneurial activity is the provision of services in relation to alternative means of payment. According to Estonian Money Laundering and Terrorist Financing Prevention Act, Estonian legislation also requires permission from the EFSA.

Since ICO models and tokens vary widely, each ICO condition must be evaluated individually. EFSA recommends that any person planning to set up an organization to issue tokens or issue tokens, ICO organizers, distributors and relevant trading platforms should make a legal analysis of their compliance with applicable laws.

In August 2017, Estonia revealed that it is considering the issue of creating the world's first national cryptocurrency. Called estcoin, the digital currency will be part of the current program in Estonia - electronic residency. The goal of this program is to provide almost everyone who has access to the Internet with the opportunity to create a business in Estonia, even without stepping into the land of the Baltic state.

On December 19, 2017, the Managing Director of the Estonian E-residency program, Kaspar Korjus, said that the e-residency program is state-owned, and, like most of today's start-ups, it can be funded by the ICO.

Korjus proposed three possible scenarios for the release of a resident cookie:

1. Estcoin as the first social token. It will be used as a stimulator for the formation of a “digital nation”. E-Residency members will join it first.
2. Estcoin as a token for smart contracts, which will be the basis of a secure identification system by the government. It will be used to sign documents and access services when working with smart contracts.
3. Estcoin as euro. This is not about issuing an alternative currency in the eurozone, but about a token that will combine the advantages of decentralizing virtual currencies and the stability of paper money. In this case, only members of e-Residency will be able to use the token.

It is worth noting that the President of the European Central Bank criticized such a proposal by the Estonian government to create its digital currency, stating that the euro is the only valid currency in the EU. At the moment, Estonia is studying comments and opinions about the cookie in order to better understand how to structure it better.

The intention to create our own cryptocurrency clearly shows that this small European country is ready to rapidly introduce new technologies, including the blockchain.

See also: ICO in search of jurisdiction .