Estonia proposes bans on DeFi and non-custodial wallets

Estonia is proposing draft legislation for virtual asset service providers (VASPs) which will still allow consumers to trade, hold and own cryptocurrencies, but will create clear and secure frameworks that regulate crypto companies that offer financial services.

The state is not interested in putting a crimp on the crypto industry. However, it seems interested in ensuring that any official businesses dealing in crypto have a healthy capitalization to offer consumers a safe service.

An initial rumor that the bill was also seeking to suspend decentralized finance (DeFi), an exciting but high-risk aspect of the crypto industry, as well as non-custodial wallets, was dismissed by the ministry.

The proposed legislation however comes with stiff criteria for anti-money laundering (AML) requirements for VASPs as well.

In a statement, the Estonian government said: “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.”

Suspecting that the Sunday announcement would raise many questions, the Ministry of Finance launched an informational page addressing some of those queries. The new rules, which are tighter, may be due to an original flaw in design it seems.

The Estonian Financial Intelligence Unit (FIU), which was tasked with issuing licenses to VASPs in 2017, may have been too lax with the way it awards them and who gets them.

To shield consumers, the bill would expect VASPs to have a minimum share capital of $140,000 give or take. Another suggestion could send this amount up to $400,000.

The bill also aims to prohibit fully anonymous services. Know-your-customer (KYC) practices are an important part of any financial service and Estonia does not wish to allow any VASPs that may avoid this aspect of the identification lest it leads to issues such as money-laundering.

Speaking to CoinDesk, spokesperson for the Ministry of Finance Märt Belkin said that the goal was to create a framework that regulated VASPs in their capacity of financial services, and that any proposed changes were “tech-agnostic”.

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Updated: 01/05/2022 — 14:00