The Ministry of Finance has sent to the Ministry of Justice a draft regulation with which are established prudential and supervisory requirements for a large number of Estonian FinTech sector participants – including crowdfunding platvorms as well as services that provide investment opportunities in crypto assets.
„The Estonian FinTech sector has experienced rapid growth in the last years, a number of foreign entrepreneurs have started their business activities here and new innovative services and capital raising ventures have emerged. Until now, these service providers have been unregulated or regulated in a limited manner, and usually are not subject to financial supervision. At the same time, in the previous year 440 million euros were mediated through crowdfunding platforms and in the last five years, the total value of transactions on these platforms was around 900 million euros,“ said Minister of Finance Keit Pentus-Rosimannus.
The main goal of these changes is to provide uniform rules for all participants in the sector, and ensuring that investors as well as consumers would be provided correct and complete information regarding the offered instruments and provided services, and to protect their rights.
Due to the development of technology, the last decade has brought along many alternative opoortunities which enable to engage funds from the public. The activities of companies providing such opportunities are currently largely unregulated in Estonia, also lacking are efficient measures for the protection of investors. Consumers and investors may receive too little information, due to the lack of rules and it is also easier to commit fraud, in an unregulated financial sector.
When the changes come into force, current and new crowdfunding service providers would have to enforce these new requirements in their business activities. This means applying for authorisation and that the Financial Supervision Authority would excercise supervision over these companies. In addition, companies in the sector would have additional reporting obligations; also they would have to adhere to the requirements of providing the relevant service and be liable for infringement of these requirements. In addition, all virtual currency service providers that have been issued an activity license from the Financial Intelligence Unit would have to apply for authorisation from the Financial Supervision Authority and implement the requirements set out in the draft act in their business acitivities.
At the end of year 2020, there were around 20 companies registered in Estonia that operated crowdfunding platforms. These platforms mediated funds in the approximate amount of 440 million euros, which is 1,6% of Estonian GDP. The total value of transactions in the last five years was around 900 million euros.
Around 400 entrepreneurs are authorised as virtual currency service providers by the FIU today. However, we do not have an adequate statistic for services that mediate crypto assets.
The regulation aims to cover a large part of the Estonian Fintech sector by implementing requirements that ensure a more equal treatment of entrepreneurs that provide financial services, while harmonising conditions for competition and to provide the clients a better overviw of the service provided, and imposing relevant protection mechanisms.
The draft act was preceded by a legislative intent published in 2019, and from the feedback we received it was evident that the stakeholders of the sector are in favour of regulating the field.
On November 10th 2021, the regulation applicable to European crowdfunding service providers came into force which regulates only the crowdfunding service platforms that enable to invest in companies. This draft act aims to apply similar requirements to other crowdfunding ventures to ensure equal treatment of service providers acting in the sector. Concurrently the Ministry of Finance has also initiated the adoption of a draft act that would amend the Money Laundering and Terrorist Financing Prevention Act in an effort to manage and mitigate the risks within the sector.