What would happen if Estonia decided to launch its own crypto tokens through an initial coin offering (or an ICO)?
The Estonian e-residency programme began a discussion over the summer in 2017 for an idea that we nicknamed “estcoin”. Since then, the subject has generated an enormous amount of attention, including both supportive feedback and criticism, in every part of the world.
We raised the idea because e-residency is considered to be a government startup – so we are continuously improving it based on the feedback of e-residents and always look to the private sector for best practises that we should be using.
ICOs are a new phenomenon that are transforming the growth of startups. Instead of giving up shares, many startups are now raising finance by issuing their own blockchain-based crypto tokens to investors around the world.
Raising finance is only half the story of ICOs, though. People who invest in crypto tokens issued by a startup are then strongly incentivised to support the development of that startup in other ways too – and they tend to form an online community.
Estcoins to support the development of digital nation
From Estonia’s perspective, estcoins were proposed as a way to raise money and support for the development of our digital nation from more people around the world. We would also want to structure the tokens so that they help build our e-resident community and incentivise our own key objective, which is to increase the number of companies started in Estonia through e-residency.
This activity already has a major positive impact on Estonia as e-residents bring a significant amount of business to the Estonian economy. An independent report released in December by Deloitte revealed that e-residents had already brought €14.4 million back to Estonia in the first three years and this is predicted to rise to €1.8 billion by 2025, which is a return of €100 for every €1 invested in the programme. We will only achieve this though if we continue to provide real value to our e-residents around the world.
We now want to go even further and not just launch our own ICO, but also make e-residency the best option globally for companies to launch their own trusted ICOs.
After the estcoin proposal was published, I organised a kick-off meeting inside the Estonian parliament involving representatives from across Estonia’s public and private sector, as well as key crypto entrepreneurs and “hackers” from around the world. It was attended by members of the e-residency programme team, our advisory committee, Estonia’s ministry of finance, Estonian parliamentarians, the Bank of Estonia, companies conducting ICOs and law firms advising them.
Together, we began the enormous task of understanding how Estonia could better embrace blockchain and the use of crypto tokens in a way that supports legitimate entrepreneurs and helps grow our digital nation, while protecting our public interest and minimising risks to our state and business environment.
We sought to learn from the best practises developed in other countries, but also explore how Estonia’s unique advantages can take us further. Since then, we have continued to work closely together and are constantly exploring solutions and exchanging ideas.
Boom or bust?
As the ICO phenomenon continues to grow, there will be particular nations that become “havens” for companies launching them. The reality is that a large proportion of ICOs simply won’t have the standards we desire.
In addition, the value of crypto tokens in general are extremely volatile right now, so the rapid gains we are currently witnessing by Bitcoin and others could easily be followed by rapid devaluations soon. Many analysts have pointed out similarities between the booming crypto market today and the booming dotcom market of the 90s, which eventually did burst. However, the fundamental technology behind it — the internet in that case — did go on to change the world and open vast new possibilities so the same thing could happen to crypto, even if it’s also a bubble about to burst.
What people are looking for, in any eventuality, is real value through greater trust. Trust is also the most important value behind e-residency though because we are offering a secure government-backed digital identity that provides access to our open and transparent business environment. That’s why we will focus on attracting trusted ICOs.
So how can we better support trusted ICOs through e-residency?
The first thing we can do is relatively straightforward: we can provide clearer guidance on how to legally and responsibly launch an ICO within our regulatory environment.
Many e-residents already use the programme for investment purposes, but our longer-term objective is to create an economy of scale for both investors and entrepreneurs to use our platform together.
We now have the opportunity to cut out the middlemen of central stock registries with a combination of blockchain, crypto tokens and secure digital identities. This would provide truly decentralised and trusted peer-to-peer securities trading globally through e-residency.
How will estcoin work?
As part of these discussions across the public and private sector, we have also examined how Estonia’s own crypto token could function, considering the feedback that we have received globally.
We have identified not one, but three variants of estcoin that would benefit both our digital nation and those who use them.
1. The community estcoin
Community estcoins would be a mechanism to accelerate the growth of our digital nation by increasing the value of joining our e-resident community and rewarding those who help us build it.
There are currently an enormous number of e-residents who already volunteer their help to grow our digital nation in different ways, such as by producing content about their experiences or encouraging others to sign up, but it’s been a challenge to understand how we can reward them as well as provide support.
In addition, one of the most valuable activities that e-residents do to grow the value of the programme is to conduct business with each other, as well as Estonians. This means that e-residency is not just access to valuable services, but also access to an increasingly valuable community of like-minded people who can help you grow your company too.
Fortunately, we are already developing a community platform, so we want to ensure then that estcoins could have a real utility value within that platform and that they could be automatically issued in exchange for activities that support the community.
For example, e-residents should be able to earn estcoins if they drive web traffic to e-residency, successfully sign up a new e-resident, post a tender within our community that provides work to another e-resident or Estonian company, or spend time providing useful advice to other e-residents.
Estcoins will enable that platform to grow faster through a network effect, but it’s possible that any funds raised could also be allocated to further develop this platform, as well as provide investment into companies that operate within Estonia’s business environment.
2. The identity estcoin
At the heart of Estonia’s digital nation — and our e-residency programme — is a secure, government-issued digital identity. What would happen if we also starting using blockchain technology to tokenise identities?
In this model, estcoins would be the blockchain-based tokens used for activities within our digital society, such as digitally signing documents, logging into services or enforcing smart contracts.
Here’s where these estcoins differ sharply from the previous model. Identity estcoins cannot be exchanged or sold because they are part of your identity.
Identity estcoins would eliminate some of the technology that is currently required to operate our digital nation and that would also eliminate much of the costs and hassle that this technology brings.
3. The euro estcoin
We’ve discussed models for estcoin that either increase or decrease in value, but what if we introduced estcoins and simply pegged their value to the euro? That’s how euro estcoins would work.
We would never provide an alternative currency to the euro, but it’s possible that we could combine some of the decentralised advantages of crypto with the stability and trust of fiat currency and then limit its use within the e-resident community.
Banks would be required to move money in and out of euro estcoins, but transactions could then take place independently of them through the blockchain. This means that community-based value exchanges could take place globally for free. All that is required is a digital wallet and the commitment of government to buy back every euro estcoin for one euro.
Our e-residents are world citizens and the ability to conduct business globally with greater ease is one of the main drivers behind the growth of the programme. Euro estcoins within the e-resident community could facilitate this exchange of value globally, while encouraging more business among e-residents and Estonians.
The opinions in this article are those of the author. This is a condensed version of Kaspar Korjus’ article, which was originally published on the e-residency blog. Cover image by Peter Kentie.