Why hasn’t Estonia issued any e-money licences?

Interesting, but in the digitally advanced state with tech-savvy people – Estonia – there are currently no companies with e-money licence issued by Estonia – so, why don’t any of the Estonian companies offer services related to e-money?

If you go to the Estonian Financial Supervisory Authority website, you will see an empty place under the e-money licence issued. So far, all supervised e-money institutions that offer its services in Estonia have obtained an e-money licence from another member states of the EU. The issue is the limits specified in the Payments Institutions and E-money Institutions Act where it is stated that up to €1,000 or €2,500 of e-money may be stored on e-money device depending on rechargeability during a calendar year.

According to the European Central Bank, e-money as an electronic store of monetary value on a technical device that may be widely used for making payments to entities other than the e-money issuer.

The EU’s e-money directive was adopted in response to the emergence of new pre-paid electronic payment products and amended the third anti-money laundring directive with thresholds of €1,000 and €2,500 of e-money stored on e-money device per calendar year which can be subjects to simplified due diligence measures. Even though the directive is no longer in force, the approach towards simplified due diligence remains the same in the fourth anti-money laundring directive. If e-money does not exceed the new thresholds specified in the fourth directive, then simplified customer due diligence may apply.

While transposing the e-money directive, the Estonian legislator apparently took the amendments designed for the third directive and transposed it into the Payments Institutions and E-money Institutions Act as limits for e-money issuing instead of incorporating it into the Money Laundering and Terrorist Financing Prevention Act of Estonia as a condition for simplified customer due diligence.

It is important to note that €1,000/€2,500 of e-money stored on e-money device per calendar year are limits for e-money device, but in the context of anti-money laundering it serves as a threshold for simplified customer due diligence. If the sum of money is, for example, €3,000 of e-money per calendar year per one e-money device, then not simplified, but regular customer due diligence must be undertaken. Therefore, the e-money directive does not set forth the limits for issuing e-money, but what is the thresholds for e-money which trigger simplified customer due diligence. However, Estonia put those thresholds as limits for e-money issuing per e-money device during a calendar year, which made it unattractive for business to apply for an e-money licence in Estonia.

In plain English, it means that everyone who operates with e-money (for example, e-wallet providers etc.) cannot store more than €1,000 or €2,500 per e-money device depending on its rechargeability during a calendar year. It may be a case where an e-wallet provider may allow one customer to have no more than €1,000/€2,500 during one calendar year. Business-wise, such limits are burdensome and stop companies from applying for an e-money licence in Estonia. Furthermore, since e-money device is not defined in the Payments Institutions and E-money Institutions Act or in the e-money directive, it may be interpreted as a “catch all” clause and consequently and such limits would apply to all companies that store e-money.

Estonia is losing investments

Having such limits for e-money issuing, Estonia is losing investments. Businesses are afraid of incorporating an e-money institution in Estonia as those limits of e-money will not attract customers who want to operate with more than €1,000/€2,500 per calendar year. Above all, it creates obstacles for the development of the fintech industry. Such limits are not encouraging for young startups to open something new in this field and even if they do come up with a new idea, they apply for an e-money licence in other member states of the EU.

There was a case in Estonia where LHV Bank introduced the CUBER Wallet app, a blockchain-based wallet that allowed users to send digital representations of real euros. However, soon LHV had to stop operating its Cuber Wallet as the Financial Supervisory Authority stated that it falls under the Payments Institutions and E-money Institutions Act and the limits of €1,000/€2,500 must apply. The representative of the Cuber Wallet app also emphasised at a fintech conference in Riga that such limits were one of the reasons LHV terminated the Cuber project.

However, the Estonian public authorities have noticed the problem and the situation may be resolved in a new draft law on Payments Institutions and E-money Institutions Act. At the moment, this draft law on Payments Institutions and E-money Institutions Act is being prepared for the second reading in the parliament. The ministry of finance and Financial Supervisory Authority rendered their opinions where they suggest removing the limits of €1,000/€2,500 from the new draft law. Particularly, they emphasise that it is a disproportionate restriction as so far nobody has been issued an authorisation to operate as an e- money institution in Estonia.

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The cover image is illustrative. The opinions in this article are those of the authors.

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About the author: Nikolay Demchuk and Eduardo Silva

Nikolay Demchuk is a lawyer at NJORD Law Firm, specialising in IT law and anti-money laundering regulation. Eduardo Silva is a legal assistant at NJORD Law Firm.