Estonia’s Increased Crypto-Centric KYC and Anti-Money Laundering Regulations

Cryptocurrencies have transformed the way society views money, its value, how it can be traded, where it is stored, and who regulates it. Hailed as both revolutionary and dangerous, depending who you ask, the allure has been unmistakable. More than 50 central banks globally have experimented with cryptocurrencies or are developing their own. The cryptocurrency space has moved exponentially faster than the more traditional financial institutions, which has resulted in a lag between innovation and regulation, with some countries banning them entirely.

Estonia was not one of those countries. Long seen as a leader in the digital space, Estonia has become a type of haven for blockchain and cryptocurrency leaders, which is why last week’s news that it had revoked licenses from 500 crypto companies came as a shock to some. 

The move has been tied to a larger crackdown on illicit financial transactions as the investigation into a Danske Bank money laundering scandal comes to a close. The scandal, in which 200 billion euros were laundered through an Estonian branch, has reinforced the urgent need for financial institutions to implement Know Your Customer (KYC) as a part of their larger Anti-Money Laundering (AML) efforts. 

Estonia’s New Regulations

Since loosening the restriction for cryptocurrency companies in 2017, Estonia issued a whopping 1,400 licenses to firms in the subsequent years. While part of the regulation that stipulates firms must begin operations within six months of obtaining a license is not new, it is the enforcement of this piece alone that led to the country revoking more than 30 percent of Estonian crypto companies’ licenses.

Speaking with Bloomberg, the head of Estonia’s Financial Intelligence Unit (FIU), the regulator responsible for issuing the licenses, claimed that the new regulations are a response to stricter AML requirements and risk mitigation, and not meant to suppress the crypto field, nor are the regulations industry-specific. 

The Estonian government has also passed a bill amending the processing time for 30 to 90 days and has upped the license fees substantially. Any crypto company registered in Estonia must now either incorporate in the country or open a local branch. 

KYC Strengthens AML Efforts 

The basic idea behind and value of KYC from a financial institution’s perspective is to understand who their customer base is (whether as individuals or as a firm) and what types of transactions they will be carrying out with that account. KYC becomes a crucial part of AML in assessing the risk any given customer or account poses. It can be monitored and flagged, thus to a large extent preventing illicit activity from happening at all.

While the true cost of KYC varies depending on the number of users any given company has and processes, the cost of non-compliance is grave. Danske Bank is facing fines in the billions. In addition to fines and legal fees, ideals of credibility, security and safety can all be tarnished indefinitely, resulting in lower customer retention rates, the loss of partnerships, or outside investment. 

Opting for a fully automated identity verification and KYC solution can not only reduce processing times while increasing AML efforts, it removes the need for in-house staff during the approval process, reducing both costs and removing the risk of human error. A trusted and compliant solution eliminates the need and associated costs to the development of proprietary technology. Creating a frictionless onboarding process for customers allows companies to focus on their overall user experience and purpose. 

One thing for certain is that regulation that prevents identity theft and fraud will only become more prevalent, and companies without KYC baked into their business model run the risk of being shut down or never starting at all. 

Ready to take your identity verification and KYC efforts to the next level? Schedule a demo with our experts or start a 30 days free trial and we’ll make sure that your business will be AML regulation proof!