Will Estonia Ban Cold Wallet and Defi Participation?

Will Estonia Ban Cold Wallet and Defi Participation?

Will Estonia Ban Cold Wallet? On 23rd December 2021, the Estonian government approved laws that may affect the way crypto enthusiasts deal with their lives. The legislation is intended to regulate virtual asset service providers (VASPs) more effectively; and furthermore, prevent risks associated with money laundering and other financial crimes.

However, even though the purpose of the law is good; there are several factors associated with the new legislation that will surely result in limitations to cryptocurrency users. They could even treat other derivatives badly such as options on Bitlevex or futures on FTX and Binance. We are going to analyze this massive effect.

Understanding the Background of the New Bill

The new law approved in Estonia is building upon existing legislation that prohibits people to open anonymous virtual accounts. This rule was enacted after early 2020 when the Estonian government decided to put virtual assets under greater scrutiny.

In essence, the regulation does not apply to physical customers but regulates virtual asset service providers (VASPs) that conduct activities for (or on behalf) of natural persons or legal entities.

Accordingly, the legislation will touch customers who own or trade virtual assets; and neither will require customers to share their wallets’ private keys. Additionally, the bill will not affect people who own crypto within private wallets not provided by VASPs.

The sensitive topic in the matter is that customers will not be able to utilize anonymous accounts with Estonian VASPs. Similarly, Estonian VASPs will not be able to offer anonymous accounts or wallets.

As provided by the draft legislation, VASPs in Estonia must identify their customers when facilitating transactions of virtual assets. Accordingly, the VASP must retain identified information in a way to permit it to be linked to a specific transaction.

How is the Crypto Market in Estonia Nowadays? – An Overview

Estonia has seen a surge in cryptocurrency-related business after a massive boom of VASP licenses in 2017. However, around 2000 licenses have revoked since then, with only around 400 companies keeping them, after the sector came under increased regulatory scrutiny in 2019.

The current landscape caused by allegations that billions of dollars of illicit funds passed through the local unit of Denmark’s largest bank in 2018. The new regulations come in anticipation of the country’s review of its money laundering policies expected this quarter; in line with similar actions by the Council of Europe.

Accordingly, Estonian Financial Intelligence Unit (FIU) director Matis Maeker; which can grant and revoke licenses, had already stated that all licenses would terminated; which would require companies to reapply.

However, an official spokesperson later clarified that this was not the official opinion of the EU and that the Estonian government would not take this course of action.

Will Estonia Ban Cold Wallet and Defi Participation? – Not Directly, At Least

Recently, Estonia’s Ministry of Finance Keit Pentus-Rosimannus said that the new legislation will not ban customers from owning or trading crypto. Specifically, the law applies only to VASPs, which may affect decentralized wallet creators. 

The proposed bill may also have an increasing impact on these companies financially; as it would create hefty requirements in terms of capital investment and structure.

Pentus-Rosimannus’ statement was a response to news that the new bill would virtually ban DeFi; and non-custodial wallets from Estonian territory. In the statement, Pentus-Rosimannus affirms the new legislation passed to strengthen anti-money laundering requirements for VASPs.

Particularly, the bill aims to reduce the creation of anonymous accounts as much as possible; as a measure against money laundering schemes and attempts to circumvent that standard imposed by law.

In the statement, the Estonian government clarifies that “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.”

Later on, the Estonian ministry published an additional information page to address the most common questions asked about the new bill. Among the information, the Estonian government affirms; that the proposed bill represents the country’s answer to the Financial Action Task Force (FATF) guidance on VASPs’ regulation.

An official spokesperson of the Ministry of Finance added that the legal proposals are “tech-agnostic”. Hence, they are meant to regulate specific technologies; – not the services provided to the customers at the end of the line. 

As any financial service would regulated; the main goal seems to be regulating VASPs as they provide financial services as standard non-crypto entities. 

Will Estonia Ban Cold Wallet and Defi Participation? – The Verdict

Starting in February, Estonia expected to introduce sweeping changes to its definition of Virtual Asset Service Providers; or VASPs, to include various cryptocurrency-related services – a change that could impact cryptocurrency ownership in Estonian territory.

The legislation is now in the process of interagency review, with implementation scheduled for February 2022. Regulated cryptocurrency companies have until March 18, 2022, to bring their operations and paperwork into compliance.

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